ALLIANCE HEALTHCARE SVCS INC AIQ
April 16, 2013 - 3:10pm EST by
bedrock346
2013 2014
Price: 9.60 EPS N/A N/A
Shares Out. (in M): 11 P/E 0.0x 0.0x
Market Cap (in M): 90 P/FCF 1.8x 1.9x
Net Debt (in M): 519 EBIT 53 60
TEV: 609 TEV/EBIT 11.5x 10.0x

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  • Medical Examination
  • Turnaround
 

Description

Alliance Imaging (AIQ)

LONG

 

Business:

Alliance Healthcare (formerly Alliance Imaging) is one of the largest diagnostic imaging and radiation service businesses in the country. The company reports 2 segments: 

  • Imaging Services – does MRI and PET/CT scans, both in mobile units and at fixed sites, generally under 3-5 year contracts with hospitals and healthcare facilities, where AIQ is typically paid on a per-scan basis. 
  • Radiation Oncology – 29 centers, which are all in hospital settings, generally under 8-10 contracts.

MRI was 41% of 2012 revenue, PET/CT 33% and Radiation Oncology 18%. 

 

AIQ’s Tough Slog

Radiology has been a very profitable business for hospitals, arguably the most profitable of the major business lines a hospital can enter.  AIQ’s own results demonstrate the high profitability, with average Gross Margins of 47% and EBITDA margins nearing 35%:

 

FYE Dec ($mn's) FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A CAGR/Avg
Gross Profit                    215                    214                    204                    215                    209                    234                    235                    214                    214                    220  0.3%
% margin  52.0%  49.6%  47.5%  47.2%  47.1%  47.2%  46.5%  44.7%  43.4%  46.6%  47.2%
EBITDA                    168                    166                    156                    161                    152                    171                    170                    147                    140                    148  (1.4%)
% margin  40.5%  38.5%  36.3%  35.4%  34.3%  34.6%  33.6%  30.7%  28.4%  31.3%  34.4%
EBIT                       87                       82                       70                       73                       65                       75                       62                       42                       34                       53  (5.5%)
% margin  21.1%  19.1%  16.2%  16.0%  14.5%  15.1%  12.2%  8.8%  6.9%  11.1%  14.1%

 

 

Given the high profitability, the industry has seen robust growth in scans but there have been a number of challenges:

  • The industry is plagued with chronic overcapacity fueled by cheap financing from the equipment makers like GE and Siemens. 
  • Alliance had a particular tough go of it as its mobile MRI business has been in chronic decline as the hospitals that were its best customers inevitably replaced mobile MRI centers with fixed sites, some run by Alliance but many not. 
  • The growth in scans also resulted in a crackdown in government and insurance reimbursement as they pushed back on what was perceived as unnecessary scans.
  • The great recession also has taken a toll as high unemployment in states like Michigan and California reduced that amount of volume as private insurance coverage declined.

 

As a result, the company’s MRI business has seen both volume and pricing declines for years:

 

  FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A
MRI Statistics                    
Avg Number of Total Systems                333            320            308            304            280            281            288            266
Avg Number of Scan-Based Systems            306            293            282            270            253            254            241            238            243            223
Scans/system/day             9.5             9.7             9.5             9.4             9.3             9.2             8.8             8.3             8.1             8.5
Total Number of Scan-Based MRI Scans     828,173     812,730     753,020     702,898     645,711     630,875     567,624     505,640     500,430     494,739
Price per Scan $361 $356 $355 $360 $365 $381 $384 $384 $368 $360

The company’s approach to these issues was to throw capital at it by investing in higher end and higher reimbursement Pet and CT scan centers and to diversify into oncology. 

 

Revenue FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A
Total MRI Revenue             322             316             294             280             265             269             239             215             206             196
PET/CT Revenue               56               78               96             133             140             168             202             186             169             155
Radiation Oncology, Other               38               39               41               42               40               59               66               78             119             121
Total Revenue             415             432             431             456             445             496             506             479             494             472

 

 

The result of this strategy was profitless prosperity as the company staved off the declines in Revenue and EBITDA but never managed to pare its substantial LBO debt load. EBITDA was essentially consumed by acquisition spending, CapX and interest expense. The company’s operating approach also appeared to be one of wait and hope the employment market improved in its home markets, which has yet to occur.

 

FYE Dec ($mn's) FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A
Revenue                    414                    432                    431                    456                    445                    496                    506                    479                    494                    472
                     
EBITDA                    168                    166                    156                    161                    152                    171                    170                    147                    140                    148
Capex                       98                       86                       86                       75                       65                       75                       74                       67                       50                       41
Interest Expense                       44                       45                       35                       42                       45                       50                       46                       51                       50                       54
EBITDA-Capx-Int Exp                       26                       36                       36                       45                       43                       47                       50                       29                       41                       53
Acquisitions                       11                          0                       50                          0                       89                       75                          1                       34                       48                          0
Cash Flow                       15                       36                   (15)                        45                   (46)                    (29)                        49                      (5)                       (7)                        53

 

Turnaround in Place

The board faced with a collision course with a debt restructuring, finally took action over the past 1-2 years, replacing CEO Paul Viviano with Larry Buckelew in June 2012.  Buckelew has been an AIQ director since 2009 and has spent his entire career in various healthcare companies. 

 

Although Buckelew was technically named interim CEO, he took a number of steps to improve Alliance’s results:

  • Naming a new Chief Operating Officer (Michael Shea, who had previously been at DaVita) and new President of Imaging Services (Richard Jones)
  • Restructuring the Imaging Services sales force
  • Pruning over $20mn in lower profit Imaging Services Revenue
  • Shutting unprofitable oncology centers
  • Continuing a cost cutting program that resulted in $36mn in annual savings

 

Buckelew also took steps to get Alliance’s finances under control:

  • In 2012, he paid down $75mn of the company’s debt, covering all the required amortization payments until the debt matures in 2016.  To fund part of the paydown, he entered a sale leaseback transaction where they sold 28 assets, raising $30mn.  This deal increased rent expense by $7.9mn, but lowered interest expense by $5.4mn.  

 

Buckelew’smoves seem to be bearing fruit:

  • Net Debt to EBITDA has dropped from 4.4 to 3.2 by the end of this year.
  • Retention rates for their Imaging Services customer contract renewals have reach the mid-80s (up from the 70s). 
  • For 2012, both Gross Margin (46.6%) and EBITDA margin (31.3%)were 300bps higher than 2011’s results, and reversed a downward trend that began in 2009.
  • While the midpoint of 2013 EBITDA guidance is flat with 2012 (at $150mn), on an apples to apples basis (adjusting for Medicare cuts and revenue they have pruned) 2013 EBITDA would be $160mn, implying 7% y/y growth. 
  • 2013 guidance for free cash flow for debt repayment is projected to be about $30mm or almost $3 per share on a $9 stock. 

 

The bond market has reacted very favorably to these developments as they have rallied in the past year from the 60s to par.  The stock market has yet to appreciate the improvement in the company’s financials perhaps in part due to a 1 for 5 reverse split that dramatically reduced the trading liquidity in the name from 50mm shares outstanding to 10mm.

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts

  • The stock market should eventually see what the high yield market does.  If the stock were to trade at just 5x current year EBITDA, it would yield approximately $25 per share in value. With debt under control and trading at par and free cash flow going in the right direction, this multiple does not seem unreasonable.   Given the company’s leverage, even slight moves in valuation can have significant effects on the equity value.

 

Price per Share:      
    2013 EBITDA
               150            160            170
Multiple 4.0x         10.50         14.27         18.04
5.0x         24.64         29.35         34.06
6.0x         38.78         44.43         50.09

 

  • AIQ has a fairly significant fixed cost base.  An improvement in industry fundamentals could have a dramatic effect on revenue and EBTIDA.  Higher employment and the increased number of people having health insurance coverage under ObamaCare could provide drive higher industry revenue. 
  • Since AIQ is owned by LBO firms that will eventually need to exit, a sale of the company is a distinct possibility. 

 

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    Description

    Alliance Imaging (AIQ)

    LONG

     

    Business:

    Alliance Healthcare (formerly Alliance Imaging) is one of the largest diagnostic imaging and radiation service businesses in the country. The company reports 2 segments: 

    MRI was 41% of 2012 revenue, PET/CT 33% and Radiation Oncology 18%. 

     

    AIQ’s Tough Slog

    Radiology has been a very profitable business for hospitals, arguably the most profitable of the major business lines a hospital can enter.  AIQ’s own results demonstrate the high profitability, with average Gross Margins of 47% and EBITDA margins nearing 35%:

     

    FYE Dec ($mn's) FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A CAGR/Avg
    Gross Profit                    215                    214                    204                    215                    209                    234                    235                    214                    214                    220  0.3%
    % margin  52.0%  49.6%  47.5%  47.2%  47.1%  47.2%  46.5%  44.7%  43.4%  46.6%  47.2%
    EBITDA                    168                    166                    156                    161                    152                    171                    170                    147                    140                    148  (1.4%)
    % margin  40.5%  38.5%  36.3%  35.4%  34.3%  34.6%  33.6%  30.7%  28.4%  31.3%  34.4%
    EBIT                       87                       82                       70                       73                       65                       75                       62                       42                       34                       53  (5.5%)
    % margin  21.1%  19.1%  16.2%  16.0%  14.5%  15.1%  12.2%  8.8%  6.9%  11.1%  14.1%

     

     

    Given the high profitability, the industry has seen robust growth in scans but there have been a number of challenges:

     

    As a result, the company’s MRI business has seen both volume and pricing declines for years:

     

      FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A
    MRI Statistics                    
    Avg Number of Total Systems                333            320            308            304            280            281            288            266
    Avg Number of Scan-Based Systems            306            293            282            270            253            254            241            238            243            223
    Scans/system/day             9.5             9.7             9.5             9.4             9.3             9.2             8.8             8.3             8.1             8.5
    Total Number of Scan-Based MRI Scans     828,173     812,730     753,020     702,898     645,711     630,875     567,624     505,640     500,430     494,739
    Price per Scan $361 $356 $355 $360 $365 $381 $384 $384 $368 $360

    The company’s approach to these issues was to throw capital at it by investing in higher end and higher reimbursement Pet and CT scan centers and to diversify into oncology. 

     

    Revenue FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A
    Total MRI Revenue             322             316             294             280             265             269             239             215             206             196
    PET/CT Revenue               56               78               96             133             140             168             202             186             169             155
    Radiation Oncology, Other               38               39               41               42               40               59               66               78             119             121
    Total Revenue             415             432             431             456             445             496             506             479             494             472

     

     

    The result of this strategy was profitless prosperity as the company staved off the declines in Revenue and EBITDA but never managed to pare its substantial LBO debt load. EBITDA was essentially consumed by acquisition spending, CapX and interest expense. The company’s operating approach also appeared to be one of wait and hope the employment market improved in its home markets, which has yet to occur.

     

    FYE Dec ($mn's) FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012A
    Revenue                    414                    432                    431                    456                    445                    496                    506                    479                    494                    472
                         
    EBITDA                    168                    166                    156                    161                    152                    171                    170                    147                    140                    148
    Capex                       98                       86                       86                       75                       65                       75                       74                       67                       50                       41
    Interest Expense                       44                       45                       35                       42                       45                       50                       46                       51                       50                       54
    EBITDA-Capx-Int Exp                       26                       36                       36                       45                       43                       47                       50                       29                       41                       53
    Acquisitions                       11                          0                       50                          0                       89                       75                          1                       34                       48                          0
    Cash Flow                       15                       36                   (15)                        45                   (46)                    (29)                        49                      (5)                       (7)                        53

     

    Turnaround in Place

    The board faced with a collision course with a debt restructuring, finally took action over the past 1-2 years, replacing CEO Paul Viviano with Larry Buckelew in June 2012.  Buckelew has been an AIQ director since 2009 and has spent his entire career in various healthcare companies. 

     

    Although Buckelew was technically named interim CEO, he took a number of steps to improve Alliance’s results:

     

    Buckelew also took steps to get Alliance’s finances under control:

     

    Buckelew’smoves seem to be bearing fruit:

     

    The bond market has reacted very favorably to these developments as they have rallied in the past year from the 60s to par.  The stock market has yet to appreciate the improvement in the company’s financials perhaps in part due to a 1 for 5 reverse split that dramatically reduced the trading liquidity in the name from 50mm shares outstanding to 10mm.

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Catalysts

    • The stock market should eventually see what the high yield market does.  If the stock were to trade at just 5x current year EBITDA, it would yield approximately $25 per share in value. With debt under control and trading at par and free cash flow going in the right direction, this multiple does not seem unreasonable.   Given the company’s leverage, even slight moves in valuation can have significant effects on the equity value.

     

    Price per Share:      
        2013 EBITDA
                   150            160            170
    Multiple 4.0x         10.50         14.27         18.04
    5.0x         24.64         29.35         34.06
    6.0x         38.78         44.43         50.09

     

    • AIQ has a fairly significant fixed cost base.  An improvement in industry fundamentals could have a dramatic effect on revenue and EBTIDA.  Higher employment and the increased number of people having health insurance coverage under ObamaCare could provide drive higher industry revenue. 
    • Since AIQ is owned by LBO firms that will eventually need to exit, a sale of the company is a distinct possibility. 

     

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