Equity Research. Emergency Medical Services Corp (EMS-NYSE) EMS: Zacks Company Report - HOLD OUTLOOK SUMMARY DATA ZACKS ESTIMATES

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1 Equity Research November 18, 2008 Chris Kallos North Canal Street, Chicago, IL Emergency Medical Services Corp EMS: Zacks Company Report - HOLD Current Recommendation Hold Prior Recommendation Sell Date of Last Change 08/13/2007 Current Price (11/17/08) $36.75 Six- Month Target Price $38.00 (EMS-NYSE) OUTLOOK Emergency Medical Services Corporation (EMS) is a leading provider of emergency medical services in the United States operating under the AMR and EmCare brands. The company reported better than expected net income of $28.6M (up 95% y/y), or EPS of $0.66, compared to net income of $14.7M, or EPS of $0.34 in 3Q07. The increase in earnings was attributed primarily to the FEMA deployment, the net impact of higher rates and volumes on existing contracts, increased volume from net new contracts and acquisitions. We reiterate our Hold recommendation at current levels. SUMMARY DATA 52-Week High $ Week Low $20.73 One-Year Return (%) Beta Average Daily Volume (sh) 327,600 Shares Outstanding (mil) 42 Market Capitalization ($mil) $1,528 Short Interest Ratio (days) 7.16 Institutional Ownership (%) 28 Insider Ownership (%) Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using 12 months EPS 25.9 P/E using 2008 Estimate 18.8 P/E using 2009 Estimate 18.0 Zacks Rank 1 Risk Level Type of Stock Mid-Blend Industry Med-Outp/Hm Cre Zacks Rank in Industry 6 of 34 ZACKS ESTIMATES Revenue (in millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 478 A 486 A 501 A 1,934 A A 517 A 530 A 537 A 2,107 A A 571 A 679 A 606 E 2,422 E ,566 E Earnings per Share (EPS is operating earnings before non recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2006 $0.17 A $0.25 A $0.24 A $0.33 A $1.01 A 2007 $0.42 A $0.35 A $0.34 A $0.31 A $1.42 A 2008 $0.40 A $0.43 A $0.66 A $0.48 E $1.96 E 2009 $2.04 E Zacks Projected EPS Growth Rate - Next 5 Years % 16 Copyright 2008, Zacks Investment Research. All Rights Reserved.

2 OVERVIEW Emergency Medical Services Corporation (EMS) is a leading provider of emergency medical services in the United States operating under the AMR and EmCare brands. On January 31, 2005, an investor group led by Onex Partners LP and Onex Corporation purchased both AMR and EmCare from the Laidlaw International Inc. for $828.8M, to form EMS LP, before listing on the NYSE on December 16, Laidlaw International Inc. had acquired AMR and EmCare in AMR (American Medical Response) is currently the largest provider of ambulance services in the United States, based on net revenue and number of transports, with an estimated 8% share of the total ambulance services market and a 21% share of the private provider ambulance market. AMR has an operational presence in approximately 34 states. In FY07, AMR accounted for 57% of total revenues. Approximately 60% of AMR s net revenue is currently generated from emergency 911 ambulance transport services. Non-emergency ambulance transport services, including critical care transfer, wheelchair transports and other interfacility transports, account for another 32%, with the balance generated from the provision of training, dispatch centers and other services to communities and public safety agencies. AMR currently has approximately 3,300 contracts with communities, government agencies, healthcare providers, and insurers to provide ambulance transport services. In FY07 EmCare accounted 43% of total revenues. EmCare is the largest provider of outsourced emergency department staffing and related management services to healthcare facilities with an estimated 6% share of the total emergency department services market and a 9% share of the outsourced emergency department services market. EmCare primarily provides emergency department staffing and related management services to healthcare facilities, including: the recruitment and subsequent subcontracting of physicians and other healthcare professionals, to client hospitals. As of September 30, 2005, EmCare provided services under 333 contracts. EmCare also has practice support agreements with independent physician groups and hospitals for the provision of unbundled management services such as billing and collection, recruiting, risk management and certain other administrative services. In addition, EmCare has become one of the leading providers of hospitalist services. A hospitalist is a physician who specializes in the care of acutely ill patients in an in-patient setting. Payment for EmCare services are derived from: the federal and state governments (primarily under the Medicare and Medicaid programs); health maintenance organizations, preferred provider organizations and private insurers; hospitals, and; individual patients. BULL STORY The ambulance industry is highly fragmented, with an estimated 11,200 providers across the U.S. representing annual revenues of over $12B. In light of the company s already significant share of the national market, we believe, a long history as a contract service provider, high contract retention rates and new contract signings bode well for expansion of AMR s existing business, and increase the potential for strategic acquisitions over the medium term. In addition increased demand for effective use of technology, cost-efficient services, improved patient outcomes and emergency preparedness and response, should continue to fuel the current trend by communities and hospitals to outsource ambulance services to private providers. Similarly, aging of the population and increasing focus on cost containment, and on emergency departments in particular, in the hospital sector coupled with complex regulatory/compliance requirements and a shortage of ER doctors, should continue to drive outsourcing trends in favor of well-established private providers of emergency department related services. We note that EmCare has developed proprietary physician recruitment software that according to management has enhanced recruitment efficiency and improved our physician retention rate. A significant increase in cash flow from operations in 2Q08 has increased cash on hand as at June 30, 2008 to approximately $73M, which enhances the company s ability to both lower long-term debt and grow via acquisition. Zacks Investment Research Page 2

3 BEAR STORY EMS is currently carrying approximately $476M of long term debt on the balance sheet, which we believe is high and increases the company s exposure to interest rate risk. As a consequence a substantial portion of future cash flow from operations will be required to service the debt, thereby reducing funds available for other purposes and limiting the company s ability to respond to competitor activity. This risk is further compounded by existing restrictive covenants in the company s senior secured credit facility and the indenture governing EMS senior subordinated notes. Given the company s relatively high proportion of revenues derived from government-sponsored programs such as Medicare, which is typical in the healthcare sector, we believe the risk of changes to reimbursement policy is significant. Additionally, the company s short operating history as a publicly listed entity limits performance comparisons with prior periods. As a result, we believe several quarters of financial reporting by EMS will be required to develop confidence amongst investors that the current management team can indeed deliver on stated earnings objectives. AMR currently generates approximately 63% of the company s total revenue and as highlighted in recent quarters remains vulnerable to both seasonal factors, staffing levels and most importantly fuel costs. Rising fuel costs, in particular, represent a significant challenge to the AMR division profitability given the transport service nature of the business. RECENT NEWS On October 31, 2008, EMS announced 3Q08 financial results. The company reported better than expected net income of $28.6M (up 95% y/y), or EPS of $0.66, compared to net income of $14.7M, or EPS of $0.34 in 3Q07. The increase in earnings was attributed primarily to the FEMA deployment, the net impact of higher rates and volumes on existing contracts, increased volume from net new contracts and acquisitions. Net revenue in 3Q08 was $679.3M, up 28.2% y/y (11.1% y/y excluding the change in FEMA deployment revenue). FEMA deployment revenue was $101.1M in the quarter, which included $11M in expense pass-throughs, compared to $10.5M in 3Q07. Adjusted EBITDA was $73.5M, up 38.6% y/y. Cash flow from operations in 3Q08 was $75.1M, versus $37.7M in 3Q07. Cash on hand as at September 30, 2008 was $135.7M versus long-term debt of $474.9M. In 3Q08, AMR generated net revenue of $425.3M, an increase of 36.8% y/y (7.6% y/y excluding the change in FEMA deployment revenue) compared to 3Q07. The 7.6% increase in net revenue was from an improvement in revenue per transport in existing markets offset by lower than anticipated nonemergency transports. Adjusted EBITDA was $47.2M, up 81.4% y/y, primarily due to the net impact of higher revenue, including the FEMA deployment, which was partially offset by higher compensation, insurance expense and fuel costs. In 3Q08, EmCare generated net revenue of $254M, up 16.1% y/y, which reflected volume increases at existing contracts and 74 net new contracts added since June 30, Of the 74 net new contracts added, 45 were from the acquisition of Clinical Partners in August 2008 with related management fee revenue of $1.1M during the quarter. Adjusted EBITDA was $26.3M, down 2.6% y/y, compared to $27M in 3Q07. The reduction in Adjusted EBITDA was primarily attributed to an unfavorable prior period insurance adjustment of $3.9M in 3Q08 compared to a favorable prior period adjustment of $3.1M in 3Q07. Management raised previous FY08 EPS guidance to between $1.90 and $2.00 (previously $1.70 and $1.75). Adjusted EBITDA is now expected in the range of $240M to $245M (previously $227M to $232M). Zacks Investment Research Page 3

4 VALUATION We have valued EMS on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the healthcare sector. We believe EMS is well positioned strategically to grow its primary AMR subsidiary via acquisition and at the same time continue expansion of its EmCare network. Our $38 price target is derived using a P/E multiple of 19.4 X FY08 EPS of $1.96. Industry Comparables Pr Chg P/E CFY EPS Gr Price/ Price/ Price/ YTD 5Yr Est Book Sales CF EMERGENCY MEDIC Industry Mean Industry Median S&P DAVITA INC QUEST DIAGNOSTC HEALTHSOUTH CP LINCARE HLDGS PROJECTED INCOME STATEMENT & BALANCE SHEET Emergency Medic Income Statement and Balance Sheet (Dollars in millions, except EPS data) 12/03 12/04 12/05 12/06 12/07 12/08E Sales 1,655 1,934 2,107 2,422 Cost of Goods Sold SG&A 1,283 1,459 1,584 1,821 Other operating expenses Interest and other Zacks Adjusted Income before NRI Net Income Diluted EPS before NRI Reported EPS Cash & Marketable Securities Current Assets Current Liabilities Long Term Debt Shareholder's Equity Zacks Investment Research Page 4

5 HISTORICAL ZACKS RECOMMENDATIONS DISCLOSURES The analysts contributing to this report do not hold any shares of EMS. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Buy- Zacks expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold- Zacks expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell- Zacks expects the company will under perform the broader U.S. Equity market over the next one to two quarters. The current distribution of Zacks Ratings is as follows on the 1060 companies covered: Buy- 24.5%, Hold- 67.1%, Sell 8.1%. Data is as of midnight on the business day immediately prior to this publication. Zacks Investment Research Page 5