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BRLI > SEC Filings for BRLI > Form 10-K on 13-Jan-2014All Recent SEC Filings

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Form 10-K for BIO REFERENCE LABORATORIES INC


13-Jan-2014

Annual Report


Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations.

You are encouraged to read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related footnotes included at the end of this Annual Report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. See "Risk Factors" included elsewhere in this Annual Report for a discussion of some of the important factors that could cause actual results to differ materially from those described or implied by the forward-looking statements contained in the following discussion and analysis. See "Special Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report.

All amounts are presented in thousands, except share and per share amounts and per patient data.


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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 lays 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 our 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 for processing along with specialized testing in order to simplify their diagnostic ordering and review procedures 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 within the region. Even within our regional footprint, we provide the same services that we provide on a national basis as well as some regional 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 the smaller regional competitors; testing in some of these areas may be provided outside of physician offices. In October 2012, we launched Laboratorio Buena Salud, the first national testing laboratory dedicated to serving Spanish-speaking populations in the United States. All business will be conducted in Spanish, including patient and physician interactions.

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 only three US publicly traded full service laboratories operating primarily in the U.S. While that means that the two national mega-laboratories and Bio-Reference Laboratories are the only remaining publicly traded full service commercial laboratories, there are numerous hospital outreach programs and smaller reference laboratories that compete for the commercial clinical laboratory business scattered throughout the country. 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 Metropolitan area. We have had several successful strategic relationships with such technology opportunities. In addition to new 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. We are currently preparing to launch a comprehensive pre-natal program to leverage our presence in the women's health environment and we will continue to vigilantly seek focused diagnostic marketing opportunities where we can provide information, technology, service or support that expand and grow our clinical laboratory.

On December 21, 2012, the Company entered into an agreement with Meridian Clinical Laboratory Corporation, a Florida corporation having its place of business in Miami, Florida ("Meridian"), pursuant to which the Company purchased all issued and outstanding common stock of Meridian for approximately $1,848 of which $250 is deferred for one year.

On December 31, 2012, Bio-Reference Laboratories, Inc. (the "Company") entered into an agreement with Florida Clinical Laboratory, Inc., a Florida corporation having its place of business in Melbourne, Florida ("FCL"), pursuant to which the Company purchased all issued and outstanding shares of capital stock of FCL for approximately $7,016, of which $1,000 is deferred for eighteen months assuming certain conditions are met.

On August 7, 2013 the Company purchased substantially all of the operating assets and certain of the operating liabilities of Hunter Laboratories, Inc., ("Hunter") a California corporation having its principal place of business in Campbell, California. The gross purchase price was $15,215 plus payroll adjustment of $111 totaling $15,326. Of that amount $3,000 was deferred to cover anticipated pre closing liabilities.

On August 20, 2013 the Company through its subsidiary GeneDx, Inc. purchased the entire membership interest in Edge BioServ, LLC, ("Edge Bio") a Delaware limited liability company having its place of business in Gaithersburg, Maryland. The gross purchase price was approximately $2,502. Of that $375 was deferred to cover anticipated pre closing liabilities.

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 has been essential to our own operations. We license the technology to other laboratories throughout the country that they utilize to more effectively compete against the national laboratories. These other 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 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 has produced significant revenues relative to the primary laboratory operations.


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Results of Operations

All comparisons to prior periods are adjusted in accordance with the Accounting Standards Update 2011-7 under Topic 954 of FASB codification.

Fiscal Year 2013 Compared to Fiscal Year 2012

NET REVENUES:

Net revenues for the year ended October 31, 2013 were $715,354 as compared to $614,255 for the year ended October 31, 2012; this represents a 16% increase in net revenues. This increase is due to a 10% increase in patients serviced and a 6% increase in net revenue per patient. Our laboratory operations had net revenues of $709,592 in fiscal 2013 and $609,763 in fiscal 2012.

The number of patients serviced during the year ended October 31, 2013 was 8,549, which was 10% greater when compared to the prior fiscal year. Net revenue per patient for the year ended October 31, 2013 was $83.00 compared to net revenue per patient for the year ended October 31, 2012 of $78.16, an increase of 6% as a result of increases in esoteric testing.

Despite continued strong volume growth, the Company believes there is an ongoing recalibration of reimbursement for the industry, which has resulted in substantial downward pressure from many payers regarding reimbursement in FY13. Over the past year, the Company has had to negotiate contract modifications to reimbursement rates, conditions of payment and / or eligibility with dozens of health plans representing a substantial numbers of lives nationwide; most of these changes became effective toward the end of FY13 and especially in Q4FY13.

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.

COST OF SERVICES:

Cost of services for the year ended October 31, 2013 was $392,815 as compared to $337,644 for the year ended October 31, 2012, an increase of 16% as compared to a 16% increase in net revenues. This is basically in line with the increase in our net revenues.

GROSS PROFIT:

Gross profit on net revenues increased to $322,539 for the year ended October 31, 2013 from $276,611 for the year ended October 31, 2012; an increase of $45,928 (17%), primarily attributable to the increase in net revenues. Gross profit margins remained consistent at 45% from fiscal 2012 to fiscal 2013.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the year ended October 31, 2013 were $240,566 as compared to $200,480 for the year ended October 31, 2012, an increase of $40,086 or 20%. This increase is slightly more than the increase in net revenues due to additional bad debt expenses the Company recorded as the result of the ongoing reimbursement changes in the marketplace. We expect this trend to continue in the near future.

INTEREST EXPENSE:

Interest expense increased from $1,455 during the year ended October 31, 2012 to $1,606 during the year ended October 31, 2013; an increase of $151 or 10%. This increase is due to an increase in utilization of the PNC Bank line of credit. Management believes that this trend will continue in the near term.

NET INCOME:

We realized net income of $45,825 for the twelve month period ended October 31, 2013 as compared to $42,156 for the twelve month period ended October 31, 2012, an increase of 9%.

Pre-tax income for the period ended October 31, 2013 was $81,097, as compared to $74,516 for the period ended October 31, 2012, an increase of $6,581 (9%) and was caused primarily by an increase in net revenues. The provision for income taxes increased from $32,360 for the period ended October 31, 2012, to $35,272 (9%) for the current twelve month period.

During this fiscal year the Company received a refund of $1,062 for its New York State clinical laboratory inspection fee that was included in other income.

Our diluted net income per share went from $1.51 in fiscal 2012 to $1.65 in fiscal 2013.

Fiscal Year 2012 Compared to Fiscal Year 2011

NET REVENUES:

Net revenues for the year ended October 31, 2012 were $614,255 as compared to $522,081 for the year ended October 31, 2011; this represents an 18% increase in net revenues. This increase is due to a 16% increase in patients serviced and a 2% increase in net revenue per patient. Our laboratory operations had net revenues of $609,763 in fiscal 2012 and $517,721 in fiscal 2011.

The number of patients serviced during the year ended October 31, 2012 was 7,801, which was 16% greater when compared to the prior fiscal year. Net revenue per patient for the year ended October 31, 2012 was $78.16 compared to net revenue per patient for the year ended October 31, 2011 of $76.82, an increase of 2% as a result of increases in esoteric testing.

During the fiscal year ended October 31, 2012, we increased our sales force by approximately 12%, mostly in the specialty testing services that we market nationally. We believe that this increase in sales personnel accounted for a majority of the 16% increase in our patient volume. This allowed us to expand or increase our presence in a number of markets and we expect this trend to continue.

While there is always uncertainty as to the sustainability of such growth in the future, we believe that our historical performance of 20% compound annual growth rate for the past 18 years, the current demand for our services and our continued corporate focus on strategic


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growth, together with our expertise in the industry, should enable us to sustain continued strong growth in the near term. Going beyond that, however, our revenues and patient counts could be adversely affected by a number of factors including, but not limited to an extended 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 17 years of sustained growth.

Our net revenues for the fourth quarter of fiscal 2012 and cumulative results for the fiscal 2012 as well as operating results during the first quarter of fiscal 2013 have been affected by the adverse weather conditions associated with the hurricane Sandy. Based on actual revenues and expenses from the period immediately preceding the storm as well as the analysis of the period following the storm, management has calculated the damage from, the hurricane Sandy resulted in a loss of net revenues of approximately $5,000 for the fourth quarter of fiscal 2012 and approximately $3,000 for the first quarter of fiscal 2013.

COST OF SERVICES:

Cost of services for the year ended October 31, 2012 was $337,644 as compared to $287,853 for the year ended October 31, 2011, an increase of 17% as compared to an 18% increase in net revenues. The Company's medical supplies expense increased by 34% due to the higher cost of specialty testing supplies. Our medical equipment repair costs increased by 26% year over year due to higher equipment utilization rate. We expect these trends to continue.

GROSS PROFIT:

Gross profit on net revenues increased to $276,611 for the year ended October 31, 2012 from $234,229 for the year ended October 31, 2011; an increase of $42,382 (18%), primarily attributable to the increase in net revenues. Gross profit margins remained consistent at a rate of 45% from fiscal 2011 to fiscal 2012.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the year ended October 31, 2012 were $200,480 as compared to $174,454 for the year ended October 31, 2011, an increase of $26,026 or 15%. This is basically in line with the increase in net revenues. We expect this trend to continue in the near future.

INTEREST EXPENSE:

Interest expense decreased from $1,747 during the year ended October 31, 2011 to $1,455 during the year ended October 31, 2012; a decrease of $292 or 17%. This decrease is due to a decrease in utilization of the PNC Bank line of credit. Management believes that this trend will continue in the near term due to the decrease in utilization of this credit facility.

NET INCOME:

We realized net income of $42,156 for the twelve month period ended October 31, 2012 as compared to $36,359 for the twelve month period ended October 31, 2011, an increase of 16%.

Pre-tax income for the period ended October 31, 2012 was $74,516, as compared to $64,846 for the period ended October 31, 2011, an increase of $9,670 (15%) and was caused primarily by an increase in net revenues. The provision for income taxes increased from $28,487 for the period ended October 31, 2011, to $32,360 (14%) for the current twelve month period.

Our diluted net income per share went from $1.29 in fiscal 2011 to $1.51 in fiscal 2012.

Our operating results for the fourth quarter of fiscal 2012 and cumulative results for the fiscal 2012 as well as operating results during the first quarter of fiscal 2013 have been affected by hurricane Sandy. Based on actual revenues and expenses from the period immediately preceding the storm as well as the analysis of the period following the storm, Management has calculated the damage from the storm resulted in a loss of earnings approximately $0.06 per share for the fourth quarter of fiscal 2012 and approximately $0.03 per share for the first quarter of fiscal 2013.

Liquidity and Capital Resources

Our working capital at October 31, 2013 was approximately $161,116 as compared to approximately $151,625 at October 31, 2012, an increase of $9,491 (6%). Our cash position decreased by approximately $7,191 during the current twelve month period. We increased our short term borrowing by approximately $26,139 and decreased our long term debt by approximately $435. We had current liabilities of approximately $133,762 at October 31, 2013. We generated approximately $17,662 in cash from operations, a decrease of approximately $35,436 as compared to the year ended October 31, 2012.

The decrease is primarily due to slower cash collections. These slower collections are, in the opinion of management, attributable first in part to the expired "grandfather" provision, 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. The second reason for slower collection, in our opinion, involves changes in the molecular coding around the country by Medicare and in some cases Medicaid, who have simply stopped paying at all for these molecular tests. These reimbursement levels are set my CMS. With regard to payments by Medicare, there still remain many of these tests whose reimbursement has not been determined by the carrier. 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. In many cases billings were delayed for some time until prices were loaded in the various systems around the country. Lastly, slower collections occurred due to a dispute with Horizon Blue Cross Blue Shield of New Jersey ("Horizon BCBSNJ") concerning Horizon BCBSNJ's obligation to pay Bio-Reference with respect to certain of its insurance plans. Please see "Legal Proceedings" above. .

Accounts receivable, net of allowance for doubtful accounts, totaled approximately $206,261 at October 31, 2013, an increase of approximately $53,014 from October 31, 2012, or 35%. This increase was primarily attributable to increased revenue and slowdown in the collection cycle. Cash collected over the twelve month period ended October 31, 2013 increased 11% over the prior twelve month period.


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Net service revenues on the statements of operations are as follows:

                                                               ($)
                                                           Year Ended
                                                           October 31,
                                                 2013         2012         2011
Gross Service Revenues                         3,524,108    3,052,431    2,482,349

Contractual Adjustments and Discounts:
Medicare/Medicaid Portion                        354,638      320,697      293,874
All Other Third Party Payors*                  2,393,872    2,070,073    1,629,833
Total Contractual Adjustments and Discounts    2,748,510    2,390,770    1,923,707
Service Revenues Net of Contractual
Adjustments and Discounts                        775,598      661,661      558,642
Patient Service Revenue Provision for Bad
Debts**                                           60,244       47,406       36,561
Net Revenues                                     715,354      614,255      522,081

Percent of Contractual Allowances,
Discounts and Patient Service Provision for
Bad Debts to Gross Revenue.                         79.7 %       79.9 %       79.0 %



* All Other Third Party and Direct Payors consists of almost eight hundred distinct payors, including commercial health insurers and administrators as well as professionally billed accounts such as physicians, hospitals, clinics and other direct billed accounts.

** Represents the amount of Bad Debt Expense that is now required to be presented as a deduction from patient service revenue (net of contractual allowances and discounts) pursuant to ASU No. 2011-7.

Credit risk with respect to accounts receivable is generally diversified due to the large number of patients 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 to establish an allowance for uncollectible accounts. As a consequence, we believe that our accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.

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


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LABORATORY GROSS RECEIVABLES BY PAYOR GROUP

($)

                                                     FY 2013
                       30 Days   %    60 Days   %    90 Days   %    >90 Days   %     Total     %
Self Pay                12,723   18 %  12,934   18 %  11,244   15 %   35,367   49 %  72,269   100 %
Medicare                35,783   45 %  12,801   16 %   4,732    6 %   25,841   33 %  79,158   100 %
Medicaid                 5,625   20 %   4,377   15 %   4,321   15 %   14,145   50 %  28,469   100 %
Pro Bill                16,103   51 %   6,162   20 %   3,085   10 %    6,140   19 %  31,491   100 %
Commercial Insurance   196,097   46 %  59,571   14 %  33,559    8 %  137,204   32 % 426,432   100 %
Total                  266,332   42 %  95,847   15 %  56,942    9 %  218,698   34 % 637,819   100 %




                                                          ($)
                                                        FY 2012
                       30 DAYS   %    60 DAYS   %    90 DAYS   %    >90 DAYS   %     TOTAL     %
Self Pay                 9,620   18 %  10,633   20 %   9,474   18 %   24,202   44 %  53,929   100 %
Medicare                25,898   56 %   6,550   14 %   2,992    6 %   11,186   24 %  46,626   100 %
. . .
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