CorVel Corporation — FY2020 Form 10-K
Period clarification: The supplied filing is CorVel’s annual report for the fiscal year ended March 31, 2020, not a 2018 Q4 filing. Amounts below are in U.S. dollars.
Business context and reporting period
CorVel provides workers’ compensation, auto and group-health claims management and medical cost-containment services to insurers, third-party administrators, employers and government agencies. It reports one operating segment, managed care, with revenue divided between patient management and network solutions.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $592.2 million | $595.7 million |
| Gross profit / margin | $125.9 million / 21.3% | $124.8 million / 21.0% |
| Income before taxes | $60.7 million | $61.5 million |
| Net income | $47.4 million | $46.7 million |
| Diluted EPS | $2.55 | $2.46 |
| Operating cash flow | $80.8 million | $78.6 million |
- Net margin was 8.0%, compared with 7.9% in FY2019. The effective tax rate declined to 22% from 24%.
- Patient management revenue increased 5.1% to $386.8 million; network solutions revenue declined 9.7% to $205.4 million. The shift reflected TPA growth and fewer pharmacy bills reviewed.
- Cash and cash equivalents were $83.2 million at year-end, versus $91.7 million a year earlier; working capital was $75.3 million, down from $98.6 million.
- Cash used in investing was $32.4 million, mainly for property and equipment. Cash used in financing was $57.0 million, including $65.6 million of share repurchases.
- The revolving credit facility expired in September 2019 and was not renewed. Management reported virtually no interest-bearing debt historically and considered cash and expected operating funds adequate for at least the next 12 months.
- Adoption of lease accounting added $90.7 million of right-of-use assets and $98.3 million of lease liabilities at March 31, 2020. Contractual operating-lease payments totaled $99.5 million undiscounted.
Changes versus prior periods
- Revenue fell 0.6%, after 6.7% growth in FY2019. Patient management growth, including a 13% increase in TPA customers and 3.3% more claims opened, was offset by weaker network solutions revenue.
- Gross profit rose 0.9%, and gross margin improved to 21.3% from 21.0%, helped by higher margins in enhanced bill review services. G&A increased 3.0% to $65.2 million, primarily due to legal and marketing costs.
- Pre-tax income declined 1.3%, but net income increased 1.4%, primarily due to lower income tax expense. Diluted EPS rose 3.7%, supported by fewer diluted shares following repurchases.
- Buybacks totaled 822,353 shares for $66 million in FY2020, at an average $79.78 per share. The program was temporarily paused in March 2020 and management expected to resume it in the June quarter.
Outlook, risks and unusual items
- Management warned that COVID-19 could materially harm future revenue, results, financial condition and cash flows. Unemployment, lower customer exposure and fewer claims were already reducing demand; future case volumes could be materially below March-quarter levels.
- The company reduced its workforce by 8%, starting in the March quarter and continuing through June, reduced planned capital expenditures and compensation, deferred certain compensation, and deferred payroll tax deposits. It said it did not intend to apply for government loans.
- Management expects greater growth opportunities in TPA and related services than in other service areas, but provided no quantified revenue or earnings guidance.
- Key risks include claim-volume declines, customer contract losses or insourcing, competition, regulatory changes, labor and benefit costs, cybersecurity and service interruptions, and litigation. The filing cites a July 2019 security incident as a lesser contributor to higher legal expenses; it does not provide a clear quantified loss from that incident.
- Management said ordinary-course litigation was not expected to result in aggregate material payments. The auditor identified revenue recognition involving variable consideration in certain customer contracts as a critical audit matter. No goodwill or long-lived-asset impairment was reported at year-end.
- The company reported $17.6 million of remaining performance obligations, expected to recognize approximately 97% within one year. FY2020 Q4 revenue was $147.0 million and net income was $11.7 million, compared with $151.1 million and $11.8 million, respectively, in FY2019 Q4.
Important facts for investors to verify
- Confirm the filing period: this is FY2020, not 2018 Q4; review the full 10-K for details omitted from the supplied text.
- Track post-year-end COVID-19 effects on claim volumes, customer exposure, collections, service mix and operating margins.
- Assess whether TPA growth can offset continued pharmacy and other network-solutions weakness, and whether reported TPA customer and claim growth translates into profitable revenue.
- Review cash generation and liquidity after buybacks, capital spending and lease obligations; confirm whether repurchases resumed as expected.
- Examine the security incident, customer-contract legal expenses, variable-consideration revenue estimates and accounts-receivable quality for subsequent developments.