Alliance Imaging reaps benefits of debt refi, plans to cut debt; eyes Medicare reimbursement changes

By Paul Deckelman

New York, Feb. 24 - Alliance Imaging Inc. was back in the black in the 2005 fourth quarter and for the full year from year-earlier losses - although those year-ago figures were impacted by a $44 million charge that the Anaheim, Calif.-based provider of diagnostic imaging services took for early retirement of debt as part of several end-of-year financing transactions.

Those transactions, at the very end of 2004, paid dividends to the company in 2005 in terms of lower interest costs, which in turn helped its cash flow generation.

Company executives told analysts on an unusually long conference call Friday following the release of the quarterly and year-end numbers that they plan to use free cash flow to cut debt, although they offered no numerical goals or other specifics.

The executives also said that they would be carefully evaluating the impact of anticipated Medicare reimbursement changes mandated by the federal Deficit Reduction Act of 2005. Those changes will be phased in this year and next.

Although Alliance's 7¼% notes due 2012 - and the bonds of such industry competitors as Radiologix Inc,., MedQuest Inc., and, especially, InSight Health Services Corp. - were beaten up earlier this month on investor fears about the likely impact those reimbursement rate changes might have on the financial health of such providers, Alliance executives such as chairman and chief executive officer Paul S. Viviano, president and chief operating officer Andrew P. Hayek and chief financial officer Howard K. Aihara were restrained in offering any predictions about what they might mean specifically for Alliance.

For one thing, many of the specific reimbursement rates for particular services have not even been set yet, and will be announced later this year by the Center for Medicare and Medicaid Services.

Viviano also pointed out that in 2005, just 13% of the company's revenues came from "retail" channels - Alliance billing a third-party provider such as a health insurance company or Medicare for services provided to a patient at an Alliance-run facility. Fully 87% of its business is "wholesale," with Alliance billing hospitals, physician groups and other fellow medical services providers with whom it deals in providing sophisticated imaging equipment and personnel and running the imaging centers, which are frequently located right inside hospital buildings or in separate modular units on hospital campuses. Some of the imaging facilities are in separate stand-alone facilities located away from hospitals, although Alliance sometimes operates them under contract to hospitals, or to physician practice groups.

Sees new rates cutting supply

Viviano and Hayek also opined that the lowered reimbursement rates might actually help established industry players like Alliance - which has been in the business since 1982 - by discouraging potential new competitors.

"Our view is that this will dramatically impact supply," said Viviano - that is, too many providers of imaging services going after the same customers.

"I think the new entrants into markets, building fixed-site imaging centers, probably will be curtailed dramatically as a result of this piece of legislation. That means that over some point in time the supply and demand will reach equilibrium. When that is, we're not sure, but that only can have a positive impact on all of the providers that are left in the market as we believe new entrants will be limited going forward."

In the fourth quarter ended on Dec. 31, Alliance booked net income of $2.548 million (five cents per share) on revenues of $110.192 million, a reversal of the $23.715 million net loss (49 cents per share) seen in the year-earlier quarter on revenues of $107.193 million. On a full-year basis, 2005 saw net income of $19.849 million (39 cents per share) on revenues of $430.788 million, versus a 2004 loss of $486,000 (one cent per share) on revenues of $432.080 million.

Refi cuts 2005 interest costs

The 2004 fourth-quarter and full-year results were adversely impacted by the $44.393 million early debt retirement charge the company took, after it successfully tendered for $256.4 million of its 10 3/8% senior subordinated notes due 2011, or about 98.6% of the $260 million of notes originally outstanding.

The tender offer was one of several refinancing transactions the company undertook at the end of 2004, a list which also included the issuance of $150 million of new 7¼% senior notes due 2012 and the company's entrance into a new, enlarged credit facility that replaced its existing $256 million term loan C facility with a combination of new term loan and revolving credit facility borrowings at a lower rate - 225 basis points over Libor versus Libor plus 237.5 bps previously.

The refinancing of the 10 3/8% bonds, using proceeds from the new bond issue and some of the bank borrowing "had the biggest impact on reducing interest expense in 2005," Aihara said. Net interest expense in the fourth quarter decreased by about $1.6 million to $9.805 million from $11.419 million in the year-ago quarter. For the full year, interest costs dropped to $37.491 million from $44.039 million in 2004.

The CFO said that company had a lower average interest rate after the completion of those financing transactions, which pulled down the interest rates. Its interest coverage ratio, comparing last 12-months consolidated adjusted EBITDA to its last 12 months consolidated cash interest expense improved to 4.99 times interest costs at the end of 2005 from 3.53 times at the end of 2004.

Debt up on acquisitions

Alliance's long-term debt increased by $3.9 million in 2005 to $579.6 million as of the end of the year, up from $575.7 million a year earlier. The company spent $50.2 million for acquisitions in 2005; excluding the cash spent on such acquisitions, total debt would have decreased by $46.3 million to about $529.4 million.

Aihara said that credit facility debt of $414.4 million consisted of $384.9 million of term loan debt and $29.5 million of outstanding revolver borrowings out of the total $70 million revolver line. With another $5.6 million in letters of credit debt outstanding, total revolver availability as of the year end was $34.9 million.

He said that out of the roughly $385 million of term loan borrowings, some $330 million is hedged [against interest rates rising beyond a certain point] through 2007 and 2008.

Enjoying lower interest costs in 2005, among other factors, cash flow from operating activities was $34 million in the fourth quarter, up from $13.8 million in the 2004 fourth quarter, while full year operating cash flow was $127.1 million, up from $120.9 million.

However, cash and cash equivalents decreased by $7.3 million in 2005 to $13.4 million as of the end of the year from $20.7 million at the end of 2004.

Lower EBITDA in Q4

The company said that its fourth-quarter and full-year 2005 results were negatively impacted by lower demand for its MRI scans, the impacts of Hurricanes Katrina and Rita, and rising fuel and transportation costs, which affect the mobile imaging centers portion of its business. Those negatives helped push adjusted EBITDA for the quarter down to $37.489 million, from $39.484 million in the year-earlier period, and reduced adjusted EBITDA for the year to $159.996 million from $167.881 million in 2004.

The fall-off in adjusted EBITDA forced Alliance to seek amendments from its lenders in December of the credit facility covenants establishing the maximum permissible leverage ratio of debt vs. adjusted EBITDA. The company sought, and got, an increase in the maximum leverage ratio permitted under the agreement as of the last day of any fiscal quarter to 4 times adjusted EBITDA for the term of the agreement; prior to the amendment, the maximum leverage ratio had been 3.75 to 1 as of the last date of any fiscal quarter, beginning March 31 of this year.

As a result, at the end of the year, Alliance had a leverage ratio for consolidated total debt of 3.62 times last 12 months consolidated adjusted EBITDA, up somewhat from 3.43 times as of the end of 2004 - when consolidated debt was slightly lower and adjusted EBITDA higher - but still within permitted levels.

The amendment also established a maximum senior leverage ratio - that is, excluding subordinated debt, such as the 7¼% bonds - of three times adjusted EBITDA as of the last day of any fiscal quarter. As of the end of the year, that ratio of consolidated senior debt stood at 2.66 times the last 12 months consolidated adjusted EBITDA figure.

Aihara said that in connection with the execution of the amendment, the interest rate on the company's tranche C term loan was increased by 25 basis points, and the company incurred an amendment fee of 12.5 bps.

When an analyst asked whether, given the current environment, the company was still maintaining its leverage ratio targets in the low three times area, Aihara declared that "we intend to be in compliance with our debt covenants and continue to use free cash flow to pay down debt."

However, when directly asked by another analyst whether Alliance would consider buying back some of its bonds on the open market - they are currently trading at a discount to par, in the low-to-mid 80s - as an alternative to putting money into building new facilities, including its recent push into radiation oncology services, Viviano replied that "we are focusing our capital investments on projects that we think will yield growth for the company at some point in time, so we are focusing our capex, as we've indicated, on fixed sites that replace mobile MRI systems, and now on oncology as well, so we're focusing our capex investments in that direction."

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