CORVEL CORP annual report, FY2018

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CorVel Corporation (NASDAQ: CRVL) — Form 10-K

Period clarification: The supplied filing is CorVel’s annual report for the fiscal year ended March 31, 2019, not a 2017 fourth-quarter filing. Financial comparisons below are primarily fiscal 2019 versus fiscal 2018.

Business context and reporting period

CorVel provides workers’ compensation, auto and group-health claims management and medical cost-containment services. Its offerings include claims administration, bill review, provider networks, case management, pharmacy and directed-care services. The company reports one operating segment, managed care.

Financial performance and liquidity

  • Revenue: $595.7 million, up 6.7% from $558.4 million. Patient management revenue rose 16.4% to $368.2 million; network solutions revenue fell 6% to $227.5 million.
  • Profitability: Gross profit was $124.8 million, up 16.4%; gross margin was 21.0%, versus 19.2%. Pretax income increased 28.4% to $61.5 million. Net income rose 30.8% to $46.7 million; diluted EPS increased 31.6% to $2.46. Net margin was 7.9%, versus 6.4%.
  • Cash flow: Cash from operations was $78.6 million, compared with $62.2 million. Investing activities used $15.3 million and financing activities used $27.4 million. Cash increased $35.9 million to $91.7 million.
  • Liquidity and debt: Working capital was $98.6 million. The company had no revolving borrowings at year-end and had a $10 million revolving facility, scheduled to expire in September 2019. Customer deposits were $45.3 million.
  • Capital returns: CorVel repurchased 582,159 shares for $35.2 million during the year. The board raised the program’s lifetime authorization to 37 million shares; 35.5 million had been repurchased cumulatively by year-end.

Material changes versus the prior year

  • Patient management grew, primarily from TPA services; TPA customers increased 7% and claims opened increased 20%. The shift lifted patient management to 61.8% of revenue, from 56.7%.
  • Network solutions declined, including a 9.2% decrease in pharmacy bills reviewed. Management also cited lower case-management services to non-TPA customers.
  • Gross margin improved as TPA efficiencies, CareIQ revenue and scale benefits offset the lower-margin mix of TPA services. Cost of revenue rose 4.4%, slower than revenue; G&A increased 6.6%, including higher corporate systems and legal costs.
  • Fiscal 2019 operating cash flow increased, while investing outflows fell from $27.7 million to $15.3 million, partly because fiscal 2018 included building and server purchases.

Outlook, risks and notable items

  • No specific revenue or earnings guidance is provided. Management expects relatively greater growth from TPA and related services and says available cash, expected operating funds and the credit facility should meet requirements for at least 12 months.
  • Key risks include declining workers’ compensation claims, competition and customer insourcing, contract nonrenewal, changing regulation, labor and benefit cost increases, litigation, and the ability to maintain secure and reliable technology systems.
  • Operating lease commitments totaled $64.9 million. Adoption of the new lease standard in fiscal 2020 was expected to add operating lease liabilities exceeding $98 million to the balance sheet; corresponding right-of-use assets were also anticipated.
  • The effective tax rate was 24% in fiscal 2019. Management noted that further interpretation of the Tax Cuts and Jobs Act could change the company’s future tax rate and results.
  • Management reported ordinary-course litigation that it did not expect to be material. The company adopted ASC 606 in fiscal 2019 and reported no material impact on income-statement or balance-sheet line items. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
  • Michael Combs became CEO in January 2019; Brandon O’Brien became CFO in October 2018. Management said disclosure controls and internal controls were effective at year-end.

Important facts for investors to verify

  • Confirm the intended period: this is fiscal 2019, not 2017 Q4; the filing’s unaudited fiscal 2019 fourth-quarter results show revenue of $151.1 million and diluted EPS of $0.63.
  • Track whether TPA growth and improved margins persist, particularly as network solutions revenue declines and TPA services carry lower margins.
  • Review cash conversion and working-capital movements, including the increase in accrued liabilities and customer deposits.
  • Check the status and renewal terms of the $10 million credit facility, which was due to expire in September 2019.
  • Assess the balance-sheet and expense effects of lease-standard adoption, tax-law developments, and continued share repurchases.