Business context and reporting period
CorVel provides managed-care and medical cost-containment services, principally for workers’ compensation, automobile, and group-health claims. It reports one operating segment. The filing covers the quarter and six months ended September 30, 2018 (fiscal 2019 Q2), compared with the same 2017 periods; this does not match the request metadata “2017 Q2.” Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Sep. 30 | Six months ended Sep. 30 |
|---|---|---|
| Revenue | $148.2m vs. $136.4m; +8.6% | $298.6m vs. $274.0m; +9.0% |
| Gross profit / margin | $31.5m / 21.3% vs. $25.8m / 18.9% | $62.8m / 21.0% vs. $54.5m / 19.9% |
| Income before taxes | $16.4m vs. $12.1m; +35.7% | $31.8m vs. $26.2m; +21.3% |
| Net income | $12.8m vs. $8.4m; +52.4% | $24.6m vs. $17.2m; +43.1% |
| Diluted EPS | $0.67 vs. $0.44 | $1.29 vs. $0.90 |
For the six months, operating cash flow was $48.6m, versus $30.6m; capital expenditures were $6.5m, versus $11.4m. Cash increased to $90.1m from $55.8m at March 31, 2018. Working capital was $88.6m. The company had no debt outstanding and no revolving borrowings; its renewed facility provides up to $10m and expires September 2019. It reported compliance with the facility’s covenants. Current liabilities were $115.6m, compared with current assets of $204.1m.
Material changes and management commentary
- Patient management revenue increased 17.6% in the quarter to $91.9m, largely from claims-management customers; it was 62.1% of quarterly revenue, up from 57.3%. Network solutions revenue fell 3.4% to $56.2m, including a 22.2% decrease in pharmacy bills reviewed.
- For six months, patient management revenue rose 16.3% to $179.8m; management attributed growth to claims management, partly offset by lower case-management services. Cost of revenue rose 7.4%, including $11.8m higher field-operation salaries and growth in lower-margin TPA services.
- Quarterly G&A increased 10.4% to $15.1m, primarily from legal and corporate-systems costs. The six-month increase was 9.7% to $31.0m.
- The effective tax rate fell to 22.0% for the quarter and 22.8% for six months, versus 30.5% and 34.6%, respectively, principally reflecting the Tax Cuts and Jobs Act. Management expects a 24%–26% combined federal and state effective rate for fiscal 2019, subject to results and tax-law interpretation.
- Cash from operations benefited from higher earnings and a $17.3m increase in accrued liabilities; management attributed the latter partly to a shift from semi-monthly to bi-weekly payroll. Management considers liquidity adequate for at least 12 months and for planned operations, investment, and repurchases.
Outlook, risks and unusual items
No revenue or earnings guidance is provided. Key risks discussed include declining workers’ compensation claims, customer insourcing or contract loss, competition and pricing pressure, labor and benefit costs, regulatory and tax uncertainty, litigation and professional liability, and cybersecurity or systems interruptions. Management says ordinary-course litigation is not expected to result in a material payment. Operating lease commitments totaled $65.7m, including $13.5m due within one year. Adoption of revenue-recognition guidance on April 1, 2018 had no material financial-statement impact; the company was evaluating lease-accounting adoption effective April 1, 2019.
The company repurchased about $11.3m of shares in the six months and reported additional post-quarter repurchases of $4.6m. The filing reports a CFO transition effective October 1, 2018. Operating results are not necessarily indicative of full-year results; management also notes fewer working days can affect quarterly performance.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is for September 30, 2018, not 2017 Q2.
- Assess whether patient-management growth can offset weakness in network solutions, particularly the decline in pharmacy bill-review volume.
- Separate recurring operating cash generation from the cash-flow benefit of higher accrued liabilities and the payroll-timing change.
- Track the expected 24%–26% fiscal 2019 tax rate and any subsequent tax-law guidance or revisions.
- Verify share-repurchase disclosures: the quarter’s repurchase count is stated as 133,425 in Note 4 and 133,449 in the quarterly repurchase table.
- Monitor lease commitments, the September 2019 credit-facility renewal, and the stated operational, regulatory, legal, and cybersecurity risks.