CorVel Corporation — FY2016 Form 10-K
Period clarification: The filing is for the fiscal year ended March 31, 2016, not fiscal 2014. It also reports unaudited fourth-quarter results for the three months ended March 31, 2016.
Business context and reporting period
CorVel provides workers’ compensation and related claims-management and healthcare cost-containment services, including claims administration, bill review, provider networks, case management and pharmacy services. It reports one operating segment, managed care. No customer represented 10% or more of revenue in fiscal 2016.
Financial results and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $503.6 million | $492.6 million | +2.2% |
| Gross profit | $104.5 million | $100.0 million | +4.6% |
| Income before taxes | $46.1 million | $45.6 million | +1.1% |
| Net income | $28.5 million | $28.6 million | −0.2% |
| Diluted EPS | $1.43 | $1.37 | +4.4% |
| Net cash from operations | $51.3 million | $44.3 million | +$7.0 million |
Gross margin was 20.8% versus 20.3%; net margin was 5.7% versus 5.9%. Revenue grew faster than cost of revenue (up 1.6%), but general and administrative expense rose 7.5% to $58.5 million. Operating cash flow exceeded property and equipment purchases of $16.8 million; the resulting difference was approximately $34.6 million.
At March 31, 2016, cash and cash equivalents were $32.8 million, working capital was $42.7 million, and total assets were $220.3 million. Current assets of $123.1 million exceeded current liabilities of $80.4 million. The company reported virtually no interest-bearing debt historically and had no revolving borrowings outstanding; its credit facility provided up to $10 million and was scheduled to expire in September 2016. The filing states cash, expected operating funds and the facility were expected to meet requirements for at least 12 months.
FY2016 Q4 revenue was $128.3 million, gross profit $26.4 million, and net income $6.7 million; Q4 FY2015 figures were $122.2 million, $22.7 million, and $5.6 million, respectively.
Material changes versus prior year
- Patient management revenue increased 3.2% to $277 million, driven principally by TPA services: customers and claims opened each increased 7%.
- Network solutions revenue increased 1.0% to $226 million. Management cited lower CERiS revenue and a nominal decrease in case management among offsets to overall growth.
- Revenue mix shifted toward patient management, which represented 55.1% of revenue versus 54.5%; management said it was focusing more on TPA services and expected greater growth opportunities there.
- Net income was nearly flat: higher gross profit was offset by higher G&A and a higher effective tax rate (38.1% versus 37.3%). Diluted EPS rose primarily because diluted weighted-average shares declined 4.2%, partly reflecting repurchases.
- Operating cash flow improved mainly because prepaid taxes were closer to the actual tax liability than in the prior year. Investing cash use decreased to $17.4 million, principally on lower property additions.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said it expected more growth in TPA services than in other services, while noting the outlook is subject to risks.
- Risks include falling workplace injury and claim volumes, customer contract losses or insourcing, competition and pricing pressure, regulatory changes, provider resistance to cost-containment practices, litigation, labor availability and cost, cybersecurity or data-processing interruptions, and dependence on key personnel and competitive software.
- G&A included a $2.1 million increase in legal expense related to settlement of two lawsuits in the final quarter. The company also reported ordinary-course litigation; management did not expect aggregate resolution payments to be material.
- CorVel repurchased 893,771 shares for $31.5 million in FY2016, averaging $35.27 per share; $1.1 million of additional repurchases occurred after year-end through the filing date. The board expanded lifetime authorization to 35 million shares. The company does not currently plan to pay cash dividends.
- Contractual obligations totaled $51.3 million, including $46.2 million of operating leases, $3.2 million of software license commitments and $1.8 million for uncertain tax positions. No off-balance-sheet arrangements were reported. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Confirm the reporting-period mismatch in the request: this is FY2016, with comparative FY2015 and FY2014 data, rather than a FY2014 Q4 filing.
- Review the quality and durability of TPA-led growth, including competitive pricing and the effect of a lower-margin service mix on margins.
- Assess whether repurchase-driven EPS growth is supported by sustained earnings and cash generation, and the impact of ongoing buybacks on liquidity.
- Check the status and terms of the $10 million credit facility after its stated September 2016 expiration, as well as lease and other contractual commitments.
- Review the lawsuit settlements, remaining contingencies, and exposure to regulatory, cyber/data, customer-retention and claims-volume risks.