AmSurg Corp. ( AMSG - Analyst Report ) reported earnings per share (“EPS”) of 49 cents in the third quarter of 2012, up 9% compared to year-ago quarter’s adjusted EPS of 45 cents. Reported EPS was in line with the Zacks Consensus Estimate and remained at the higher end of the company’s guidance range of 47−49 cents. Revenues during the quarter increased 16% year over year to $226.4 million almost in line with the Zacks Consensus Estimate.

The significant upside in revenues was primarily attributable to a 2% rise in same-center revenues combined with an increase in the number of operating centers to 229 at the end of third quarter 2012 (from year-ago 223 centers ), even with one less business day in the quarter. Further, the new centers delivered an 8% year-over-year increase in total procedures with 7% jump in revenue per procedure as multi-specialty centers grew as a percentage of center mix.

Operating expenses increased 17.8% year over year to $151.6 million due to higher salaries and benefits (up 20.2% to $72.7 million), supply cost (up 25.5% to $31.5 million) and other operating expenses (up 9.7% to $47.3 million). As a result, operating margin declined 80 basis points to 33.1% during the quarter.

AmSurg exited the quarter with $35.7 million in cash and cash equivalents versus $40.7 million at the end of 2011, and had $179 million available under its revolving credit facility. For the third quarter, net cash flows from operating activities were $72.5 million compared with $62.6 million in the year-ago quarter.

Outlook

AmSurg increased the lower end of its 2012 revenue guidance by $10 million to $915−$925 million, just short of the current Zacks Consensus Estimate of $926 million. The company also narrowed the adjusted EPS outlook for 2012 to $1.98−$2.01 from earlier range of $1.97−$2.01 (the current Zacks Consensus Estimate is $2.02).

Further, the company adjusted its same-center revenue growth forecast to 3% (earlier guidance was 2−3%). Net cash flow provided by operating activities, less distribution to non-controlling interests, is expected to be in a range of $115−$120 million for 2012 (unchanged).

Additionally, AmSurg also provided its EPS guidance for the fourth quarter of 2012. The company expects EPS in the range of 48−51 cents. The current Zacks Consensus Estimate of 51 cents remains at the high end of the range.

Recommendation

We are encouraged by AmSurg’s impressive third quarter results with improvement in same-center sales in successive quarters and increase in 2012 guidance even amid uncertain economic conditions and high unemployment. The company reported expansion in top line on the back of growth in total procedures, mainly with the opening of new centers and solid same–center performances. During the reported quarter, the company acquired one center and had 15 centers under a letter of intent.

We expect AmSurg to go ahead with its acquisition pipeline, supported by a strong cash position. Government agencies have undertaken initiatives to curtail healthcare expenditure, thereby resulting in a shift toward ambulatory surgery centers from admission to traditional hospitals.

However, the company is encountering several challenges such as reimbursement issues, higher expenses and economic uncertainty. Collectively these result in deferring elective procedures with a decline in doctor visits by patients, and thereby decreasing surgical volume. This also mounts pressure on margins. Moreover, competitive landscape is tough with the presence of players such as HCA Holdings, Inc. ( HCA - Snapshot Report ) .

Currently, AmSurg retains a short-term Zacks #4 Rank (Sell rating). Over the long term, we are Neutral on the stock.