CorVel Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017; comparative results are for FY2016 and FY2015. The request metadata says “2015 Q4,” but the supplied filing is the FY2017 annual report, not a 2015 quarterly filing.
Business context
CorVel provides workers’ compensation, auto and group-health claims management and medical cost-containment services. Its two service categories are patient management and network solutions. It reports one operating segment, managed care, and serves insurers, third-party administrators, employers and public-sector customers.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $518.7 million | $503.6 million | +3.0% |
| Gross profit | $104.8 million | $104.5 million | +0.2% |
| Gross margin | 20.2% | 20.8% | Down 0.6 percentage points |
| Income before tax | $47.5 million | $46.1 million | +3.2% |
| Net income | $29.5 million | $28.5 million | +3.3% |
| Diluted EPS | $1.51 | $1.43 | +5.6% |
| Operating cash flow | $52.1 million | $51.3 million | +1.4% |
- Patient management revenue rose 3.9% to $288 million; network solutions revenue rose 1.8% to $230 million. Patient management reached 55.6% of revenue, with growth primarily attributed to TPA services.
- Cost of revenue grew 3.7%, faster than revenue. Management cited a higher mix of lower-margin TPA services, competitive pricing, lower bill-review activity and increased TPA staffing costs. G&A fell 2.1% to $57.2 million, mainly from lower legal and IT expenses.
- Cash and equivalents were $28.6 million at year-end, down from $32.8 million. Working capital declined to $38.8 million from $42.7 million. Investing cash use was $31.0 million, including property additions and server and software-license purchases.
- The company reported virtually no interest-bearing debt and no borrowings on its $10 million revolving facility at year-end. The facility was due to expire in September 2017; $4.5 million of letters of credit were outstanding separately.
- FY2017 share repurchases totaled 745,575 shares for approximately $28.0 million. The board expanded authorization to 36 million cumulative shares; 34.6 million had been repurchased since program inception.
Changes, outlook and notable items
- Revenue growth accelerated from 2.2% in FY2016 to 3.0% in FY2017, while gross margin contracted. EPS growth exceeded net-income growth, primarily reflecting fewer diluted shares after repurchases.
- Management said it expects TPA services to grow faster than its other services, citing better revenue opportunities. It projected cash from operations and available funds would cover expected needs for at least the next 12 months; it did not provide specific revenue or earnings guidance.
- Capital spending increased: property and equipment purchases were $31.0 million versus $16.8 million in FY2016. The company said FY2018 property additions should approximate spending in years before FY2017.
- CorVel early adopted ASU 2016-09 in the fourth quarter, reclassifying a $0.5 million excess stock-compensation tax benefit to the income-tax provision and operating cash flow. Prior periods were not adjusted.
- Subsequent to year-end through the filing date, CorVel repurchased 204,255 additional shares for $9.1 million, averaging $44.44 per share. Michael Combs was appointed President effective April 1, 2017.
- Management identified risks including falling workers’ compensation claims, customer contract losses or insourcing, competition and pricing pressure, regulatory changes, labor costs and retention, litigation and liability, and technology, cybersecurity and data-processing disruptions. Ordinary-course litigation was not expected by management to result in material aggregate payments. No goodwill or long-lived-asset impairment was identified at year-end.
Most important facts to verify
- Confirm FY2017 TPA growth, customer and claim increases, and whether this lower-margin service mix continues to pressure gross margin.
- Review the cash-flow statement and capital-expenditure detail, including the server and multi-year software-license purchases, and assess ongoing investment needs.
- Check the revolving credit facility’s renewal or replacement after its September 2017 expiration and the company’s liquidity after continued buybacks.
- Assess the sustainability and price paid for share repurchases, including the post-year-end purchases, relative to operating cash generation and investment requirements.
- Track workers’ compensation claim trends, customer retention and insourcing, regulatory developments, and the company’s litigation, self-insurance and cybersecurity exposures.