CORVEL CORP 10-Q

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, 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,” 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. 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; the ability to expand certain areas of the Company’s business; growth in the Company’s sale of TPA services; 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; cost of capital and capital requirements; dependence on key personnel; the impact of possible cybersecurity incidents; existing and possible litigation and legal liability in the course of operations and the Company’s ability to resolve such litigation; 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 the Company’s consolidated financial statements; the continued availability of financing in the amounts and at the terms necessary to support the Company’s 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. In November 2020, the Bureau of Labor Statistics reported that the occupational injury and illness incidence rate for 2019 remained unchanged from the prior year. This is the second year in a row that the rate did not decline. Patient Management Services In addition to its network solutions services, the Company offers a range of patient management services, which involve working one-on-one with injured employees and their various healthcare professionals, employers and insurance company adjusters. Patient management services include claims management and all services sold to claims management customers, case management, 24/7 nurse triage, utilization management, vocational rehabilitation, and life care planning. 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. Patient management services include the processing of claims for self-insured payors with respect to property and casualty insurance. 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 automated medical fee auditing, preferred provider management and reimbursement services, retrospective utilization review, facility claim review, professional review, pharmacy services, directed care services, Medicare solutions, clearinghouse services, independent medical examinations, and inpatient medical bill review. 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. Page 15 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 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: (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. COVID-19 Pandemic The economies of the United States and other countries around the world have rapidly contracted as a result of the COVID-19 pandemic. The decreased level of economic activity and uneven economic recovery is leading to, and is likely to continue to lead to, a decline and/or volatility in exposure units and prolonged and uneven unemployment. While the full impact of the COVID-19 pandemic cannot be fully assessed at this time, the Company expects that the ongoing global economic slowdown and uneven recovery resulting from the COVID-19 pandemic could continue to have a material adverse effect on its business, results of operations, financial condition, and cash flows in one or more future quarters. The COVID-19 pandemic impacted our business, most significantly during the June and September 2020 quarters. We implemented a 10% reduction in headcount that began late in the March 2020 quarter and continued through the June 2020 quarter. We took actions intended to protect our employees and our customers that adversely affected our results. We reduced discretionary spending, including but not limited to cutting spending in planned capital expenditures, travel, recruiting, consulting and temporary help expenses. Additionally, we temporarily suspended share repurchases under our stock repurchase program, from March 21 through June 14, 2020. We did not apply for governmental loans to support our operations, but we have taken advantage of certain aspects of the CARES Act such as the deferral of payroll tax deposits through December 31, 2020. The majority of our workforce continues to work from home. The Company began realizing sequential increases in revenues during the September and December 2020 quarters, and the March and June 2021 quarters. Management expects this trend to continue in 2021, especially with the distribution of vaccines, but there can be no assurance that vaccines will be distributed timely or be effective, that there will not be additional surges in COVID-19 and new stay-at-home mandates, or that the economic recovery will continue. Summary of Quarterly Results The Company’s revenues increased to $152.6 million in the quarter ended June 30, 2021 from $129.6 million in the quarter ended June 30, 2020, an increase of $23.0 million, or 17.8%. This increase was due to an increase in revenues in patient management and network solutions services primarily as a result of the economy recovering from the impact of the economic shutdown due to the COVID-19 pandemic in the United States that started during the June 2020 quarter. Page 16 Cost of revenues increased to $115.4 million in the quarter ended June 30, 2021 from $103.1 million in the quarter ended June 30, 2020 , a n in crease of $12.3 million, or 11.9% . This in crease was pri marily due to the in crease of 17.8 % in revenue mentioned above , in connection with which there was an increase in salaries resulting from in crease d headcount of 7 % in field operations. General and administrative expense increased to $16.6 million in the quarter ended June 30, 2021 from $15.6 million in the quarter ended June 30, 2020, an increase of $1.1 million, or 6.8%. This increase was primarily due to an increase in marketing, legal, and information technology costs. Income tax expense increased to $3.7 million in the quarter ended June 30, 2021 from $2.6 million in the quarter ended June 30, 2020, an increase of $1.1 million, or 42.1%. Income before income tax provision increased to $20.6 million in the quarter ended June 30, 2021 from $10.9 million in the quarter ended June 30, 2020, an increase of $9.6 million, or 88.3%. The effective tax rate was 18.1% for the quarter ended June 30, 2021 compared to 24.0% in the quarter ended June 30, 2020. Diluted weighted average shares increased to 18.2 million shares in the quarter ended June 30, 2021 from 18.1 million shares in the quarter ended June 30, 2020, an increase of 106,000 shares, or 0.6%, due to the weighted impact of options exercised partially offset by the weighted impact of shares repurchased under the Company’s stock repurchase program. Diluted earnings per share increased to $0.92 per share in the quarter ended June 30, 2021 from $0.46 per share in the quarter ended June 30, 2020, an increase of $0.46 per share, or 100.0%. The increase in diluted earnings per share was primarily due to an increase in net income. Results of Operations for the three months ended June 30, 2021 and 2020 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 ended June 30, 2021 and 2020 are as follows: June 30, 2021 June 30, 2020 Patient management services 65.8 % 65.8 % Network solutions services 34.2 % 34.2 % 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 ended June 30, 2021 and 2020. The Company’s past operating results are not necessarily indicative of future operating results. Three Months Ended Three Months Ended Percentage June 30, 2021 June 30, 2020 Change Change Revenue $ 152,620,000 $ 129,600,000 $ 23,020,000 17.8 % Cost of revenues 115,407,000 103,091,000 12,316,000 11.9 % Gross profit 37,213,000 26,509,000 10,704,000 40.4 % Gross profit as percentage of revenue 24.4 % 20.5 % General and administrative 16,645,000 15,585,000 1,060,000 6.8 % General and administrative as percentage of revenue 10.9 % 12.0 % Income before income tax provision 20,568,000 10,924,000 9,644,000 88.3 % Income before income tax provision as percentage of revenue 13.5 % 8.4 % Income tax provision 3,725,000 2,622,000 1,103,000 42.1 % Net income $ 16,843,000 $ 8,302,000 $ 8,541,000 102.9 % Weighted Average Shares Basic 17,897,000 17,983,000 (86,000 ) (0.5 %) Diluted 18,220,000 18,114,000 106,000 0.6 % Earnings Per Share Basic $ 0.94 $ 0.46 $ 0.48 104.3 % Diluted $ 0.92 $ 0.46 $ 0.46 100.0 % Page 17 Revenues Change in revenue to the quarter ended June 30, 2021 from the quarter ended June 30, 2020 Revenues increased to $152.6 million in the quarter ended June 30, 2021 from $129.6 million in the quarter ended June 30, 2020, an increase of $23.0 million, or 17.8%. Patient management services revenues increased to $100.4 million from $85.2 million, an increase of 17.9%. This increase is primarily due to higher revenue from the Company’s TPA and related services. Total new claims increased by 22% during the June 30, 2021 quarter compared to the June 30, 2020 quarter. Network solutions services revenues increased to $52.2 million from $44.4 million, an increase of 17.6%. This increase is primarily due to increases in enhanced bill review programs services, which resulted in higher revenue per bill. 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. Change in cost of revenues to the quarter ended June 30, 2021 from the quarter ended June 30, 2020 Cost of revenues increased to $115.4 million in the quarter ended June 30, 2021 from $103.1 million in the quarter ended June 30, 2020, an increase of $12.3 million, or 11.9%. The increase in cost of revenues was primarily due to the increase in total revenues of 17.8%, in connection with which there was an increase in salaries resulting from increased headcount of 7% in field operations. General and Administrative Expense For the quarter ended June 30, 2021, general and administrative expense consisted of approximately 51% 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 June 30, 2021 from the quarter ended June 30, 2020 General and administrative expense increased to $16.6 million in the quarter ended June 30, 2021 from $15.6 million in the quarter ended June 30, 2020, an increase of $1.1 million, or 6.8%. This increase was primarily due to an increase in marketing as corporate marketing events are starting to occur again in 2021 after being cancelled in 2020 due to the COVID-19 pandemic. Additionally, legal and information technology costs also increased. Income Tax Provision Change in income tax expense to the quarter ended June 30, 2021 from the quarter ended June 30, 2020 Income tax expense increased to $3.7 million in the quarter ended June 30, 2021 from $2.6 million in the quarter ended June 30, 2020, an increase of $1.1 million, or 42.1%. Income before income tax provision increased to $20.6 million in the quarter ended June 30, 2021 from $10.9 million in the quarter ended June 30, 2020, an increase of $9.6 million, or 88.3%. The effective tax rate was 18.1% for the quarter ended June 30, 2021 compared to 24.0% in the quarter ended June 30, 2020. The effective tax rate is less than the statutory tax rate primarily due to the impact of stock option exercises. Page 18 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 increased to $114.6 million as of June 30, 2021 from $106.5 million as of March 31, 2021, an increase of $8.1 million. Cash decreased to $138.7 million as of June 30, 2021 from $139.7 million as of March 31, 2021, a decrease of $1.1 million. This is primarily due to an increase in net income and proceeds from stock options exercised, partially offset by cash used 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 will be paid back by the end of calendar year 2021 and the other half will be paid back by the end of calendar year 2022. 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 June 30, 2021, the Company had $138.7 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. The Company believes that the cash balance at June 30, 2021 along with anticipated internally-generated funds will be sufficient to meet the Company’s expected cash requirements for at least the next twelve months. The Company cannot provide any assurance that the assumptions used to estimate its liquidity requirements will remain accurate due to the unprecedented nature of the disruption to operations and the unpredictability of the COVID-19 global pandemic. Consequently, estimates of the duration of the pandemic and the severity of the impact on future earnings and cash flows could change and have a material impact on our results of operations and financial condition. The ultimate duration and impact of the COVID-19 pandemic on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic, the distribution and effectiveness of vaccines, repeat or cyclical outbreaks, and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. Furthermore, the extent to which the Company’s mitigation efforts are successful, if at all, is not presently ascertainable. However, the Company expects that its results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include a global recession. Operating Activities Three months ended June 30, 2021 compared to three months ended June 30, 2020 Net cash provided by operating activities decreased to $14.5 million in the three months ended June 30, 2021 from $15.4 million in the three months ended June 30, 2020, a decrease of $1.0 million. The decrease in cash flow from operating activities was primarily due to the fact that the Company had a prior year deferral of payroll taxes provided by the CARES Act that was no longer available during the current quarter. Investing Activities Three months ended June 30, 2021 compared to three months ended June 30, 2020 Net cash flow used in investing activities increased to $6.5 million in the three months ended June 30, 2021 from $3.6 million in the three months ended June 30, 2020, an increase of $2.9 million. Capital purchases were $6.5 million for the three months ended June 30, 2021 and $3.6 million for the three months ended June 30, 2020. This increase was due to the Company returning their capital spend to a more consistent amount while during the three months ended June 30, 2020, the Company reduced its planned capital expenditures due to the COVID-19 pandemic. Financing Activities Three months ended June 30, 2021 compared to three months ended June 30, 2020 Net cash flow used in financing activities increased to $9.1 million for the three months ended June 30, 2021 from $0.9 million for the three months ended June 30, 2020, an increase of $8.1 million. The increase in net cash used in financing activities was primarily due to an increase in spending on share repurchases to $14.2 million for the three months ended June 30, 2021. The Page 19 Company spent $2.4 million on share repurchases for the three months ended June 30, 2020, when the stock repurchase program was temporarily suspended due to the COVID-19 pandemic. Contractual Obligations The following table summarizes the Company’s contractual obligations outstanding as of June 30, 2021: Payments Due by Period Within One Between One and Between Three and More than Total Year Three Years Five Years Five Years Operating and finance leases $ 56,352,000 $ 9,748,000 $ 21,184,000 $ 13,786,000 $ 11,634,000 Total $ 56,352,000 $ 9,748,000 $ 21,184,000 $ 13,786,000 $ 11,634,000 Operating leases are rents for the Company’s physical locations. Litigation The Company is involved in litigation arising in the ordinary course of business. Management 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. However, the Company generally does not believe these impacts are material to its revenues or net income. Off-Balance Sheet Arrangements The Company is not a party to off-balance sheet arrangements as defined by the rules of the SEC. 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. Critical Accounting Policies The SEC 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 ended March 31, 2021, filed with the SEC on May 28, 2021. No changes in critical accounting policies have been made since the filing of that Annual Report on Form 10-K. Additional information related to adoption of accounting standards is provided in Note 1 to the accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the 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. Page 20 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 a description of recently issued and adopted accounting pronouncements.