Business context and reporting period
CorVel Corporation provides medical cost-containment and managed-care services, including patient management and network solutions, to workers’ compensation, auto, and other healthcare payors. The filing is a Form 10-Q for the quarter ended September 30, 2014—fiscal 2015 second quarter—and the six months then ended. This differs from the “2013 Q2” period in the request metadata.
Financial performance and liquidity
- Quarter: Revenue was $123.7 million, up 3.6% year over year. Gross profit was $25.5 million, down 6.8%; gross margin fell to 20.6% from 22.9%. Income before tax was $12.7 million, down 15.8%, and net income was $7.9 million, down 9.1%. Diluted EPS was $0.37 versus $0.41.
- First six months: Revenue was $248.1 million, up 4.5%. Gross profit was $53.2 million, down 2.0%, and gross margin declined to 21.4% from 22.8%. Income before tax was $26.2 million, down 10.1%; net income was $16.2 million, down 6.4%. Diluted EPS was $0.77 versus $0.80.
- Revenue mix and drivers: Quarterly patient-management revenue rose 9.8% to $67.1 million, while network-solutions revenue declined, attributed to customer losses and lower bill volume, partly offset by new customers. For the six months, patient-management revenue increased 8.2% to $132.5 million; network-solutions revenue edged up 0.4% to $115.6 million. Patient management represented 54.2% of quarterly revenue, versus 51.2% a year earlier.
- Costs and margins: Quarterly cost of revenue rose 6.7%, faster than revenue, primarily due to a greater mix of lower-margin TPA services, higher salaries, and employee health-benefit costs. G&A increased 4.3% for the quarter and 7.5% for the six months, mainly reflecting continued investment in proprietary software and IT.
- Cash flow: Six-month operating cash flow was $15.6 million, down from $28.5 million. Investing used $10.7 million, including $9.9 million for property and equipment and $0.8 million for a private-equity investment. Financing used $11.7 million, including $13.2 million for treasury-stock purchases. Cash declined $6.7 million from fiscal year-end to $28.2 million.
- Balance sheet and debt: At September 30, cash was $28.2 million, current assets $119.1 million, current liabilities $66.1 million, and stockholders’ equity $132.2 million. The company reported no debt outstanding. Its renewed revolving facility provides up to $10 million and expires in September 2015; $4.5 million of letters of credit were outstanding separately and do not reduce borrowing availability. Working capital was reported at $53.0 million.
Changes, outlook, risks, and unusual items
- Management attributed weaker profitability to costs growing faster than revenue as lower-margin TPA services expanded. Six-month days sales outstanding increased to 44 days from 41 days a year earlier; management also cited lower accrued liabilities and higher tax payments in explaining reduced operating cash flow.
- No specific financial guidance was provided. Management said cash and anticipated internally generated funds should meet expected requirements for at least the next 12 months, including operations, capital spending, share repurchases, and new services. It cautioned that financing may not be available on acceptable terms if needed.
- The board had committed $2.0 million to a private-equity limited partnership; $0.8 million was invested during the half-year, with the remaining $1.2 million expected within 12 months. No impairment was recorded.
- Share repurchases totaled 309,952 shares for $13.2 million during the six months. After quarter-end through October 23, the company bought another 76,624 shares for $2.549 million, averaging $33.27 per share.
- Contractual obligations totaled $57.6 million, including $54.2 million of operating leases. Unrecognized tax benefits were $964,000. Management said ordinary-course litigation was not expected to result in a material payment; no material loss contingency was identified.
- Key risks cited include lower workers’ compensation claims or outsourced services, customer losses and competition, labor and benefit costs, regulatory changes, litigation and liability exposure, and information-security or system disruptions. Management reported disclosure controls effective; it also noted the CFO transition during the quarter. The company is evaluating the revenue-recognition standard effective for its fiscal year beginning April 1, 2017; adoption impact was not yet estimable.
Important facts for investors to verify
- Whether growth in patient-management TPA work can be sustained without further gross-margin compression.
- Whether receivables collection and operating cash flow improve, given higher DSO and the year-over-year cash-flow decline.
- The pace and price of continued repurchases, and their effect on cash available for investment and strategic opportunities.
- Use and covenant headroom of the $10 million credit facility, and fulfillment of the remaining private-equity commitment.
- Developments in customer retention, labor costs, legal matters, and uncertain tax positions.