Alliance HealthCare Services Reports Third Quarter 2012 Results

Alliance HealthCare Services Reports Third Quarter 2012 Results

Company Grows Organic Adjusted EBITDA For Second Consecutive Quarter, Generates Significant Cash Flow And Updates 2012 Guidance

NEWPORT BEACH, Calif.--(BUSINESS WIRE)-- Alliance HealthCare Services, Inc. (NYS: AIQ) (the "Company" or "Alliance"), a leading national provider of outpatient diagnostic imaging and radiation therapy services, announced results for the third quarter ended September 30, 2012.

Third Quarter Highlights

• Adjusted EBITDA of $41.7 million increased 5.7% sequentially and 8.2% from the year ago period, which includes $2.2 million gain from non-recurring legal settlement. Organic growth, excluding the legal settlement, equaled $1.0 million, or 2.6% compared to third quarter of 2011

• Significant cash flow generation has given the Company a cash and cash equivalents position of $78.6 million, providing the opportunity to increase financial flexibility by amending its credit facility to expand its total leverage covenant and reduce its term loan by $75.0 million utilizing cash from the balance sheet and proceeds from a sale-leaseback transaction

• Total debt (including current maturities) less cash and cash equivalents (before investments in acquisitions), decreased $46.8 million in the first nine months of 2012 compared to a decrease of $28.2 million in the same period last year, a 66% improvement

• Cost saving initiatives generated $35 million in annualized savings since August 2011, versus goal of $20- $25 million

• Regained compliance with two NYSE listing requirements within the provided grace periods

• Company improves 2012 cash flow and capital expenditure guidance ranges

Third Quarter 2012 Financial Results

"Our solid results this quarter were attributable to the continued success of Project Phoenix, the cost savings plan that we introduced last summer. The adoption of this cost savings discipline permanently changed the corporate culture to focus on continuously improving operational efficiency at Alliance, and has generated $35 million in annualized savings since inception," stated Larry C. Buckelew, Chairman of the Board and interim Chief Executive Officer. "These cost savings improvements and a continued focus on efficiency have translated to a second consecutive quarter of organic Adjusted EBITDA growth. We continued to strategically prune our customer base, consciously sacrificing some incremental near-term revenue to enhance the long-term value proposition and profitability that will lead to higher renewal rates and deeper relationships with our most valued customers. In addition, our strong cash generation provides the stability and flexibility to make significant progress against our strategic growth initiatives. These positive third quarter results reaffirm that we have the right financial characteristics, culture, and long-term objectives necessary to create value for our shareholders."

Revenue for the third quarter of 2012 was $116.0 million compared to $120.7 million in the second quarter of 2012. On a year-over-year basis, third quarter 2012 revenue decreased 8.5% from $126.8 million in the third quarter of 2011, primarily due to trimming our portfolio of unprofitable Imaging Division and Oncology Division businesses.

Alliance's Adjusted EBITDA (as defined below) increased 5.7% sequentially to $41.7 million in the third quarter of 2012, including a non-recurring legal settlement, compared to $39.4 million in the second quarter of 2012. On a year-over-year basis, Adjusted EBITDA increased 8.2% from $38.5 million in the third quarter of 2011. The sequential and year-over-year growth was organic, as the Company made no additional acquisitions since the US Radiosurgery and 247 Radiology transactions in April 2011. As described above, Adjusted EBITDA in the third quarter of 2012 included a one-time cash benefit of $2.2 million from a legal settlement arising from the acquisition of Medical Outsourcing Services, LLC ("MOS") in 2008. Adjusting for this benefit, Alliance's Adjusted EBITDA grew 2.6% to $39.5 million compared to the third quarter of 2011.

Alliance's net loss, computed in accordance with generally accepted accounting principles ("GAAP"), improved by $136.0 million to ($1.2) million in the third quarter of 2012 compared to ($137.3) million in the third quarter of 2011. Alliance's net loss in the third quarter of 2012 was sequentially stable compared to ($0.8) million in the second quarter of 2012.

Net loss per share on a diluted basis, computed in accordance with GAAP, was ($0.02) per share in the third quarter of 2012 compared to ($2.58) per share in the third quarter of 2011. In the third quarter of 2012, net loss per share on a diluted basis was impacted by ($0.02) in the aggregate due to restructuring charges, mergers and acquisitions transaction costs, fair value adjustments related to interest rate swaps, and differences in the GAAP income tax rate from our historical income tax rate. In the third quarter of 2011, net loss per share on a diluted basis was impacted by ($2.53) in the aggregate due to impairment charges, restructuring charges, fair value adjustments related to interest rate swaps, mergers and acquisitions transaction costs, refinancing transaction costs and differences in the GAAP income tax rate from our historical income tax rate. Alliance's historical income tax rate has been 42%, compared to the GAAP income tax rate of 49.0% in the third quarter of 2012 and 16.2% in the third quarter of 2011.

Cash flows provided by operating activities were $37.3 million in the third quarter of 2012 compared to $24.4 million in the third quarter of 2011. The difference in operating cash flows is primarily attributable to improved operating performance and timing of working capital requirements. The Company has been focused on asset efficiency, which has reduced Alliance's capital expenditures. In the third quarter of 2012, capital expenditures were $6.6 million compared to $15.0 million in the third quarter of 2011. Alliance opened five new fixed-site imaging centers in the third quarter of 2012, and will continue to allocate sufficient resources through targeted investments designed to support and move forward the long-term goals of the business.

Alliance's net debt, defined as total long-term debt (including current maturities) less cash and cash equivalents, decreased $46.8 million to $552.5 million at September 30, 2012 from $599.3 million at December 31, 2011. Cash and cash equivalents were $78.6 million at September 30, 2012 and $44.2 million at December 31, 2011. The Company's net debt, as defined above, divided by the last twelve months Adjusted EBITDA, as defined in the Company's credit agreement, was 3.82x for the twelve month period ended September 30, 2012.

The Company's total long-term debt (including current maturities) decreased to $631.1 million at September 30, 2012 from $643.5 million at December 31, 2011. The Company's total long-term debt divided by the last twelve months Adjusted EBITDA, as defined in the credit agreement, was 4.37x for the twelve month period ended September 30, 2012. Adjusted EBITDA as defined in the Company's credit agreement includes an adjustment to exclude income attributable to non-controlling interest in subsidiaries.

Term Loan Amendment

On October 29, 2012, the Company received the requisite lender consents to amend its Credit Agreement dated December 1, 2009.

The amendment will modify the financial covenants to provide Alliance with greater flexibility. Under the amended Credit Agreement, Alliance will be required to maintain (i) a maximum ratio of consolidated total debt to consolidated Adjusted EBITDA less minority interest expense of 5.00 to 1.00 through September 30, 2014, 4.75 to 1.00 from October 1, 2014 through September 30, 2015, 4.50 to 1.00 from October 1, 2015 through December 31, 2015 and 4.25 to 1.00 thereafter. The minimum ratio of consolidated Adjusted EBITDA less minority interest expense to consolidated interest expense remains unchanged.

In connection with the effectiveness of the amendment, the Company expects to raise $30 million from a sale of certain imaging assets which the Company will then lease under competitive terms and conditions pursuant to an agreement that has been executed with the financing parties. The sale and lease transactions are expected to be executed on November 1, 2012 and will close on or around November 5, 2012, subject to satisfaction of closing conditions. The Company plans to use the $30 million raised in the sale and lease transactions combined with $45 million on its balance sheet to make a payment of $75 million to permanently reduce borrowings outstanding under the term loan facility and, in addition, the Company will pay a fee to the consenting lenders.

In connection with the $30 million sale and lease transactions, the Company will incur approximately $8 million of annual rent expense (subject to adjustment based on changes in interest rates prior to closing) which will reduce Adjusted EBITDA in the future.

Adjusted for the proposed sale and lease transactions and repayment of the $75 million under the Credit Agreement, the Company's ratio of consolidated total debt to consolidated Adjusted EBITDA less minority interest expense as of September 30, 2012 as calculated pursuant to the Credit Agreement would have been 4.07 to 1.00.

NYSE Listing Update

As previously disclosed, on September 28, 2011, the New York Stock Exchange ("NYSE") notified the Company that it no longer satisfied the minimum $75 million market capitalization requirement. The NYSE accepted the Company's plan to regain compliance with this standard, and granted the Company an 18-month grace period through March 23, 2013, to demonstrate compliance with that standard. In addition and also as previously disclosed, the Company announced that it had received notification from the NYSE that it no longer complied with the audit committee composition rule as a result of the appointment of Mr. Buckelew as interim Chief Executive Officer, and separately the minimum $1.00 stock price requirement as a result of the stock demonstrating an average closing price of less than $1.00 per share for a 30-day period.

On September 6, 2012, the Company announced that it had regained compliance with the minimum $1.00 stock price requirement as of August 31, 2012. On October 29, 2012, the Company announced the appointment of Scott A. Bartos to its Board of Directors and its Audit Committee effective December 1, 2012, which will allow the Company to regain compliance with the audit committee composition rule within the grace period granted by the NYSE.

Full Year 2012 Guidance

Alliance is updating certain of its full year 2012 guidance ranges as follows:

The guidance ranges for 10-15 fixed-site imaging center openings and 3-5 radiation oncology center openings remain unchanged.

Buckelew concluded, "We expect the trends of improved Adjusted EBITDA and incrementally declining revenue to continue in the near-term as we focus on assessing the profitability of our customer base and expanding our profitable relationships. Reducing our debt obligation is a top priority, and our strategic operational discipline and strong cash generation have provided us with the financial flexibility to pay down our term loans and renegotiate our covenants at a more attractive rate. Our strong underlying business fundamentals will continue to provide us the opportunity to make smart investments in growing our business while running a cost-efficient organization."

"The hard work from the entire Alliance team in moving our strategic growth initiatives forward has us poised to take the next steps in our company's evolution, as we build upon our strong history and foundation to become the strategic and indispensable partner of choice to our hospital customers." added Buckelew.

Third Quarter 2012 Earnings Conference Call

Investors and all others are invited to listen to a conference call discussing third quarter 2012 results. The conference call is scheduled for Thursday, November 1, 2012 at 8:30 a.m. Eastern Time. The call will be broadcast live on the Internet and can be accessed by visiting the Company's website at www.alliancehealthcareservices-us.com. Click on Audio Presentations in the Investors section of the website to access the link.

The conference call can be accessed at (877) 638-4550 or (973) 582-2737. Interested parties should call at least five minutes prior to the call to register. A telephone replay will be available until December 1, 2012. The telephone replay can be accessed by calling (855) 859-2056 or (404) 537-3406. The conference call identification number is 56812635.

Definition of Adjusted EBITDA

Adjusted EBITDA, as defined by the Company's management, represents net income (loss) before: interest expense, net of interest income; income taxes; depreciation expense; amortization expense; net income (loss) attributable to noncontrolling interests; non-cash share-based compensation; severance and related costs; restructuring charges; fees and expenses related to acquisitions; costs related to debt financing; non-cash impairment charges; and other non-cash charges included in other (income) expense, net, which includes non-cash losses on sales of equipment. The components used to reconcile net income (loss) to Adjusted EBITDA are consistent with our historical presentation of Adjusted EBITDA. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles in the United States, or "GAAP." For a more detailed discussion of Adjusted EBITDA and reconciliation to net income (loss), see the section entitled "Adjusted EBITDA" included in the tables following this release.

About Alliance HealthCare Services

Alliance HealthCare Services is a leading national provider of advanced outpatient diagnostic imaging and radiation therapy services based upon annual revenue and number of systems deployed. Alliance focuses on MRI, PET/CT and CT through its Imaging division and radiation therapy through its Oncology division. With approximately 1,900 team members committed to providing exceptional patient care and exceeding customer expectations, Alliance provides quality clinical services for over 1,000 hospitals and other healthcare partners in 46 states. Alliance operates 499 diagnostic imaging and radiation therapy systems. The Company is the nation's largest provider of advanced diagnostic mobile imaging services and one of the leading operators of fixed-site imaging centers, with 130 locations across the country. Alliance also operates 30 radiation therapy centers, including 15 dedicated stereotactic radiosurgery facilities, many of which are operated in conjunction with local community hospital partners, providing treatment and care for cancer patients. With 15 stereotactic radiosurgery facilities in operation, Alliance is among the leading providers of stereotactic radiosurgery nationwide.

Forward-Looking Statements

This press release contains forward-looking statements relating to future events, including statements related to the Company's improvement plan, including its efforts to stabilize and grow the Imaging Division, expand the Radiation Oncology Division, and increase organizational efficiency and cost savings through the Journey to Excellence and Project Phoenix initiatives; the closing of the sale and lease transactions; the amount of capital raised through the sale and lease transactions; the use of the proceeds of the sale and lease transaction and cash on the balance sheet to repay indebtedness under the Credit Agreement; the amount of annual rent expense under the sale and lease transactions; the effectiveness and terms of the amendment to the Credit Agreement; the Company's Full Year 2012 Guidance, including its forecasts of revenue, Adjusted EBITDA, cash capital expenditures, decrease in long-term debt and the opening of new fixed-site imaging and radiation therapy centers; and estimates of revenues lost and revenues gained from new client contracts in the Company's revenue gap disclosures on the last page of the tables following this release. In this context, forward-looking statements often address the Company's expected future business and financial results and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks" or "will." Forward-looking statements by their nature address matters that are uncertain and subject to risks. Such uncertainties and risks include: changes in the preliminary financial results and estimates due to the restatement or review of the Company's financial statements; the nature, timing and amount of any restatement or other adjustments; the Company's ability to make timely filings of its required periodic reports under the Securities Exchange Act of 1934; issues relating to the Company's ability to maintain effective internal control over financial reporting and disclosure controls and procedures; the Company's high degree of leverage and its ability to service its debt; factors affecting the Company's leverage, including interest rates; the risk that the counterparties to the Company's interest rate swap agreements fail to satisfy their obligations under these agreements; the Company's ability to obtain financing; the effect of operating and financial restrictions in the Company's debt instruments; the accuracy of the Company's estimates regarding its capital requirements; the effect of intense levels of competition in the Company's industry; changes in the methods of third party reimbursements for diagnostic imaging and radiation oncology services; fluctuations or unpredictability of the Company's revenues, including as a result of seasonality; changes in the healthcare regulatory environment; the Company's ability to keep pace with technological developments within its industry; the growth or lack thereof in the market for imaging, radiation oncology and other services; the disruptive effect of hurricanes and other natural disasters; adverse changes in general domestic and worldwide economic conditions and instability and disruption of credit markets; difficulties the Company may face in connection with recent, pending or future acquisitions, including unexpected costs or liabilities resulting from the acquisitions, diversion of management's attention from the operation of the Company's business, and risks associated with integration of the acquisitions; and other risks and uncertainties identified in the Risk Factors section of the Company's Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the "SEC"), as may be modified or supplemented by our subsequent filings with the SEC. These uncertainties may cause actual future results or outcomes to differ materially from those expressed in the Company's forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake to update its forward-looking statements except as required under the federal securities laws.