CORVEL CORPORATION
This report may include certain forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including (without limitation)
statements with respect to anticipated future operating and financial
performance, including the impact of COVID-19, growth and acquisition
opportunities and other similar forecasts and statements of expectation. Words
such as "expects," "anticipates," "intends," "plans," "predicts," "believes,"
"seeks," "estimates," "potential," "continue," "strive," "ongoing," "may,"
"will," "would," "could," "should," as well as variations of these words and
similar expressions, are intended to identify these forward-looking statements.
Forward-looking statements made by the Company and its management are based on
estimates, projections, beliefs, and assumptions of management at the time of
such statements and are not guarantees of future performance.
The Company disclaims any obligations to update or revise any forward-looking
statement based on the occurrence of future events, the receipt of new
information or otherwise. Actual future performance, outcomes, and results may
differ materially from those expressed in forward-looking statements made by the
Company and its management as a result of a number of risks, uncertainties and
assumptions. Representative examples of these factors include (without
limitation) the impact of global pandemics, such as COVID-19; general industry
and economic conditions, including a decreasing number of national claims due to
a decreasing number of injured workers; competition from other managed care
companies and third party administrators; our ability to renew or maintain
contracts with our customers on favorable terms or at all; our ability to expand
certain areas of our business; growth in our sale of third-party administrator
("TPA") services; shifts in customer demands; increases in operating expenses
including employee wages, benefits, and medical inflation; our ability to
produce market-competitive software; cost of capital and capital requirements;
our ability to attract and retain key personnel; the impact of possible
cybersecurity incidents on our business; possible litigation and legal liability
in the course of operations and our ability to resolve such litigation; changes
in regulations affecting the workers' compensation, insurance and healthcare
industries in general; governmental and public policy changes, including but not
limited to legislative and administrative law and rule implementation or change;
the impact of recently issued accounting standards on our consolidated financial
statements; the availability of financing in the amounts, at the times, and on
the terms necessary to support our future business; and the other risks
identified in Part II, Item 1A of this report.
Overview
CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers' compensation benefits, automobile insurance claims, and group health insurance benefits. The Company's services are provided to insurance companies, TPAs, governmental entities, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims. InNovember 2022 , theBureau of Labor Statistics reported that the occupational injury count for 2021 was 2.24 million compared to 2.11 million in 2020, and 2.69 million in 2019. While there was an increase in the injury count for 2021 compared to 2020, the count has not returned to pre-pandemic levels.
Network Solutions Services
The Company's network solutions services are designed to reduce the price paid
by its customers for medical services rendered in workers' compensation cases,
automobile insurance policies, and group health insurance policies. The network
solutions services offered by the Company include professional nurse review,
true line item review, expert fee negotiations, specialty networks, preferred
provider organization ("PPO") management, medical bill repricing, automated
adjudication, and electronic reimbursement. Network solutions services also
includes revenue from the Company's directed care network (known as CareIQ),
including imaging, physical therapy, durable medical equipment, and translation
and transportation.
Patient Management Services
In addition to its network solutions services, the Company provides a unique
approach to patient management through the TPA services it offers. Patient
management services include claims management and all services sold to claims
management customers, as well as case management, the Company's 24/7 virtual
care platform with nurse triage, utilization management, vocational
rehabilitation, and disability, liability claims, and auto claims management.
This integrated service model controls claims costs by advocating medical
management at the onset of a claimant's injury to decrease administrative costs
and to shorten the duration of the claimant's disability. This automated
solution offers a personalized treatment program for each injured worker, using
precise treatment protocols to meet the changing needs of patients on an ongoing
basis. The Company offers these services on a stand-alone basis or as an
integrated component of its medical cost containment services.
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--------------------------------------------------------------------------------Organizational Structure
The Company's management is structured geographically with regional vice presidents who are responsible for all services provided by the Company within his or her particular region and responsible for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.
Business Enterprise Segments
The Company operates in one reportable operating segment, managed care. The Company's services are delivered to its customers through its local offices in each region and financial information for the Company's operations follows this service delivery model. All regions provide the Company's patient management and network solutions services to customers.Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 280-10, "Segment Reporting", establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company's internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company's operating revenue generated withinthe United States . Under FASB ASC 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: (i) the nature of products and services; (ii) the nature of the production processes; (iii) the type or class of customer for their products and services; and (iv) the methods used to distribute their products or provide their services. The Company believes each of its regions meet these criteria as each provides similar services and products to similar customers using similar methods of production and distribution.
Because we believe we meet each of the criteria set forth above and each of our regions have similar economic characteristics, we aggregate our results of operations in one reportable operating segment, managed care.
Seasonality
While we are not directly impacted by seasonal shifts, we are affected by the change in working days in a given quarter. There are generally fewer working days for our employees to generate revenue in the third fiscal quarter due to employee vacations, inclement weather, and holidays.
Summary of Quarterly Results
The Company's revenues increased to$179.4 million in the quarter endedDecember 31, 2022 from$164.5 million in the quarter endedDecember 31, 2021 , an increase of$14.9 million , or 9.0%. This increase resulted primarily from both patient management and network solutions activity with existing customers and, to a lesser extent, an increase in new customers. Cost of revenues increased to$139.0 million in the quarter endedDecember 31, 2022 from$129.3 million in the quarter endedDecember 31, 2021 , an increase of$9.7 million , or 7.5%. This increase was primarily due to the increase of 9.0% in revenue mentioned above. Additionally, there was an increase in salaries of 9.8% resulting from increased average headcount of 9.3% in field operations and growth in average annual salary increases due to wage inflation. General and administrative expense increased to$18.1 million in the quarter endedDecember 31, 2022 from$17.5 million in the quarter endedDecember 31, 2021 , an increase of$0.6 million , or 3.6%. This increase was primarily due to an increase in corporate system costs. Income tax expense increased to$5.4 million in the quarter endedDecember 31, 2022 from$3.8 million in the quarter endedDecember 31, 2021 . Income before income tax provision increased to$22.2 million in the quarter endedDecember 31, 2022 from$17.7 million in the quarter endedDecember 31, 2021 , an increase of$4.5 million , or 25.6%. The effective tax rate was 24.2% for the quarter endedDecember 31, 2022 compared to 21.6% in the quarter endedDecember 31, 2021 . Diluted weighted average common and common equivalent shares decreased to 17.5 million shares for the quarter endedDecember 31, 2022 from 18.2 million shares for the quarter endedDecember 31, 2021 , a decrease of 724,000 shares, or 4.0%, due to the weighted impact of shares repurchased partially offset by the weighted impact of options exercised. Diluted earnings per share increased to$0.96 per share in the quarter endedDecember 31, 2022 from$0.76 per share in the quarter endedDecember 31, 2021 , an increase of$0.20 per share, or 26.3%. The increase in diluted earnings per share was primarily due to an increase in net income, which was slightly offset by a decrease in weighted diluted shares. Page 18 --------------------------------------------------------------------------------
Results of Operations for the three months ended
The Company derives its revenues from providing patient management and network solutions services to payors of workers' compensation benefits, automobile insurance claims, and group health insurance benefits. The percentages of total revenues attributable to patient management and network solutions services for the quarters endedDecember 31, 2022 and 2021 are as follows: December 31, 2022 December 31, 2021 Patient management services 66.3 % 65.5 % Network solutions services 33.7 % 34.5 % The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company's unaudited consolidated income statements for the three months endedDecember 31, 2022 and 2021. The Company's past operating results are not necessarily indicative of future operating results. Three Months Ended Three Months Ended Percentage December 31, 2022 December 31, 2021 Change Change Revenue$ 179,386,000 $ 164,508,000 $ 14,878,000 9.0 % Cost of revenues 139,041,000 129,320,000 9,721,000 7.5 % Gross profit 40,345,000 35,188,000 5,157,000 14.7 % Gross profit as percentage of revenue 22.5 % 21.4 % General and administrative 18,128,000 17,506,000 622,000 3.6 % General and administrative as percentage of revenue 10.1 % 10.6 % Income before income tax provision 22,217,000 17,682,000 4,535,000 25.6 % Income before income tax provision as percentage of revenue 12.4 % 10.7 % Income tax provision 5,368,000 3,824,000 1,544,000 40.4 % Net income $ 16,849,000 $ 13,858,000$ 2,991,000 21.6 % Weighted Average Shares Basic 17,245,000 17,785,000 (540,000 ) (3.0 %) Diluted 17,487,000 18,211,000 (724,000 ) (4.0 %) Earnings Per Share Basic $ 0.98 $ 0.78$ 0.20 25.6 % Diluted $ 0.96 $ 0.76$ 0.20 26.3 % Revenues
Change in revenue to the quarter ended
Revenues increased to$179.4 million in the quarter endedDecember 31, 2022 from$164.5 million in the quarter endedDecember 31, 2021 , an increase of$14.9 million , or 9.0%. Patient management services revenues increased to$118.9 million from$107.7 million , an increase of 10.4%. This increase is primarily due to higher revenue from the Company's TPA and related services. Total new claims increased by 7% during theDecember 31, 2022 quarter compared to theDecember 31, 2021 quarter. Network solutions services revenues increased to$60.5 million from$56.8 million , an increase of 6.5%. This increase is primarily due to increases in enhanced bill review programs services, which resulted in a higher number of bills reviewed and higher revenue per bill. Most of the increase came from growth with existing customers and, to a lesser extent, growth with new customers.
Cost of Revenues
The Company's cost of revenues consists of direct expenses, costs directly
attributable to the generation of revenue, and indirect costs which are incurred
to support the operations in the field offices which generate the revenue.
Direct expenses primarily include (i) case manager and bill review analysts'
salaries, along with related payroll taxes and fringe benefits, and (ii) costs
associated with independent medical examinations (known as IME), prescription
drugs, and MRI, physical therapy, and durable medical equipment providers. Most
of the Company's revenues are generated in offices which provide both patient
management services and network solutions services. The largest of the field
indirect costs are (i) manager salaries and bonuses, (ii) account executive base
pay and commissions, (iii) salaries of administrative and clerical support,
field systems personnel and PPO network developers, along with related payroll
taxes and fringe benefits, and (iv) office rent. Approximately 36% of the costs
incurred in the field are considered field indirect costs, which support both
the patient management services and network solutions operations of the
Company's field operations.
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Change in cost of revenues to the quarter ended
Cost of revenues increased to$139.0 million in the quarter endedDecember 31, 2022 from$129.3 million in the quarter endedDecember 31, 2021 , an increase of$9.7 million , or 7.5%. The increase in cost of revenues was primarily due to the increase in total revenues of 9.0%. Additionally, there was an increase in salaries of 9.8% resulting from increased average headcount of 9.3% in field operations and growth in average annual salary increases due to wage inflation. Headcount increased due to an increase in new business and volume of business.
General and Administrative Expense
For the quarter endedDecember 31, 2022 , general and administrative expense consisted of approximately 50% of corporate systems costs, which include the corporate systems support, implementation and training, rules engine development, national IT strategy and planning, depreciation of hardware costs in the Company's corporate offices and backup data center, the Company's nationwide area network, and other systems related costs. The Company includes all IT-related costs managed by the corporate office in general and administrative expense whereas the field IT-related costs are included in the cost of revenues. The remaining general and administrative costs consist of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development, and other general corporate expenses.
Change in general and administrative expense to the quarter ended
General and administrative expense increased to$18.1 million in the quarter endedDecember 31, 2022 from$17.5 million in the quarter endedDecember 31, 2021 , an increase of$0.6 million , or 3.6%. This increase was primarily due to an increase in corporate system costs.
Income Tax Provision
Change in income tax expense to the quarter ended
Income tax expense increased to$5.4 million in the quarter endedDecember 31, 2022 from$3.8 million in the quarter endedDecember 31, 2021 . Income before income tax provision increased to$22.2 million in the quarter endedDecember 31, 2022 from$17.7 million in the quarter endedDecember 31, 2021 , an increase of$4.5 million , or 25.6%. The effective tax rate was 24.2% for the quarter endedDecember 31, 2022 compared to 21.6% in the quarter endedDecember 31, 2021 . For the quarter endedDecember 31, 2022 , the effective tax rate was higher due to a decrease in stock option exercises. Page 20 --------------------------------------------------------------------------------
Results of Operations for the nine months ended
The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company's consolidated income statements for the nine months endedDecember 31, 2022 and 2021. The Company's past operating results are not necessarily indicative of future operating results. Nine Months Ended Nine Months Ended Percentage December 31, 2022 December 31, 2021 Change Change Revenue$ 533,119,000 $ 474,871,000 $ 58,248,000 12.3 % Cost of revenues 416,811,000 365,808,000 51,003,000 13.9 % Gross profit 116,308,000 109,063,000 7,245,000 6.6 % Gross profit as percentage of revenue 21.8 % 23.0 % General and administrative 54,347,000 50,810,000 3,537,000 7.0 % General and administrative as percentage of revenue 10.2 % 10.7 % Income before income tax provision 61,961,000 58,253,000 3,708,000 6.4 % Income before income tax provision as percentage of revenue 11.6 % 12.3 % Income tax provision 13,765,000 11,480,000 2,285,000 19.9 % Net income$ 48,196,000 $ 46,773,000 $ 1,423,000 3.0 % Weighted Average Shares Basic 17,379,000 17,841,000 (462,000 ) (2.6 %) Diluted 17,647,000 18,221,000 (574,000 ) (3.2 %) Earnings Per Share Basic $ 2.77 $ 2.62$ 0.15 5.7 % Diluted $ 2.73 $ 2.57$ 0.16 6.2 % Page 21
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Revenues
Change in revenue to the nine months ended
Revenues increased to$533.1 million for the nine months endedDecember 31, 2022 from$474.9 million for the nine months endedDecember 31, 2021 , an increase of$58.2 million , or 12.3%. Patient management services revenues increased to$353.2 million from$312.8 million , an increase of 12.9%. This increase is primarily due to higher revenue from the Company's TPA and related services. Total new claims increased by 15% during the nine months endedDecember 31, 2022 compared to the nine months endedDecember 31, 2021 . Network solutions services revenues increased to$179.9 million from$162.0 million , an increase of 11.0%. This increase is primarily due to increases in enhanced bill review programs services, which resulted in a higher number of bills reviewed and higher revenue per bill. Most of the increase came from growth with existing customers and, to a lesser extent, growth with new customers.
Cost of Revenues
Change in cost of revenues to the nine months ended
Cost of revenues increased to$416.8 million in the nine months endedDecember 31, 2022 from$365.8 million in the nine months endedDecember 31, 2021 , an increase of$51.0 million , or 13.9%. The increase in cost of revenues was primarily due to the increase in total revenues of 12.3%. Additionally, there was an increase in salaries of 16.2% resulting from increased average headcount of 12.8% in field operations and growth in average annual salary increases due to wage inflation. Headcount increased due to an increase in new business and volume of business.
General and Administrative Expense
Change in administrative expense to the nine months ended
General and administrative expense increased to$54.3 million in the nine months endedDecember 31, 2022 from$50.8 million in the nine months endedDecember 31, 2021 , an increase of$3.5 million , or 7.0%. This increase was primarily due to an increase in corporate system costs, marketing, and legal expenses.
Income Tax Provision
Change in income tax expense to the nine months ended
Income tax expense increased to$13.8 million for the nine months endedDecember 31, 2022 from$11.5 million for the nine months endedDecember 31, 2021 , an increase of$2.3 million , or 19.9%. Income before income tax provision increased to$62.0 million in the nine months endedDecember 31, 2022 from$58.3 million in the nine months endedDecember 31, 2021 , an increase of$3.7 million , or 6.4%. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 22.1% for the nine months endedDecember 31, 2022 and 19.8% for the nine months endedDecember 31, 2021 . For the nine months endedDecember 31, 2022 compared to the nine months endedDecember 31, 2021 , the effective tax rate is less than the statutory tax rate primarily because of the impact of the stock option exercises, that however had a less significant impact in the current year compared to prior year.
Liquidity and Capital Resources
The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, proceeds from stock option exercises. Working capital decreased to$70.3 million as ofDecember 31, 2022 from$93.6 million as ofMarch 31, 2022 , a decrease of$23.3 million . Cash decreased to$78.0 million as ofDecember 31, 2022 from$97.5 million as ofMarch 31, 2022 , a decrease of$19.5 million . This is primarily due to the increase in spending to repurchase shares of the Company's common stock. The Company did not apply for governmental loans to support the Company's operations, but has taken advantage of certain aspects of the CARES Act such as the deferral of payroll tax deposits. The Company deferred a total of$10.4 million in payroll tax deposits, half of which was paid during theDecember 31, 2021 quarter, and the other half of which was paid during theDecember 31, 2022 quarter. Page 22
-------------------------------------------------------------------------------- The Company is not a party to off-balance sheet arrangements as defined by the rules of theSEC . However, from time to time the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. The contracts primarily relate to: (i) certain contracts to perform services, under which the Company may provide customary indemnification for the purchases of such services, (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company's use of the applicable premises, and (iii) certain agreements with the Company's officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of certain actions taken by such persons, acting in their respective capacities within the Company. The terms of such customary obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no material liabilities have been recorded for these obligations on the Company's balance sheets for any of the periods presented. The Company believes that cash from operations and funds from exercises of stock options granted to employees are adequate to fund existing obligations, repurchase shares of the Company's common stock under its current stock repurchase program, introduce new services, and continue to develop the Company's healthcare related services for at least the next twelve months. Should the Company have lower income or cash flows, it could reduce or eliminate repurchases under the stock repurchase program until earnings and cash flow have returned to comfortable levels. The Company regularly evaluates cash requirements for current operations, commitments, capital acquisitions, and other strategic transactions. The Company may elect to raise additional funds for these purposes, through debt or equity financings or otherwise, as appropriate. However, additional equity or debt financing may not be available when needed, with terms favorable to the Company or at all.
As of
The Company believes that its cash and cash equivalents, along with cash generated by ongoing operations, will be sufficient to satisfy its cash requirements over the next 12 months and beyond.
Operating Activities
Nine months ended
Net cash provided by operating activities increased to$69.5 million in the nine months endedDecember 31, 2022 from$50.4 million in the nine months endedDecember 31, 2021 , an increase of$19.1 million . The increase in cash flow from operating activities was primarily due to the fact that in the nine months endedDecember 31, 2022 , there was a source of cash due to the timing of tax payments versus in the nine months endedDecember 31, 2021 , there was a use of cash due to the timing of the tax payments, which caused a$7.5 million swing.
Investing Activities
Nine months ended
Net cash flow used in investing activities increased to$19.2 million in the nine months endedDecember 31, 2022 from$18.4 million in the nine months endedDecember 31, 2021 , an increase of$0.7 million , which were exclusively capital purchases. The Company increased its spending primarily on developed software and reduced its spending on furniture and leasehold improvements as the Company reduces its lease footprint. Financing Activities
Nine months ended
Net cash flow used in financing activities increased to$69.8 million for the nine months endedDecember 31, 2022 from$56.1 million for the nine months endedDecember 31, 2021 , an increase of$13.7 million . The increase in net cash used in financing activities was primarily due to an increase in spending on share repurchases to$75.1 million for the nine months endedDecember 31, 2022 . The Company spent$65.3 million on share repurchases for the nine months endedDecember 31, 2021 . Additionally, stock option exercises decreased to$4.9 million for the nine months endedDecember 31, 2022 from$8.9 million for the nine months endedDecember 31, 2021 . The Company has historically used cash provided by operating activities and from the exercise of stock options to repurchase stock. The Company expects that it may use some of the cash on the balance sheet atDecember 31, 2022 to repurchase additional shares of its common stock in the future. Page 23 --------------------------------------------------------------------------------
Litigation
From time to time, the Company is involved in litigation arising in the ordinary course of business. The Company believes that resolution of these matters will not result in any payment that, individually, or in the aggregate, would be material to the financial position or results of operations of the Company.
Inflation
The Company experiences pricing pressures in the form of competitive prices. The Company is also impacted by rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits, and facility leases. The Company believes inflation could have a material impact to pricing and operating expenses in future periods due to the state of the economy and current inflation rates.
Critical Accounting Policies and Estimates
TheSEC defines critical accounting policies as those that require application of management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies which have the greatest potential impact on its financial statements are more fully described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of its Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 , filed with theSEC onMay 27, 2022 . No changes in critical accounting policies have been made since the filing of that Annual Report on Form 10-K. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted inthe United States of America ("GAAP"), with no need for management's judgment in their application. There are also areas in which management's judgment in selecting an available alternative would not produce a materially different result. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
Recent Accounting Standards Update
See Note 1 - Summary of Significant Accounting Policies to the accompanying unaudited consolidated financial statements contained elsewhere in this report for information about recently issued and adopted accounting pronouncements.
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