CorVel Corporation — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended December 31, 2018 (CorVel fiscal Q3 and first nine months of fiscal 2019), not 2017 Q3 as stated in the request. The financial statements are unaudited.
Business context
CorVel provides workers’ compensation and other healthcare claims management and medical cost-containment services. It reports one managed-care segment, with revenue from patient management and network solutions services.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Year-over-year change | Nine months ended Dec. 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $146.1 million | +3.8% | $444.7 million | +7.2% |
| Gross profit / margin | $29.4 million / 20.1% | +14.8%; from 18.2% | $92.2 million / 20.7% | +15.1%; from 19.3% |
| Income before tax | $13.6 million | +34.5% | $45.4 million | +24.9% |
| Net income | $10.3 million | +7.6% | $34.9 million | +30.4% |
| Diluted EPS | $0.54 | +8.0% | $1.83 | +29.8% |
Quarterly patient management revenue grew 16.1% to $92.1 million; network solutions revenue fell 12.1% to $54.0 million, including a 34.5% decline in pharmacy bills reviewed. For the nine-month period, patient management revenue rose 16.2% to $272.0 million, while network solutions revenue declined 4.5% to $172.7 million. Management attributed patient management growth mainly to claims-management customers.
For the quarter, cost of revenues rose 1.4% and general and administrative expense rose 2.0%. For nine months, those expenses increased 5.3% and 6.9%, respectively. Nine-month operating cash flow was $67.9 million versus $49.9 million; capital expenditures were $10.3 million versus $16.3 million. Cash increased to $96.5 million from $55.8 million at March 31, 2018. Working capital was $92.6 million. The company had no debt outstanding and no revolver borrowings; its credit facility provides up to $10 million and expires September 2019. The filing reports $4.5 million of letters of credit issued separately from the facility.
Material changes and unusual items
- Quarterly effective tax rate was 24%, compared with 5% in the prior-year quarter, which benefited from a $3.0 million deferred-tax remeasurement benefit following the Tax Cuts and Jobs Act. Nine-month effective rates were 23.1% and 18.7%, respectively.
- CorVel repurchased 386,552 shares for $22.6 million during the nine months, versus $11.2 million in the prior-year period. It repurchased a further 70,019 shares for $4.4 million after quarter-end.
- Revenue recognition standard ASC 606 was adopted April 1, 2018; management said adoption had no material effect on the reported income statement or balance sheet.
- Operating cash flow benefited from higher earnings and improved collections; days sales outstanding improved from 42 to 39 days.
- Michael G. Combs replaced V. Gordon Clemons as CEO effective January 18, 2019, after the quarter ended.
Outlook, commentary and risks
Management expects a combined federal and state effective tax rate of approximately 24%–26% for fiscal 2019. It said cash, anticipated operating cash generation and the credit facility should be sufficient for expected needs for at least 12 months, including operations, investment and the existing repurchase program. No specific revenue or earnings guidance is provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Management noted the long-term decline in U.S. workplace injury rates may reduce claims and medical bills available for review. Other disclosed risks include competition and customer insourcing, lower workers’ compensation volumes, pricing pressure, labor and benefit costs, regulatory or tax changes, cybersecurity and data-system disruptions, and litigation. Ordinary-course litigation was not expected by management to have a material financial effect. The company expects lease accounting adoption on April 1, 2019 to add lease-related assets and liabilities; the impact was still under evaluation.
Important facts for investors to verify
- Confirm the reporting period: this is fiscal Q3 2019, not 2017 Q3.
- Track whether patient management growth continues to offset weakness in network solutions, particularly pharmacy bill-review volumes.
- Assess the sustainability of margin and cash-flow improvement, including the contribution from working-capital movements and improved collections.
- Monitor the effect of buybacks on cash, shares outstanding and capital available for investment; verify remaining authorization and subsequent repurchases.
- Review the fiscal 2019 tax-rate outlook and the balance-sheet impact of lease-standard adoption.
- Monitor post-quarter CEO transition, credit-facility renewal timing, and the operational, regulatory, litigation and cybersecurity risks identified in the filing.