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CRVL > SEC Filings for CRVL > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for CORVEL CORP


7-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 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" and "should", and 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, except as required by law. 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) general industry and economic conditions including a decreasing number of national claims due to decreasing number of injured workers; cost of capital and capital requirements; existing and possible litigation and legal liability in the course of operations and the Company's ability to resolve such litigation; competition from other managed care companies; the ability to expand certain areas of the Company's business; shifts in customer demands; the ability of the Company to produce market-competitive software; changes in operating expenses including employee wages, benefits and medical inflation; governmental and public policy changes; dependence on key personnel; and the continued availability of financing in the amounts and at the terms necessary to support the Company's future business.

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 and auto policies. The Company's services are provided to insurance companies, third party administrators, ("TPA's"), governmental entities, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims.

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, auto policies and, to a lesser extent, group health policies. The network solutions offered by the Company include automated medical fee auditing, preferred provider services, retrospective utilization review, independent medical examinations, and inpatient bill review. Network solutions services also includes revenue from the Company's directed care network, including imaging and physical therapy.

Patient Management Services

The Company offers a range of patient management services, which involve working on a one-on-one basis with injured employees and their various healthcare professionals, employers and insurance company adjusters. The services are designed to monitor the medical necessity and appropriateness of healthcare services provided to workers' compensation and other healthcare claimants and to expedite return to work. The Company offers these services on a stand-alone basis, or as an integrated component of its medical cost containment services.

Organizational Structure

The Company's management is structured geographically with regional vice-presidents who report to the Executive Vice-President of the Company. Each of these regional vice-presidents is responsible for all services

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provided by the Company in his or her particular region and 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. FASB ASC 280-10 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 within the 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: 1) the nature of products and services; 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) 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 productions and similar methods to distribute the services and products.

Summary of Quarterly Results

The Company generated revenues of $105.5 million for the quarter ended September 30, 2012, an increase of $0.9 million, or 0.9%, compared to revenues of $104.6 million for the quarter ended September 30, 2011. The increase in revenues was primarily due to a 10% increase in patient management, which includes case management services and all services sold to TPA customers. The 10% increase in revenue was partially offset by a decrease in network solutions due to a decline in volume and the loss of a few customers which were not significant in size. The increase in patient management services was primarily due to an increase in the level of services provided to new TPA customers.

The Company's cost of revenues increased by $3.7 million, from $78.9 million in the September 30, 2011 quarter to $82.6 million in the September 30, 2012 quarter, an increase of 4.7%. TPA services require additional labor. As we have added customers in this area, we have had to hire additional direct labor resources, causing the increase in cost of revenues. In addition, pharmacy costs have increased as the volume of prescription processing has increased.

The Company's general and administrative expense decreased by $0.6 million, from $12.6 million in the September 30, 2011 quarter to $12.0 million in the September 30, 2012 quarter, a decrease of 4.9%. This decrease is primarily due to an increase in efforts to manage the Company's general and administrative costs during a period of slower revenue growth.

The Company's income tax expense decreased by $0.9 million, or 17.8%, from $5.1 million, in the September 30, 2011 quarter to $4.2 million in the September 30, 2012 quarter. The decrease in income tax expense was primarily due to the decrease in income before income taxes.

Weighted diluted shares decreased from 11.7 million shares in the September 30, 2011 quarter to 11.4 million shares in the September 30, 2012 quarter, a decrease of 296,000 shares, or 2.5%. This decrease was due primarily to the repurchase of 402,682 shares of common stock in the December 2011, March 2012, June 2012, and September 2012 quarters.

Diluted earnings per share decreased from $0.68 in the September 30, 2011 quarter to $0.58 in the September 30, 2012 quarter, a decrease of $0.10 per share, or 14.7%. The decrease in diluted earnings per share was due to the decrease in income before income taxes offset by a reduction in the number of shares outstanding due to the shares repurchased.

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Results of Operations for the three months ended September 30, 2011 and 2012

The Company derives its revenues from providing patient management and network solutions services to payors of workers' compensation benefits, auto insurance claims and health insurance benefits. Patient management services include claims management, case management, 24/7 nurse triage, utilization management, vocational rehabilitation and life care planning. Network solutions services include medical bill review, PPO management, enhanced bill review, provider reimbursement, professional review, pharmacy services, directed care services, Medicare solutions and clearinghouse services. The percentage of total revenues attributable to patient management and network solutions services for the quarters ended September 30, 2011 and September 30, 2012 are as follows:

Percentage of Revenues



                                   September 30, 2011        September 30, 2012
    Patient management services                   47.3 %                    51.7 %
    Network solutions services                    52.7 %                    48.3 %

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 three months ended September 30, 2011 and September 30, 2012. The Company's past operating results are not necessarily indicative of future operating results.

                                      Three Months Ended          Three Months Ended                               Percentage
                                      September 30, 2011          September 30, 2012            Change               Change
Revenue                              $        104,552,000        $        105,458,000        $     906,000                 0.9 %
Cost of revenues                               78,940,000                  82,622,000            3,682,000                 4.7 %

Gross profit                                   25,612,000                  22,836,000           (2,776,000 )             (10.8 %)

Gross profit as percentage of
revenue                                              24.5 %                      21.7 %

General and administrative                     12,592,000                  11,981,000             (611,000 )              (4.9 %)
General and administrative as
percentage of revenue                                12.0 %                      11.4 %

Income before income tax
provision                                      13,020,000                  10,855,000           (2,165,000 )             (16.6 %)

Income before income tax
provision as percentage of
revenue                                              12.5 %                      10.3 %

Income tax provision                            5,139,000                   4,225,000             (914,000 )             (17.8 %)

Net income                           $          7,881,000        $          6,630,000        $  (1,251,000 )             (15.9 %)

Weighted Shares
Basic                                          11,526,000                  11,270,000             (256,000 )              (2.2 %)
Diluted                                        11,672,000                  11,376,000             (296,000 )              (2.5 %)

Earnings Per Share
Basic                                $               0.68        $               0.59        ($       0.09 )             (13.2 %)
Diluted                              $               0.68        $               0.58        ($       0.10 )             (14.7 %)

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Revenues

Change in revenue from the quarter ended September 30, 2011 to the quarter ended September 30, 2012

Revenues increased from $104.6 million for the three months ended September 30, 2011 to $105.5 million for the three months ended September 30, 2012, an increase of $0.9 million, or 0.9%. The increase in revenues was primarily due to an increase in patient management, which was partially offset by a decrease in network solutions due to a decline in volume and the loss of a few customers which were not significant in size. The increase in patient management services was primarily due to an increase in the level of services provided to new TPA customers.

Cost of Revenues

The Company's cost of revenues consist of direct expenses, costs directly attributable to the generation of revenue, and field indirect costs which are incurred in the field offices of the Company. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for independent medical examination (IME) and diagnostic imaging 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 manager salaries and bonus, account executive base pay and commissions, administrative and clerical support, field systems personnel, prescription drug costs, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 35% of the costs incurred in the field are costs which support both the patient management services and network solutions operations of the Company's field offices, such as district managers, branch clerical, account executives, related payroll taxes and fringe benefits, rent, and telephone.

Change in cost of revenue from the quarter ended September 30, 2011 to the quarter ended September 30, 2012

The Company's cost of revenues increased from $78.9 million in the three months ended September 30, 2011 to $82.6 million in the three months ended September 30, 2012, an increase of $3.7 million or 4.7%. TPA services require additional labor. As we have added customers, in this area we have had to hire additional direct labor resources, causing the increase in cost of revenues. In addition, pharmacy costs have increased as the volume of prescription processing has increased.

General and Administrative Expense

For the quarter ended September 30, 2012, general and administrative expense consisted of approximately 60% of corporate systems costs which include corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company's national systems, the Company's national wide area network and other systems related costs. The remaining 40% of the general and administrative expense consisted of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development and other general corporate matters.

Change in general and administrative expense from the quarter ended September 30, 2011 to the quarter ended September 30, 2012

General and administrative expense decreased from $12.6 million in the quarter ended September 30, 2011 to $12.0 million in the quarter ended September 30, 2012, a decrease of $0.6 million, or 4.9%. This decrease is primarily due to the Company's efforts to manage non-systems related general and administrative costs by selective reductions in staff during a period of slower revenue growth.

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Income Tax Provision

Change in income tax expense from the quarter ended September 30, 2011 to the quarter ended September 30, 2012

The Company's income tax expense decreased by $0.9 million, or 17.8%, from $5.1 million for the quarter ended September 30, 2011 to $4.2 million for the quarter ended September 30, 2012 due to the decrease in income before income taxes from $13.0 million to $10.9 million during the same periods. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 39.5% for the quarter ended September 30, 2011 and 38.9% for the quarter ended September 30, 2012. The income tax provision rates were based upon management's review of the Company's estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses offset by tax credits.

Results of Operations for the six months ended September 30, 2011 and the six months ended September 30, 2012

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 six months ended September 30, 2011 and September 30, 2012. The Company's past operating results are not necessarily indicative of future operating results.

                                         Six Months Ended          Six Months Ended                            Percentage
                                        September 30, 2011        September 30, 2012          Change             Change
Revenue                                $        206,860,000      $        210,064,000      $   3,204,000               1.5 %
Cost of revenues                                155,704,000               164,047,000          8,343,000               5.4 %

Gross profit                                     51,156,000                46,017,000         (5,139,000 )           (10.0 %)

Gross profit as percentage of
revenue                                                24.7 %                    21.9 %

General and administrative                       24,886,000                24,155,000           (731,000 )            (2.9 %)
General and administrative as
percentage of revenue                                  12.0 %                    11.5 %

Income before income tax provision               26,270,000                21,862,000         (4,408,000 )           (16.8 %)

Income before income tax provision
as percentage of revenue                               12.7 %                    10.4 %

Income tax provision                             10,191,000                 8,636,000         (1,555,000 )           (15.3 %)

Net income                             $         16,079,000      $         13,226,000      $  (2,853,000 )           (17.7 %)

Weighted Shares
Basic                                            11,572,000                11,292,000           (280,000 )            (2.4 %)
Diluted                                          11,729,000                11,401,000           (328,000 )            (2.8 %)

Earnings Per Share
Basic                                  $               1.39      $               1.17      ($       0.22 )           (15.8 %)
Diluted                                $               1.37      $               1.16      ($       0.21 )           (15.3 %)

Revenues

Change in revenue from the six months ended September 30, 2011 to the six months ended September 30, 2012

Revenues increased from $206.9 million for the six months ended September 30, 2011 to $210.1 million for the six months ended September 30, 2012, an increase of $3.2 million, or 1.5%. The Company's patient management revenues increased $9 million, or 9%, from $98 million in the six months ended September 30, 2011 to

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$107 million in the six months ended September 30, 2012. The increase in patient management services was primarily due to an increase in the level of services provided to new and existing TPA customers. The Company's network solutions revenues decreased from $109 million in the six months ended September 30, 2011 to $103 million in the six months ended September 30, 2012, a decrease of $6 million, or 6%. The decrease in network solutions revenue was primarily due to a decrease in volume of higher priced services offset by an increase in volume of lower priced services.

Cost of Revenues

Change in cost of revenue from the six months ended September 30, 2011 to the six months ended September 30, 2012

The Company's cost of revenues increased from $155.7 million in the six months ended September 30, 2011 to $164.0 million in the six months ended September 30, 2012, an increase of $8.3 million, or 5.4%. This increase was partially due to the increase in the volume of services which generated the 1.5% revenue increase for the same periods. Additionally, the Company had an increase in volume of lower margin services offset by a decrease in higher margin services which resulted in a cost increase greater than the revenue increase. Direct salaries increased from $40 million for the six months ended September 30, 2011 to $45 million for the six months ended September 30, 2012. Direct pharmacy costs increased from $21 million for the six months ended September 30, 2011 to $24 million for the six months ended September 30, 2012.

General and Administrative Expense

Change in general and administrative expense from the six months ended September 30, 2011 to the six months ended September 30, 2012

General and administrative expense decreased from $24.9 million in the six months ended September 30, 2011 to $24.2 million in the six months ended September 30, 2012, a decrease of $0.7 million, or 2.9%. This decrease is primarily due to the Company's efforts to manage non-systems related general and administrative costs during a period of slower revenue growth.

Income Tax Provision

The Company's income tax expense decreased by $1.6 million, or 15.3%, from $10.2 million for the six months ended September 30, 2011 to $8.6 million for the six months ended September 30, 2012 due to the decrease in income before income taxes from $26.3 million to $21.9 million. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 38.8% for the six months ended September 30, 2011 and 39.5% for the six months ended September 30, 2012. The income tax provision rates were based upon management's review of the Company's estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses offset by tax credits.

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, stock option exercises. Working capital increased $11.6 million, from $36.5 million as of March 31, 2012 to $48.0 million as of September 30, 2012, primarily due to an increase in cash from $6.6 million as of March 31, 2012 to $20.0 million as of September 30, 2012. Cash increased due to less spending on share repurchases and no legal settlements during the current period.

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 share repurchase program, introduce new services, and continue to develop healthcare related businesses for at least the next twelve months. The Company regularly evaluates cash requirements for current operations and commitments, and for 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. Additional equity or debt financing may not be available when needed, on terms favorable to the Company or at all.

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As of September 30, 2012, the Company had $20 million in cash and cash equivalents, invested primarily in short-term, interest-bearing, highly liquid investment-grade securities with maturities of 90 days or less in federally regulated banks.

In September 2012, the Company renewed a credit agreement that had been in place throughout fiscal 2012. The line is with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement, as amended, bear interest, at the Company's option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain the current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth not greater than 1.25:1 and have positive net income. There were no outstanding revolving loans at any time during fiscal 2012 or the six months ended September 30, 2012, or as of the date hereof, but letters of credit in the aggregate amount of $8.0 million have been issued separate from the line of credit and therefore do not reduce the amount of borrowings available under the revolving credit facility. The renewed credit agreement expires in September 2013.

The Company has historically required substantial capital to fund the growth of its operations, particularly working capital to fund the growth in accounts receivable and capital expenditures. The Company believes, however, that the cash balance at September 30, 2012 along with anticipated internally generated funds, will be sufficient to meet the Company's expected cash requirements for at least the next twelve months.

Operating Cash Flows

Six months ended September 30, 2011 compared to six months ended September 30, 2012

Net cash provided by operating activities increased from $15.9 million in the six months ended September 30, 2011 to $23.9 million in the six months ended September 30, 2012. The increase in cash flow from operating activities was primarily due to the fact that in the prior fiscal year the Company paid down accrued liabilities of $9 million due to a one-time payment of a legal settlement. The current fiscal year has not had any large litigation settlements.

Investing Activities

Six months ended September 30, 2011 compared to six months ended September 30, 2012

Net cash flow used in investing activities decreased from $11.7 million in the six months ended September 30, 2011 to $6.3 million in the six months ended September 30, 2012, a decrease of $5.4 million. The decrease in net cash used in investing activities is primarily due to a decrease in the software development activity and a decrease in remodeling and furnishing office space in the six months ended September 30, 2012 compared to the same period in the prior fiscal year.

Financing Activities

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