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BRLI > SEC Filings for BRLI > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for BIO REFERENCE LABORATORIES INC

Form 10-Q for BIO REFERENCE LABORATORIES INC


6-Jun-2014

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 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 is 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 and subsequently paid.

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 Hurricane Katrina 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.


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To date, neither our PSIMedica business unit nor CareEvolve has produced significant revenues relative to the primary laboratory operations.

Second Quarter Fiscal 2014 Compared to Second Quarter Fiscal 2013

NET REVENUES:

Net revenues for the three-month period ended April 30, 2014 were $201,366 as compared to $176,452 for the three-month period ended April 30, 2013. This represents a 14% increase in net revenues. This increase is due to a 15% increase in patient counts and a decrease in revenue per patient of 1%. The number of patients serviced during the three-month period ended April 30, 2014 was 2,364, which was 15% 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, 2014 was $84.18 compared to net revenue per patient of $84.93 for the three-month period ended April 30, 2013, a decrease of 1%.

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.

COST OF SERVICES:

Cost of services increased from $95,776 for the three-month period ended April 30, 2013 to $112,817 for the three-month period ended April 30, 2014, an increase of 18%. This increase is 4% greater than the increase in net revenues. This is mainly due to additional costs incurred as the result of integrating operations of our newly acquired businesses in Florida and California.

GROSS PROFITS:

Gross profits increased from $80,676 for the three-month period ended April 30, 2013 to $88,549 for the three-month period ended April 30, 2014, an increase of 10%. Gross profit margin decreased to 44% from 46%. This decrease of is largely attributable to temporary increase in direct costs related to the newly acquired operations in Florida and California.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the three-month period ending April 30, 2013 were $59,967 as compared to $69,670 for the quarter ended April 30, 2014, an increase of 16%. This increase is slightly more than the increase in our net revenues as the result of additional expenses incurred as the result of integrating operations of newly acquired businesses in Florida and California.

INTEREST EXPENSE:

Interest expense increased to $597 during the three-month period ending April 30, 2014 from $434 during the three-month period ended April 30, 2013. This increase is due to an increase in the utilization of our PNC Bank's credit line.

NET INCOME:

We realized net income of $10,273 for the three-month period ended April 30, 2014, as compared to $11,338 for the three-month period ended April 30, 2013, a decrease of 9%. Pre-tax income for the period ended April 30, 2013 was $20,195, compared to $18,238 for the three-month period ended April 30, 2014, a decrease of 10%. As indicated previously, this substantial decrease in pre-tax income is the result of several factors such as substantial additional integration costs related to our recent acquisitions in Florida and California, changing reimbursement landscape. The provision for income taxes decreased to $7,965 for the three-month period ended April 30, 2014 from $8,857 for the period ended April 30, 2013.

Six Months 2014 Compared to Six Months 2013

NET REVENUES:

Net revenues for the six-month period ended April 30, 2014 were $382,635 as compared to $337,709 for the six-month period ended April 30, 2013. This represents a 13% increase in net revenues. This increase is due to a 13% increase in patient counts while the revenue per patient largely remained unchanged. The number of patients serviced during the six-month period ended April 30, 2014 was 4,571, which was 13% greater when compared to the prior fiscal year's corresponding six-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 six-month period ended April 30, 2013 was $83.07 compared to net revenue per patient for the six-month period ended April 30, 2014 of $82.73, a decrease of less than 1%.

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.

COST OF SERVICES:

Cost of services increased to $221,932 for the six-month period ended April 30, 2014 from $186,111 for the six-month period ended April 30, 2013. This represents a 19% increase in direct operating costs. This increase is 6% greater than the increase in net revenues. This is mainly due to additional costs incurred as the result of integrating operations of our newly acquired businesses in Florida and California.

GROSS PROFITS:

Gross profits on net revenues increased to $160,703 for the six-month period ended April 30, 2014 from $151,598 for the six-month period ended April 30, 2013; an increase of 6%. Gross profit margins were 42% for the six-month period ended April 30, 2014 compared to 45% in the corresponding six-month period ended April 30, 2013. This decrease of is largely attributable to temporary increase in direct costs related to our newly acquired operations in Florida and California.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the six-month period ended April 30, 2014 were $135,943 as compared to $115,130 for the six-month period ended April 30, 2013. This represents an increase of 18%. This increase is 5% more than the increase in net revenues as the result of additional expenses incurred as the result of integrating operations of our newly acquired businesses in Florida and California.


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INTEREST EXPENSE:

Interest expense increased to $1,206 during the six-month period ending April 30, 2014 as compared to $733 during the six-month period ending April 30, 2013, an increase of $473. This increase is due to an increase in the utilization of our PNC Bank credit line.

INCOME:

We realized net income of $13,227 for the six-month period ended April 30, 2014 as compared to $20,003 for the six-month period ended April 30, 2013, a decrease of 34%. Our operating income decreased by 32% for the six-month period ended April 30, 2014 as compared to the six-month period ended April 30, 2013. Pre-tax income for the six-month period ended April 30, 2014 was $23,494 as compared to $35,569 for the period ended April 30, 2013, a decrease of 34%. As indicated previously, this substantial decrease in pre-tax income is the result of several factors such as substantial additional integration costs related to our recent acquisitions in Florida and California, changing reimbursement landscape. The provision for income taxes decreased from $15,566 for the period ended April 30, 2013, to $10,267 for the current six-month period; a decrease of 34%.

LIQUIDITY AND CAPITAL RESOURCES:

Our working capital at April 30, 2014 was $173,712 as compared to $161,116 at October 31, 2013, an increase of 8%. Our cash position increased by $6,528 during the current period. We increased our short-term debt by $16 and repaid $259 in existing debt. We had current liabilities of $149,979 at April 30, 2014. We utilized $188 in cash from operations, compared to generating $12,832 for the six-month period ended April 30, 2013, an overall decrease of $13,020 in cash generated from operations year over year. The decrease is attributable to a slower collection rate compared to sales growth rate, happening as the result of changing reimbursement landscape. We believe this is the latest trend.

Accounts receivable, net of allowance for doubtful accounts, totaled $233,968 at April 30, 2014, an increase of $27,707 or 13% from October 31, 2013. Cash collected during the three-month period ended April 30, 2014 increased 11% 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, 2014 was 105 days, an increase of 16 days, or about 18%, from the 89 days that we reported for the period ended April 30, 2013, 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 ($)      FY 2014 ($)
Long-Term Debt                                                      3,677           486
Capital Leases                                                     11,224         5,622
Operating Leases                                                    5,832         9,015
Purchase Obligations                                               33,051        12,505
Long-Term Liabilities under Employment and
Consultant Contracts                                               11,691         5,169

Our cash balance at April 30, 2014 totaled $24,480 as compared to $17,952 at October 31, 2013. 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.

Impact of Inflation

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


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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 the responsibility of the patient to pay for laboratory service bills, most individuals in the United States have an agreement with a third party payor such as Medicare, Medicaid or a commercial insurance provider to pay all or a portion of their healthcare expenses; the majority of services provided by Bio-Reference Laboratories, Inc. ("BRLI") are to patients covered under a third party payor contract. In certain cases, the individual has no insurance or does not provide insurance information and in other cases tests are performed under contract to a professional organization (such as physicians, hospitals, and clinics) which reimburse BRLI directly; in the remainder of the cases, BRLI is provided the third party billing information and seeks payment from the third party under the terms and conditions of the third party payor for health service providers like BRLI. Each of these third party payors may differ not only with regard to rates, but also with regard to terms and conditions of payment and providing coverage (reimbursement) for specific tests. Estimated revenues are established based on a series of highly complex procedures and judgments that require industry specific healthcare experience and an understanding of payor methods and trends. We review our calculations on a monthly basis in order to make certain that we are properly allowing for the uncollectable portion of our gross billings due to the contractual adjustments and discounts and that our estimates remain sensitive to variances and changes within our payor groups. The contractual allowance calculation is made on the basis of historical allowance rates for the various specific payor groups on a monthly basis with a greater weight being given to the most recent trends; this process is adjusted based on recent changes in underlying contract provisions and shifts in the testing being performed. This calculation is routinely analyzed by BRLI on the basis of actual allowances issued by payors and the actual payments made to determine what adjustments, if any, are needed. The table below shows the adjustments made to gross service revenues to arrive at net revenues, the amount reported on our statement of operations.

                                                               ($)
                                           Three Months Ended       Six Months Ended
                                                April 30,               April 30,
                                               [Unaudited]             [Unaudited]
                                             2014        2013       2014        2013
Gross Service Revenues                     1,017,621    861,506   1,927,499   1,660,216

Contractual Adjustments and Discounts:
Medicare/Medicaid Portion                     94,520     86,433     183,439     168,260
All Other Third Party Payors*                706,234    584,211   1,330,379   1,127,496
Total Contractual Adjustments and
Discounts                                    800,754    670,644   1,513,818   1,295,756
Service Revenues Net of Contractual
Adjustments and Discounts                    216,867    190,862     413,681     364,460
Patient Service Revenue Provision for
Bad Debts**                                   15,501     14,410      31,046      26,751
Net Revenues                                 201,366    176,452     382,635     337,709



* 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 required to be presented as a deduction from patient service revenue (net of contractual allowances and . . .

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