Business context and reporting period
CorVel Corporation provides medical cost-containment and managed-care services, principally through Patient Management and Network Solutions. This is the unaudited Form 10-Q for the quarter and six months ended September 30, 2011 (fiscal 2012 Q2), compared with the periods ended September 30, 2010. The request metadata says “2010 Q2,” but the filing itself reports 2011.
Key financial metrics
| Metric | Three months ended Sep. 30, 2011 | Year-over-year change | Six months ended Sep. 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $104.6 million | +11.9% | $206.9 million | +11.9% |
| Gross profit / margin | $25.6 million / 24.5% | +10.2%; margin down from 24.9% | $51.2 million / 24.7% | +8.7%; margin down from 25.4% |
| Income before taxes | $13.0 million | +43.6% | $26.3 million | +22.8% |
| Net income | $7.9 million | +4.6% | $16.1 million | +5.1% |
| Diluted EPS | $0.68 | +9.7% | $1.37 | +8.7% |
| Operating cash flow | Not separately provided | — | $15.9 million | Down from $23.9 million |
Quarterly revenue growth reflected higher TPA utilization and patient-management services, plus growth in pharmacy and directed-care services. These faster-growing services generally carry lower gross margins, contributing to cost of revenue rising faster than revenue. Quarterly G&A fell 11.1% to $12.6 million, but the prior-year period included a $2.8 million litigation accrual; excluding it, G&A increased, primarily from investment in claims systems and software.
Cash and cash equivalents were $8.1 million at September 30, 2011, versus $12.3 million at March 31, 2011. Six-month investing cash outflow was $11.7 million, mainly property and equipment/software investment; financing cash outflow was $8.4 million, including $10.0 million of treasury-stock purchases. Working capital was $31.9 million. CorVel reported no debt outstanding. Its renewed revolving facility provides up to $10 million, expires September 2012, and had no borrowings; $8.0 million of letters of credit were issued separately and do not reduce stated borrowing availability.
Material changes versus comparable periods
- Quarterly revenue increased $11.2 million; patient management revenue rose 12.2% and Network Solutions revenue 11.7%. Six-month growth was similar, at 11.8% and 11.9%, respectively.
- Quarterly pretax income increased substantially, but net income growth was limited by the effective tax rate rising to 39.5% from 16.9%. For the six months, the rate was 38.8%, versus 28.5% a year earlier. Management said the current rate better reflects expected future rates.
- Share repurchases reduced weighted-average diluted shares 3.6% for the quarter and 3.4% for six months, supporting EPS growth. CorVel repurchased 218,202 shares for $10.0 million during the six months.
- Operating cash flow declined $8.0 million year over year, primarily because of a $9.0 million payment into escrow for the Louisiana class-action settlement. Capital spending also increased.
Outlook, risks and unusual items
- Management stated that cash, expected operating cash flow and option-exercise proceeds should fund obligations, repurchases, new services and development for at least 12 months. It also said future financing may not be available on acceptable terms. No numerical revenue or earnings guidance was provided.
- Management expects continued software-development spending, including enhancements to TPA services. It cautioned that referral and bill-review volumes may remain weak or grow only modestly unless workplace injuries and workers’ compensation claims increase.
- The Louisiana Any Willing Provider Act class action settlement provides for a $9.0 million payment, already placed in escrow, and assignment of certain insurance proceeds. At the filing date, final court approval and other settlement conditions remained pending; failure to finalize or obtain approval could revive related proceedings. The filing also describes a separate Illinois class-action settlement, previously accrued at $2.8 million, for which initial payments were made in July 2011.
- Other disclosed risks include competition and customer insourcing, regulatory and litigation exposure, lower workers’ compensation claim volumes, labor costs, dependence on key personnel, and technology, cybersecurity and service-continuity risks. Management reported effective disclosure controls and no material change in internal control during the quarter.
- CorVel repurchased 45,668 additional shares after quarter-end through October 25 for $2.2 million, averaging $48.15 per share. The filing states goodwill impairment testing found no material impairment.
Important facts for investors to verify
- Subsequent court action and final status of the Louisiana settlement, including any objections, exclusions or resumed proceedings.
- Whether revenue growth in TPA, pharmacy and directed care continues, and how the lower-margin service mix affects gross margin.
- Cash conversion and investment needs: operating cash flow fell while software-related capital expenditures and share repurchases remained significant.
- Whether the approximately 39% effective tax rate persists, as management expects, and its effect on net-income growth.
- Credit-facility renewal, covenant compliance, and the company’s capacity to balance repurchases with operating and technology investment.