CorVel Corporation (NASDAQ: CRVL) — Form 10-Q
Period clarification: The supplied filing is for the quarter ended December 31, 2020 (CorVel fiscal 2021 third quarter), not 2019 Q3. Comparative figures are for the quarter and nine months ended December 31, 2019. Financial statements are unaudited.
Business context
CorVel provides managed-care and medical-cost-containment services, principally for workers’ compensation, automobile claims, and group health. It reports one operating segment and two service lines: patient management and network solutions.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Revenue | $141.5 million | $148.1 million | $407.1 million | $445.2 million |
| Gross profit | $30.9 million | $29.3 million | $87.9 million | $95.2 million |
| Gross margin | 21.8% | 19.8% | 21.6% | 21.4% |
| Operating income before tax | $14.0 million | $12.3 million | $39.8 million | $45.9 million |
| Net income | $11.4 million | $9.4 million | $31.5 million | $35.6 million |
| Diluted EPS | $0.63 | $0.50 | $1.74 | $1.91 |
| Operating cash flow | Not separately stated | Not separately stated | $73.8 million | $66.3 million |
Quarterly revenue fell 4.4%, while net income rose 21.7% and diluted EPS rose 26.0%. Nine-month revenue declined 8.6%, net income 11.5%, and diluted EPS 8.9%. Nine-month capital expenditures were $13.3 million, versus $27.7 million; free cash flow, calculated as operating cash flow less capital expenditures, was approximately $60.5 million versus $38.6 million.
At December 31, 2020, cash and cash equivalents were $128.8 million, working capital was $100.4 million, and total current assets and liabilities were $259.2 million and $158.8 million, respectively. The company reported no debt outstanding. It had $95.9 million of operating lease liabilities, plus approximately $6.1 million of additional lease commitments for leases not yet commenced.
Material changes and drivers
- Quarterly patient management revenue decreased 1.8% to $96.6 million; network solutions revenue decreased 9.7% to $45.0 million. Management attributed the decline primarily to lower bill volume: bills were down 20% year over year, partly offset by higher revenue per bill.
- For the nine-month period, patient management revenue fell 7.3% and network solutions revenue fell 10.9%. Management attributed the declines mainly to COVID-19-related economic disruption and fewer claims; new claims decreased 12%.
- Quarterly cost of revenue fell 6.9%, faster than revenue, and gross margin improved by 2.0 percentage points. Management cited lower salaries and an 8% reduction in field-operations headcount. General and administrative expense was nearly flat.
- Nine-month gross margin increased slightly to 21.6% from 21.4%, but pretax margin declined to 9.8% from 10.3%. Lower revenue was partly offset by lower costs.
Liquidity, capital allocation, outlook, and risks
- Cash increased by $45.6 million from March 31, 2020. Management attributed this primarily to reduced planned capital spending, workforce reductions, and the temporary suspension of share repurchases. Operating cash flow also benefited from payroll-tax deferrals under the CARES Act.
- CorVel deferred $10.4 million of payroll-tax deposits; half is due by the end of calendar 2021 and half by the end of calendar 2022. The company did not apply for government loans.
- Management said it expects sequential revenue improvement to continue into 2021, but provided no numerical revenue or earnings guidance. It also warned that COVID-19 and its economic effects are expected to continue adversely affecting future results; the duration and extent are uncertain.
- The company resumed share repurchases after a temporary suspension from March 21 through June 14, 2020. It repurchased 267,120 shares for $22.1 million during the nine months and 82,157 shares for $7.7 million during the quarter. Management said repurchases could be reduced or halted if earnings or cash flows weaken.
- Key disclosed risks include pandemic-related claim and bill-volume declines, customer contract losses or reduced outsourcing, competition and pricing pressure, labor costs and staffing, regulatory changes, litigation, and cybersecurity or systems disruptions. Management considers ordinary-course litigation outcomes unlikely to be material. The filing reports no off-balance-sheet arrangements as defined by SEC rules.
- Management stated cash and anticipated internally generated funds should cover expected requirements for at least the next 12 months, while cautioning that pandemic-related assumptions and cash-flow estimates remain uncertain.
Most important facts for investors to verify
- Whether the reported sequential revenue recovery continued after December 2020, and how bill and new-claim volumes evolved.
- Whether COVID-19-related demand effects, customer activity, and the expected 2021 recovery developed as management anticipated.
- How much operating cash flow depended on the temporary $10.4 million payroll-tax deferral and when repayment affects cash flows.
- Whether margin improvement is sustainable as revenue changes and staffing levels adjust.
- Whether ongoing share repurchases and lease commitments remain consistent with liquidity needs and the company’s stated no-debt position.