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BRLI > SEC Filings for BRLI > Form 10-Q on 7-Jun-2013All Recent SEC Filings

Show all filings for BIO REFERENCE LABORATORIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BIO REFERENCE LABORATORIES INC


7-Jun-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[Dollars In Thousands Except Per Share Data, Total Patient Data Or Unless Otherwise Noted]

Overview

We are a national clinical diagnostic laboratory located in northeastern New Jersey. We are a national laboratory in certain focused areas of laboratory testing and a full service laboratory in the New York super-region. We have developed a national reputation for our expertise in certain focused areas of clinical testing. GenPath, the name by which we are known for our cancer and oncology services, is recognized for the superior hematopathology services it provides throughout the country. Our Women's Health initiative, through which we provide dedicated services for obstetrics and gynecology practices, including a unique, technically advanced multiplex process for identifying sexually transmitted infections, is also offered as GenPath. Our regional footprint lies within the New York City metropolitan area and the surrounding areas of New Jersey and southern New York State as well eastern Pennsylvania and some areas of western Connecticut; we also provide services further into New York State, Pennsylvania, Delaware and Maryland. As a regional provider, we are a full-service laboratory that primarily services physician office practices. Our drivers pick up samples and deliver reports and supplies; we provide sophisticated technical support, phlebotomy services or patient service centers where appropriate, and electronic communication services in many cases.

Physicians outside of this regional footprint send samples to our laboratory in order to take advantage of the expertise that we are able to provide in blood-based cancer pathology and associated diagnostics or to take advantage of the superior service, support and technologically advanced testing we offer in our Women's Health initiative. These accounts frequently send routine testing to us as well in order to simplify their office workflow and to take advantage of our outstanding capability, service and support. Our correctional healthcare services are used throughout the country at prisons and jails. The focused markets we serve on a national basis outside of our regional footprint do not require many of the logistical and other ancillary support services required as a full service laboratory on a regional basis. Within our regional footprint, we provide all of the same services that we provide on a national basis as well as some regionally focused diagnostic services, such as histology and pathology support services, substance abuse testing, fertility testing, hemostasis testing, women's health testing, and molecular diagnostics that are unavailable from many of our smaller regional competitors; some of the regional testing may be provided outside of physician offices in clinics or other bulk deliverers of healthcare. In October 2012, we launched Laboratorio Buena Salud ("LBS"), the first national testing laboratory dedicated to serving Spanish-speaking populations in the United States on a Spanish language first basis. All interactions with patients and physician offices are handled in Spanish unless otherwise requested by the patient or office without the need of choosing Spanish or English

Over the last few years, there have been fundamental changes in the laboratory services industry. In the 1990s, the industry was negatively impacted by the growth of managed care, increased government regulation, and investigations into fraud and abuse. These factors led to revenue and profit declines and industry consolidations, especially among commercial laboratories. There are currently two national mega-laboratories and Bio-Reference Laboratories, together with some specialty laboratories and a few small laboratories in the US public markets. There is one other Australian-based laboratory with significant presence in the US markets. In addition to these publicly-traded commercial laboratories, there are numerous hospital outreach programs and smaller reference laboratories that compete for the commercial clinical laboratory business scattered throughout the country. These clinical laboratories have had to improve efficiency, leverage economies of scale, comply with government regulations and other laws and develop more profitable approaches to pricing. Moreover, there has been a proliferation of technology advancements in clinical diagnostics over the last decade that has created significant opportunities for new testing and growth.

As a full service clinical laboratory, we are constantly looking for new technologies and new methodologies that will help us to grow. Since the turn of the century, our size alone has made us attractive to companies that are driving the advances in technology. We represent a significant opportunity for these companies to market their products with a nationally recognized specialty provider in our focused areas of specialty or in one of the major population centers of the world-the New York super-region. We have had several successful strategic relationships with such technology opportunities. In addition to new


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technology opportunities, we have an extremely seasoned and talented management staff that has been able to identify emerging laboratory markets that are under-served or under-utilized. We have recently developed programs for cardiology, histology and women's health to go along with our existing hemostasis, hematopathology and correctional healthcare initiatives which have already been established and in which we have been increasing our market share for the past several years. Over the past year, we launched several new, disruptive testing services. OnkoMatch, an offering that has emerged as a result of our joint venture with Massachusetts General Hospital, provides tumor genotyping for solid tumor cancer patients at reasonable and affordable pricing. Inherigen, our pre-natal carrier detection panel, provides broad-spectrum carrier detection of autosomal conditions that may affect child-bearing decisions. GenCerv is an advanced test for identifying which HPV positive patients are likely to have cervical cancer. StormPath is our virtual pathology solution that allows remote pathologists to use our technical laboratory capabilities and consult with our pathologists remotely in order to provide improved diagnostics. We continually seek to offer innovative testing services that are clinically relevant and which improve patient care.

The Company believes that it has an outstanding sales and marketing team and has implemented an acquisition strategy based on seeking out opportunities to acquire new technologies, new techniques, new opportunities that will enhance our existing business rather than seeking to acquire laboratories for their underlying business. Over the recent past we have made some strategic acquisitions based on this approach. Our philosophy regarding acquisitions is:
we buy laboratories we consider to be synergistic and accretive. As we have explained in the past, we offer one stop shopping to physicians as a specialty lab. When we buy laboratories in other geographic areas that do not bring in specific technical expertise, we do so to better service our clients and to add growth in the area.

On December 21, 2012, we entered into an agreement pursuant to which we agreed to purchase all of the authorized, issued and outstanding shares of Meridian Clinical Laboratory, Corp. ("MCL"), a Florida corporation. Information about MCL and the agreement may be found in the Form 8-K we filed with the Securities and Exchange Commission on December 21, 2012. MCL is a small laboratory located in the heart of the South Florida Hispanic community and will serve as a base of operations for our Florida LBS program. This acquisition will be our Florida presence for LBS.

On December 31, 2012, we entered into an agreement pursuant to which we agreed to purchase all of the authorized, issued and outstanding shares of Florida Clinical Laboratory, Inc. ("FCL"), a Florida corporation. Information about FCL and the agreement may be found in the Form 8-K we filed with the Securities and Exchange Commission on January 4, 2013. FCL had excess capacity and a strong presence in an underserved area of testing in Florida; its facilities provide the Company with better capability in Florida while expanding our service into an underserved area for testing.

On April 27, 2012, we entered into an agreement pursuant to which we purchased preferred shares of IncellDx, Inc. ("IncellDx"), a Delaware corporation. Information about IncellDx and the agreement may be found in the Current Report on Form 8-K we filed on May 1, 2012. InCellDx developed a valuable test for more positively identifying the likelihood that a woman may have cervical cancer than HPV testing alone. The Company has since introduced GenCerv based on the technology developed at InCellDx.

While we recognize that we are a clinical laboratory that processes samples, we also understand that we are an information company that needs to effectively communicate the results of our efforts back to healthcare providers. Laboratory results play a major role in the implementation of physician healthcare. Laboratory results are used to diagnose, monitor and classify health concerns. In many cases, laboratory results represent the confirming data in diagnosing complicated health issues. Since laboratory results play such an important role in routine physician care, we have developed informatics solutions that leverage our role in healthcare. We built a web-based solution to quickly, accurately, conveniently and competitively collect ordering information and deliver results. That solution is called CareEvolve. CareEvolve is a basic tool for our own operations. We license the technology to other laboratories throughout the country in order for them to more effectively compete against the national mega-laboratories. The laboratories licensing our technology are typically not our competitors since they are outside our regional footprint.

We have also created our PSIMedica business unit that has developed a Clinical Knowledge Management (CKM) System that takes data from enrollment, claims, pharmacy, laboratory results and any other available electronic source to provide both administrative and clinical analysis of a population. The system uses proprietary algorithms to cleanse and configure the data and transfer the resulting information into a healthcare data repository. Using advanced cube technology methodologies, the data can be analyzed from a myriad of views and from highly granular transactional detail to global trended overview. Events such as the Hurricane Katrina disaster in Louisiana and general pressures from the government have made development of an electronic medical record system and Pay-for Performance reimbursement priority goals in the healthcare industry. A large portion of an individual's medical record consists of laboratory data and a key performance indicator in any Pay-for-Performance initiative is laboratory result data. Our CKM system is a mature, full functioning solution that will allow us to play a role in these important national initiatives.

To date, neither our PSIMedica business unit nor CareEvolve have produced significant independent revenues relative to the primary laboratory operations, but they are important tools that we offer in the ordinary course of our laboratory business operations.

Recent Events:

We adopted the Accounting Standard Update ("ASU") No. 2011-07: Health Care Entities (Topic 954) - Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities commencing with the current fiscal year, the first year such standard is required for the Company, We believe this update will have no material impact on the Company's financial statements.

Although this update does not have a material impact on the Company's financial statements as a whole, this update requires that we adjust the presentation of our statement of operations along with prior periods presented in this report to maintain comparability. As the result of this change in presentation, our "Net Revenues", "Gross Profit on Revenues and our "General and Administrative Expenses" will change while our "Operating Income", "Net Income" and "Earnings per Share" will remain the same. The presentation is adjusted for a portion of our "Bad Debt Expense" that is now reported in our Net Revenues as required under ASU No. 2011-7.

Note [4] to our financial statements includes a table that shows the amount of
Bad Debt expense relating to patient service revenue that was moved from the Selling and Administrative expense section of our statement of operations to the Net Revenue section.

Effective February 27, 2013, we announced that we will be offering NonInvasive PreNatal Testing ("NIPT") through the Natera Panorama program. NIPT is a substitute for invasive amniocentesisand CVS testing and reduces risks associated with the testing process itself. We believe that offering an NIPT test enhances our Women's Health program and helps us to be a more comprehensive solution for the Obstetrician office.


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Second Quarter Fiscal 2013 Compared to Second Quarter Fiscal 2012

The numbers in this comparison are affected by the change in presentation on our statement of operations as the result of the Company adopting ASU 2011-7 on November 1, 2012. See discussion of ASU 2011-7 in the notes to our consolidated financial statements for more information.

NET REVENUES:

Net revenues for the three-month period ended April 30, 2013 were $176,452 as compared to $151,443 for the three-month period ended April 30, 2012. This represents a 17% increase in net revenues. This increase is due to a 6% increase in patient counts and an increase in revenue per patient of 11% due to a shift in business to higher reimbursement esoteric testing, which continues to be the principal driver in increasing net revenue per patient. The number of patients serviced during the three-month period ended April 30, 2013 was 2,066, which was 6% greater when compared to the prior fiscal year's corresponding three-month period. This increase in patient counts is mainly due to the overall success of all our lines of business. Net revenue per patient for the three-month period ended April 30, 2013 was $84.93 compared to net revenue per patient of $77.09 for the three-month period ended April 30, 2012, an increase of 11%.

Our revenues and patient counts could be adversely affected by a number of factors, including, but not limited, to an extended economic downturn in general or healthcare economic conditions, an unexpected reduction in reimbursement rates, increased market penetration by our competitors or a substantial adverse change in federal regulatory requirements governing our industry as well as a failure to continue the sizeable annual percentage increase in base business from significantly higher levels after 19 years of sustained growth.

Many provisions of Affordable Care Act ("ACA") became effective January 1, 2013. At this time we are not yet aware as to how this will affect our revenues.

COST OF SERVICES:

Cost of services increased from $83,909 for the three-month period ended April 30, 2012 to $95,776 for the three-month period ended April 30, 2013, an increase of 14%. This increase in cost of services is basically in line with the increase in net revenues.

GROSS PROFITS:

Gross profits increased from $67,534 for the three-month period ended April 30, 2012 to $80,676 for the three-month period ended April 30, 2013, an increase of 19%. Gross profit margin increased to 45% from 46%.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the three-month period ending April 30, 2012 were $50,763 as compared to $59,967 for the quarter ended April 30, 2013, an increase of $9,204 or 18%. This increase is in line with the increase in net revenues.

INTEREST EXPENSE:

Interest expense increased to $434 during the three-month period ending April 30, 2013 from $412 during the three-month period ended April 30, 2012. This decrease is due to an increase in the utilization of our PNC Bank's credit line.

NET INCOME:

We realized net income of $11,338 for the three-month period ended April 30, 2013, as compared to $9,306 for the three-month period ended April 30, 2012, an increase of 22%. Pre-tax income for the period ended April 30, 2012 was $16,401, compared to $20,195 for the three-month period ended April 30, 2013, an increase of 23%. The provision for income taxes increased to $8,857 for the three-month period ended April 30, 2013 from $7,095 for the period ended April 30, 2012.

Six Months 2013 Compared to Six Months 2012

NET REVENUES:

Net revenues for the six-month period ended April 30, 2013 were $337,709 as compared to $290,236 for the six-month period ended April 30, 2012. This represents a 16% increase in net revenues. This increase is due to a 7% increase in patient counts and an increase in revenue per patient of 9%.

The number of patients serviced during the six-month period ended April 30, 2013 was 4,038, which was 7% greater when compared to the prior fiscal year's corresponding six-month period. Net revenue per patient for the six-month period ended April 30, 2012 was $76.50 compared to net revenue per patient for the six- month period ended April 30, 2013 of $83.07, an increase of 9%.

COST OF SERVICES:

Cost of services increased to $186,111 for the six-month period ended April 30, 2013 from $162,584 for the six-month period ended April 30, 2012. This represents a 14% increase in direct operating costs. This increase in cost of services is basically in line with the increase in sales.

GROSS PROFITS:

Gross profits on net revenues increased to $151,598 for the six-month period ended April 30, 2013 from $127,652 for the six-month period ended April 30, 2012; an increase of 19%. Gross profit margins increased to 45% from 44% for the six-month period ended April 30, 2013 compared to the corresponding six-month period ended April 30, 2012. This is due to an increase in cost of services of 14% while net revenues increased 16%.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the six-month period ended April 30, 2013 were $115,130 as compared to $97,597 for the six-month period ended April 30, 2012. This represents an increase of 18%. This increase is 2% more than the increase in net revenues. This increase is basically in line with the increase to our net revenues.


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INTEREST EXPENSE:

Interest expense decreased to $733 during the six-month period ending April 30, 2013 as compared to $771 during the six-month period ending April 30, 2012, a decrease of $38. This decrease is due to primarily a decrease in our utilization of our PNC Bank credit line.

INCOME:

We realized net income of $20,003 or $0.72 per share for the six-month period ended April 30, 2013 as compared to $16,671 or $0.60 per share for the six-month period ended April 30, 2012, an increase of 20%. Our operating income increased by 21% for the six-month period ended April 30, 2013 as compared to the six-month period ended April 30, 2012. Pre-tax income for the period ended April 30, 2013 was $35,569 as compared to $29,368 for the period ended April 30, 2012, an increase of 21%. The provision for income taxes increased from $12,697 for the period ended April 30, 2012, to $15,566 (23%) for the current six-month period. Our effective tax rate increased from 43% to 44% due to an increase in our revenues earned in jurisdictions with higher tax rates.

LIQUIDITY AND CAPITAL RESOURCES:

Our working capital at April 30, 2013 was $157,088 as compared to $151,625 at October 31, 2012, an increase of 4%. Our cash position increased by approximately $395 during the current period. We increased our short-term debt by $15 and repaid $243 in existing debt. We had current liabilities of $92,025 at April 30, 2013. We generated $12,832 in cash from operations, compared to $23,650 for the quarter ended April 30, 2012, an overall decrease of $10,818 in cash generated from operations year over year. The decrease is primarily due to slower cash collections. These slower collections are, in the opinion of management, attributed in part to the expired "Grandfather Clause", a rule that allowed us to bill Medicare directly for in hospital laboratory work that was performed on Medicare patients even though the patient was in the hospital at the time the service was rendered. This exemption expired at the end of 2012 and starting in 2013 we were required to bill the hospital directly for such laboratory work instead of billing Medicare for it. As a consequence of this change collection cycle has increased and in some cases prices may have decreased. Another reason for slower collections is the change in the Blue Cross Blue Shield ("BCBS") reimbursement practices whereby instead of billing BCBS for all of the laboratory services preformed nationwide on one bill we are now required to bill each local BCBS only for the services preformed based on the location where a patient's sample was drawn. This new practice, also effective in 2013, significantly increased the complexity of our BCBS billing and collection processes. The company has since signed a number of local BCBS contracts and is presently diligently working on entering into such additional BCBS contracts.

Accounts receivable, net of allowance for doubtful accounts, totaled $176,438 at April 30, 2013, an increase of $23,191 or 15% from October 31, 2012. Cash collected during the three-month period ended April 30, 2013 increased 3% over the comparable prior year three-month period.

Credit risk with respect to accounts receivable is generally diversified due to the large number of patients and payers comprising our client base. We have significant receivable balances with government payors and various insurance carriers. Generally, we do not require collateral or other security to support customer receivables. However, we continually monitor and evaluate our client acceptance and collection procedures to minimize potential credit risks associated with our accounts receivable and establish an allowance for uncollectible accounts. As a consequence, we believe that our accounts receivable credit risk exposure beyond such allowance is not material.

A number of proposals for legislation continue to be under discussion that could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of any regulatory action, and the content of legislation, we could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on us. We are unable to predict, however, the extent of which such actions will be taken if at all.

Billing for laboratory services is complicated and we must bill various payors, such as the individual, the insurance company, the government (federal or state), the private company or the health clinic. Other factors that may complicate billing include:

Differences between fee schedules and actual reimbursement rates.

Incomplete or inaccurate billing information provided by physicians or clinics.

Disparity in coverage and information requirements.

Disputes with payors.

Internal and external compliance policies and procedures.

Significant costs are incurred as a result of our participation in government programs since billing and reimbursement for laboratory tests are subject to complex regulations. We perform the requested tests and report the results whether the billing information is correct or not or even missing. This adds to the complexity and slows the collection process and increases the aging of our accounts receivable ("A/R"). When patient invoices are not collected in a timely manner, the item is written off to the allowance. Days Sales Outstanding ("DSO") for the period ended April 30, 2013 was 89 days, an increase of 1 day, or about 1%, from the 88 days that we reported for the period ended April 30, 2012, computed under the new method taking into account the change in presentation for patient service revenue provision for bad debts. Depending on the period in question, our actual collections represent between 98% and 102% of our net collectable revenues after giving effect to our DSO lag.

See Notes to our consolidated financial statements for the information on our short and long term debt.

We intend to expand our laboratory operations organically through marketing while also diversifying into related medical fields through acquisitions. These acquisitions may involve cash, notes, common stock and/or combinations thereof.

                 Tabular Disclosure of Contractual Obligations



                                            Next Four Years and
                                              Thereafter ($)         FY 2013 ($)
Long-Term Debt                                            4,627                 458
Capital Leases                                            5,395               1,200
Operating Leases                                         15,250               7,127
Purchase Obligations                                     91,073              23,758
Long-Term Liabilities under Employment
and Consultant Contracts                                 16,961               4,982

Our cash balance at April 30, 2013 totaled $25,538 as compared to $25,143 at October 31, 2012. We believe that our cash position, the anticipated cash generated from future operations and the availability of our credit line with PNC Bank will meet our anticipated cash needs for the next 12 months.


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Impact of Inflation

To date, inflation has not had a material effect on our operations.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.

Accounting for Intangible and Other Long-Lived Assets

We evaluate the possible impairment of our long-lived assets, including intangible assets. We review the recoverability of our long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Evaluation of possible impairment is based on our ability to recover the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If the expected undiscounted pretax cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated fair value and the carrying amount of the asset.

Accounting for Revenue

Service revenues are principally generated from laboratory testing services including chemical diagnostic tests such as blood analysis, urine analysis and genetic testing among others. Service revenues are recognized at the time the testing services are performed and are reported at their estimated net realizable amounts.

Service revenues before provision for bad debts are determined utilizing gross service revenues net of contractual adjustments and discounts. Even though it is . . .

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