CorVel Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended March 31, 2014; filed June 12, 2014. The request metadata says “2012 Q4,” but the supplied filing is the FY2014 annual report. CorVel provides workers’ compensation and related claims-management, medical cost-containment, network, pharmacy, and patient-management services. It reports one operating segment.
Financial results and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $478.8 million | $429.3 million | +11.5% |
| Gross profit | $108.5 million | $91.7 million | +18.4% |
| Gross margin | 22.7% | 21.4% | +1.3 percentage points |
| General and administrative expense | $52.0 million | $47.8 million | +8.8% |
| Income before taxes | $56.5 million | $43.9 million | +28.7% |
| Net income | $34.4 million | $26.7 million | +28.7% |
| Diluted earnings per share | $1.61 | $1.19 | +35.3% |
- Net margin was 7.2%, compared with 6.2% in FY2013; income before tax margin was 11.8%, versus 10.3%.
- Revenue growth reflected higher TPA services within patient management and pharmacy services, plus more network-solutions customers and services. Patient-management revenue rose 11.7% to $248 million; network-solutions revenue rose 10.6% to $230 million.
- Patient management was 51.9% of revenue, up from 51.5%; network solutions accounted for 48.1%, down from 48.5%. Management cited greater TPA focus as a source of expected growth.
- Cost of revenue increased 9.7% to $370.3 million, including pharmacy costs rising from $51 million to $59 million and direct labor from $92 million to $99 million. G&A growth reflected higher IT and stock-compensation expense; IT expense rose to $30.7 million from $28.8 million.
- Operating cash flow was $54.8 million, essentially unchanged from $54.8 million in FY2013, despite higher net income; higher receivables and customer deposits offset earnings growth. Capital spending was $18.3 million, versus $14.9 million. Cash increased by $15.0 million to $34.9 million.
- At March 31, 2014, working capital was $49.1 million, current assets $121.0 million, and current liabilities $71.8 million. The current ratio was approximately 1.68. DSO rose to 43 days from 40; management expected it to remain in the low-to-mid-40-day range.
- No debt was outstanding. A revolving credit facility provided up to $10 million, with no loans drawn during FY2014; $8 million of letters of credit were issued. The agreement was due to expire in September 2014.
Material changes and notable items
- FY2014 revenue growth accelerated from 4.0% in FY2013 to 11.5%. Gross margin recovered from 21.4% to 22.7%, following a prior-year decline attributed partly to replacement of higher-margin business with lower-margin work.
- Net income increased $7.7 million. Reduced weighted-average shares from repurchases also contributed to diluted EPS growth; diluted average shares fell 4.8%.
- CorVel repurchased 830,460 shares for $27.2 million during FY2014, averaging $32.73 per share. The board increased the program authorization to 34 million cumulative shares; 32.1 million had been repurchased by year-end.
- A two-for-one stock split was distributed in June 2013; share and per-share data in the filing are retroactively adjusted.
- Fiscal 2014 fourth-quarter revenue was $120.2 million and net income $8.3 million, compared with $112.0 million and $7.6 million, respectively, in the FY2013 fourth quarter. Diluted EPS was $0.39 versus $0.35.
- Property and equipment spending rose as CorVel invested in data-center capacity. The company was migrating its Fort Worth backup center to Portland while building a new Nevada data center.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management said it expected TPA services to grow faster than other services, anticipated DSO in the low-to-mid-40-day range, and considered cash, expected operating funds, and the credit facility adequate for at least the next 12 months. It also anticipated potentially continuing share repurchases, subject to cash generation and board authorization.
- Key risks include declining workers’ compensation claims or referrals; customer nonrenewal, consolidation, or insourcing; pricing and competitive pressure; regulatory changes; labor and benefit cost increases; technology execution and cybersecurity; interruptions to data processing; and litigation or professional-liability exposure.
- Management said ordinary-course litigation was not expected to result in aggregate payments material to financial position or results. The filing notes potential claims and legal exposure, and that self-insurance reserves depend on estimates; actual claims could differ.
- Contractual obligations totaled $51.4 million, principally operating leases of $48.3 million, plus $2.3 million in software-license commitments and $0.7 million for uncertain tax positions.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor also gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether TPA and pharmacy growth persists and whether it offsets weaker referrals or pressure in higher-margin services.
- Whether gross-margin improvement is sustainable as labor, pharmacy, IT, and data-center costs rise.
- Receivables quality and collection timing: DSO rose to 43 days and unbilled receivables increased to $11.9 million from $5.2 million.
- Renewal or replacement of the $10 million credit facility due to expire in September 2014, and continued liquidity after repurchases and capital investment.
- Future repurchase pace and price, including the effect on cash reserves and per-share results.
- Exposure from regulatory changes, litigation, self-insurance estimates, and the data-center transition.