Business context and reporting period
CorVel Corporation provides workers’ compensation and other healthcare claims services, including claims administration, medical bill review, provider networks, utilization review and case management. It reports one operating segment, managed care.
The supplied filing is CorVel’s Form 10-K for the fiscal year ended March 31, 2015, not a 2013 Q4 filing as indicated in the request metadata. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $492.6 million | $478.8 million | +2.9% |
| Gross profit / margin | $100.0 million / 20.3% | $108.5 million / 22.7% | Gross profit -7.8% |
| Income before taxes | $45.6 million | $56.5 million | -19.4% |
| Net income | $28.6 million | $34.4 million | -16.9% |
| Diluted EPS | $1.37 | $1.61 | -14.9% |
| Operating cash flow | $44.3 million | $54.8 million | Down $10.5 million |
- Fourth-quarter FY2015 revenue was $122.2 million versus $120.2 million in Q4 FY2014. Gross profit declined to $22.7 million from $26.5 million; net income to $5.6 million from $8.3 million; diluted EPS to $0.27 from $0.39.
- FY2015 network solutions revenue fell 2.6% to $224 million; patient management revenue rose 8.5% to $269 million. The mix shift toward lower-margin TPA services contributed to gross-margin compression. Patient management represented 54.5% of revenue, up from 51.9%.
- Cash and cash equivalents were $25.5 million at March 31, 2015, down from $34.9 million. Working capital was $45.1 million, compared with $49.1 million. Current assets were $119.2 million and current liabilities $74.1 million.
- Cash used in investing activities was $24.3 million, including $22.9 million in property and equipment purchases and a $1.4 million private-equity investment. Operating cash flow less property and equipment purchases was approximately $21.4 million.
- CorVel had no material long-term debt disclosed, but had drawn $618,000 on its $10 million revolving facility at year-end; it repaid the draw on April 1, 2015. The facility was due to expire in September 2015. Letters of credit totaled $4.5 million.
- Shareholders’ equity was $127.9 million and total assets $218.8 million. The company repurchased 845,014 shares for $31.8 million during FY2015; cumulative repurchases under the program were 32.99 million shares at a total cost of $360.3 million.
Changes, outlook, risks and unusual items
- Revenue growth slowed from 11.5% in FY2014 to 2.9% in FY2015. TPA growth was supported by more customers and claims, while network solutions processed 5% fewer bills, partly offset by higher revenue per bill.
- Management expects TPA services to grow faster than other service lines, citing greater opportunity. It expects DSO to remain in the low-to-mid-40-day range and the effective tax rate to normalize in the next fiscal year. No specific revenue or earnings guidance was provided.
- Management said cash from operations, option exercises and the credit facility should fund obligations and planned activities for at least the next 12 months. Repurchases may continue, but may be reduced or suspended if earnings or cash flow weaken.
- IT expense increased to $33.0 million from $30.7 million, primarily for a new data center and added system capacity. G&A rose 4.7% to $54.4 million. Management attributed lower gross profit mainly to the revenue mix shift and increased direct labor supporting TPA services.
- Key risks include fewer workers’ compensation claims, customer contract losses or insourcing, competition and pricing pressure, regulatory changes, litigation and professional liability, labor costs and retention, cybersecurity or system interruptions, and timely delivery of competitive software. The company also notes that early intervention can reduce demand for later-stage services.
- Legal proceedings arise in the ordinary course; management did not expect aggregate resolution payments to be material. The filing reports no impairment of goodwill or long-lived assets. Operating lease commitments totaled $51.5 million; contractual obligations totaled $55.4 million, including leases, uncertain tax positions, software licensing and a private-equity commitment.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. A new revenue-recognition standard was expected to take effect for CorVel’s fiscal year beginning April 1, 2017; its impact had not yet been estimated.
Important facts for investors to verify
- Whether growth in TPA services can offset weakness in network solutions without further pressure on gross margin and earnings.
- Whether operating cash flow rebounds from $44.3 million and continues to support investment and substantial share repurchases.
- The status and terms of the revolving credit facility after its September 2015 expiration date, and the company’s liquidity after repurchases and capital spending.
- Whether quarterly earnings weakness, particularly the Q4 decline in gross profit and net income, continued into subsequent periods.
- Developments in customer retention, claims volumes, regulatory requirements, litigation exposure, data-center execution and adoption of the new revenue-recognition standard.