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EX-10.4 - EX-10.4 - CORVEL CORPcrvl-ex104_367.htm
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EX-10.1 - EX-10.1 - CORVEL CORPcrvl-ex101_370.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission file number 0-19291

 

CORVEL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

33-0282651

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

2010 Main Street, Suite 600

 

 

Irvine, CA

 

92614

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (949) 851-1473

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  

The number of shares outstanding of the registrant's Common Stock, $0.0001 par value per share, as of January 31, 2018, was 18,879,945.

 

 


CORVEL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets – March 31, 2017 and December 31, 2017 (unaudited)

 

3

 

 

 

 

 

Consolidated Income Statements (unaudited) – Three months ended December 31, 2016 and 2017

 

4

 

 

 

 

 

Consolidated Income Statements (unaudited) – Nine months ended December 31, 2016 and 2017

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) – Nine months ended December 31, 2016 and 2017

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements – December 31, 2017

 

7

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

16

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

Item 4.

Controls and Procedures

 

26

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

26

 

 

 

 

Item 1A.

Risk Factors

 

26

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

33

 

 

 

 

Item 4.

Mine Safety Disclosures

 

33

 

 

 

 

Item 5.

Other Information

 

33

 

 

 

 

Item 6.

Exhibits

 

34

 

 

 

 

 

Signatures

 

35

 

Page 2


Part I - Financial Information

Item 1 - Financial Statements

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2017

 

 

December 31, 2017

 

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note A)

 

$

28,611,000

 

 

$

53,593,000

 

Customer deposits

 

 

32,471,000

 

 

 

41,900,000

 

Accounts receivable, net

 

 

62,841,000

 

 

 

63,487,000

 

Prepaid taxes and expenses

 

 

4,944,000

 

 

 

7,610,000

 

Total current assets

 

 

128,867,000

 

 

 

166,590,000

 

Property and equipment, net

 

 

63,042,000

 

 

 

63,657,000

 

Goodwill

 

 

36,814,000

 

 

 

36,814,000

 

Other intangibles, net (Note F)

 

 

3,851,000

 

 

 

3,524,000

 

Other assets

 

 

2,809,000

 

 

 

1,410,000

 

TOTAL ASSETS

 

$

235,383,000

 

 

$

271,995,000

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts and taxes payable (Note I)

 

$

16,583,000

 

 

$

16,907,000

 

Accrued liabilities (Note I)

 

 

73,468,000

 

 

 

92,968,000

 

Total current liabilities

 

 

90,051,000

 

 

 

109,875,000

 

Deferred income taxes

 

 

6,686,000

 

 

 

1,940,000

 

Total liabilities

 

 

96,737,000

 

 

 

111,815,000

 

Commitments and contingencies (Notes G and H)

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, $.0001 par value: 120,000,000 shares authorized at March 31, 2017 and

   December 31, 2017; 53,569,067 shares issued (18,937,233 shares outstanding, net of

   Treasury shares) and 53,747,103 shares issued (18,866,048 shares outstanding, net of

   Treasury shares) at March 31, 2017 and December 31, 2017, respectively

 

 

3,000

 

 

 

3,000

 

Paid-in capital

 

 

135,683,000

 

 

 

141,666,000

 

Treasury Stock (34,631,834 shares at March 31, 2017 and 34,881,055 shares at

   December 31, 2017)

 

 

(419,802,000

)

 

 

(430,988,000

)

Retained earnings

 

 

422,762,000

 

 

 

449,499,000

 

Total stockholders' equity

 

 

138,646,000

 

 

 

160,180,000

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

235,383,000

 

 

$

271,995,000

 

See accompanying notes to unaudited consolidated financial statements.

 

Page 3


CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Three Months Ended December 31,

 

 

 

2016

 

 

2017

 

REVENUES

 

$

128,403,000

 

 

$

140,734,000

 

Cost of revenues

 

 

102,826,000

 

 

 

115,165,000

 

Gross profit

 

 

25,577,000

 

 

 

25,569,000

 

General and administrative expenses

 

 

14,134,000

 

 

 

15,496,000

 

Income before income tax provision

 

 

11,443,000

 

 

 

10,073,000

 

Income tax provision

 

 

4,394,000

 

 

 

504,000

 

NET INCOME

 

$

7,049,000

 

 

$

9,569,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.51

 

Diluted

 

$

0.36

 

 

$

0.50

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

19,426,000

 

 

 

18,849,000

 

Diluted

 

 

19,549,000

 

 

 

19,121,000

 

See accompanying notes to unaudited consolidated financial statements.

 

Page 4


CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Nine Months Ended December 31,

 

 

 

2016

 

 

2017

 

REVENUES

 

$

385,081,000

 

 

$

414,777,000

 

Cost of revenues

 

 

308,010,000

 

 

 

334,675,000

 

Gross profit

 

 

77,071,000

 

 

 

80,102,000

 

General and administrative expenses

 

 

42,239,000

 

 

 

43,794,000

 

Income before income tax provision

 

 

34,832,000

 

 

 

36,308,000

 

Income tax provision

 

 

13,340,000

 

 

 

9,571,000

 

NET INCOME

 

$

21,492,000

 

 

$

26,737,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

1.10

 

 

$

1.42

 

Diluted

 

$

1.09

 

 

$

1.41

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

19,526,000

 

 

 

18,806,000

 

Diluted

 

 

19,679,000

 

 

 

19,029,000

 

See accompanying notes to unaudited consolidated financial statements.

 

Page 5


CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

 

 

 

Nine Months Ended December 31,

 

 

 

2016

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

NET INCOME

 

$

21,492,000

 

 

$

26,737,000

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15,617,000

 

 

 

16,013,000

 

Loss on write down or disposal of property, capitalized software or investment

 

 

424,000

 

 

 

1,198,000

 

Stock compensation expense

 

 

1,736,000

 

 

 

2,382,000

 

Provision for doubtful accounts

 

 

1,684,000

 

 

 

1,791,000

 

Deferred income tax

 

 

220,000

 

 

 

(3,772,000

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,118,000

)

 

 

(2,437,000

)

Customer deposits

 

 

(4,980,000

)

 

 

(9,429,000

)

Prepaid taxes and expenses

 

 

(2,000,000

)

 

 

(2,666,000

)

Other assets

 

 

(137,000

)

 

 

237,000

 

Accounts and taxes payable

 

 

(722,000

)

 

 

324,000

 

Accrued liabilities

 

 

4,293,000

 

 

 

19,500,000

 

Net cash provided by operating activities

 

 

36,509,000

 

 

 

49,878,000

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Investment in private equity

 

 

(250,000

)

 

 

 

Purchase of property and equipment

 

 

(17,173,000

)

 

 

(16,336,000

)

Net cash (used in) investing activities

 

 

(17,423,000

)

 

 

(16,336,000

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(15,125,000

)

 

 

(11,187,000

)

Exercise of common stock options

 

 

1,868,000

 

 

 

2,404,000

 

Exercise of employee stock purchase options

 

 

201,000

 

 

 

223,000

 

Net cash (used in) financing activities

 

 

(13,056,000

)

 

 

(8,560,000

)

Increase in cash and cash equivalents

 

 

6,030,000

 

 

 

24,982,000

 

Cash and cash equivalents at beginning of period

 

 

32,779,000

 

 

 

28,611,000

 

Cash and cash equivalents at end of period

 

$

38,809,000

 

 

$

53,593,000

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

13,929,000

 

 

$

9,901,000

 

Purchase of software license under finance agreement

 

$

3,492,000

 

 

$

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Page 6


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017

 

Note A — Basis of Presentation and Summary of Significant Accounting Policies

The unaudited consolidated financial statements herein have been prepared by CorVel Corporation (“the Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The accompanying interim unaudited financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest fiscal year ended March 31, 2017. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the March 31, 2017 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements.

The Company evaluated all subsequent events and transactions through the date of filing this report.

Certain information and note disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018. For further information, refer to the audited consolidated financial statements and notes for the fiscal year ended March 31, 2017 included in the Company's Annual Report on Form 10-K filed with the SEC on June 9, 2017.

Basis of Presentation: The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in compliance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited consolidated financial statements. Actual results could differ from those estimates. Significant estimates include the values assigned to intangible assets, capitalized software development, allowance for doubtful accounts, accruals for income taxes, share-based payments related to performance-based awards, loss contingencies, estimated claims for claims administration revenue recognition, estimates used in stock option valuations, and accruals for self-insurance reserves. 

Cash and Cash Equivalents: Cash and cash equivalents consist of short-term, highly-liquid, investment-grade, interest-bearing securities with maturities of 90 days or less when purchased. Customer deposits represent cash that is expected to be returned or applied towards payment within one year through our provider reimbursement services.

Fair Value of Financial Instruments: The Company applies Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements with respect to fair value measurements of (i) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (ii) all financial assets and liabilities. ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy:

Level 1- Quoted market prices in active markets for identical assets or liabilities;

Level 2- Observable inputs other than those included in Level 1 (for example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets); and

Level 3- Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value of the asset.

The carrying amounts of the Company’s financial instruments (i.e. cash equivalents, accounts receivable, accounts payable) are all Level 1, and the Company believes they approximate their fair values at March 31, 2017 and December 31, 2017. The Company has no Level 2 or Level 3 financial instruments, except as described under the caption “Investment in Private Equity.”

Page 7


 

Investment in Private Equity: The Company has made an investment of $2,250,000 into a private equity limited partnership that invests in start-up companies primarily in the data analytics industry. The Company considers its cost method investments for impairment when the carrying value of such investments exceeds the net asset value. The Company takes into consideration the severity and duration of this excess when determining whether the cost method investment is impaired. The estimated fair value is determined from information provided on the periodic reports from the underlying private equity entity. The Company recorded an impairment to the investment of $284,000 for the year ended March 31, 2017, and an additional $1,169,000 for the nine months ended December 31, 2017. The investment is recorded in other assets on the accompanying consolidated balance sheets.

Goodwill: The Company accounts for its business combinations in accordance with the FASB ASC 805-10 through ASC 805-50, “Business Combinations,” which (i) requires that the purchase method of accounting be applied to all business combinations and (ii) addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with FASB ASC 350-10 through ASC 350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized.

Revenue Recognition: The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the services have been provided to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. For the Company’s services, the Company’s professional staff is contractually permitted to bill (i) for fees earned for time worked in fraction of an hour increments or (ii) by units of production. The Company recognizes revenue as fees are earned or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred. The Company derives its revenue from the sale of network solutions and patient management services. Network solutions and patient management services may be sold individually or combined. When a sale combines multiple elements, the Company accounts for such multiple element arrangements in accordance with the guidance included in ASC 605-25.

The multiple element arrangements consist of bundled managed care services, which include various units of accounting such as network solutions and patient management (which includes claims administration). Such elements are considered separate units of accounting due to each element having value to the customer on a stand-alone basis. The selling price for each unit of accounting is determined using the contract price and management estimates. When the Company’s customers purchase several products, the pricing of the products sold is generally the same as if the products were sold on an individual basis. Revenue is recognized as the work is performed in accordance with the Company’s customer contracts. Based upon the nature of the Company’s products, bundled managed care elements are generally delivered in the same accounting period. The Company recognizes revenue for patient management claims administration services over the life of the customer contract. The Company estimates, based upon prior experience in managing claims, the deferral amount based on the average life of a claim.

Accounts Receivable: The majority of the Company’s accounts receivable is due from companies in the property and casualty insurance industries, self-insured employers, and government entities. Accounts receivable are generally due within 30 days and are stated as amounts due from customers net of an allowance for doubtful accounts. Those accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. No one customer accounted for 10% or more of accounts receivable at either March 31, 2017 or December 31, 2017. No one customer accounted for 10% or more of revenue during the three and nine months ended December 31, 2016 and 2017.

Property and Equipment: Additions to property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, which range from two to seven years or the life of the lease. The Company accounts for internally-developed software costs in accordance with FASB ASC 350-40, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” which allows for the capitalization of software developed for internal use. These costs are included within computer software in property and equipment and are amortized over a period of five years.

Long-Lived Assets: The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected undiscounted cash flows of the operations in which the long-lived assets are deployed.

Income Taxes: The Company provides for income taxes in accordance with provisions specified in ASC 740, “Accounting for Income Taxes”. Accordingly, deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities. These differences will result in taxable or deductible amounts in the future, based on tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The ultimate realization of deferred

Page 8


 

tax assets depends on the generation of future taxable income during the periods in which temporary differences become deductible. In making an assessment regarding the probability of realizing a benefit from these deductible differences, management considers the Company’s current and past performance, the market environment in which the Company operates, tax-planning strategies and the length of carry-forward periods for loss carry-forwards, if any. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that are more likely than not to be realized. Further, the Company provides for income tax issues not yet resolved with federal, state and local tax authorities.

Earnings per Share: Earnings per common share-basic is based on the weighted average number of common shares outstanding during the period. Earnings per common share-diluted is based on the weighted average number of common shares and common share equivalents outstanding during the period. In calculating earnings per share, earnings are the same for the basic and diluted calculations. Weighted average shares outstanding decreased in the quarter ended December 31, 2017 compared to the same quarter of the prior year primarily due to repurchases of shares under the Company’s share repurchase program. See also Note D.

Recent Accounting Pronouncements: On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, “Revenue from Contracts with Customers”. This standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year delay of the effective date of this new revenue recognition standard. The guidance will now be effective for our fiscal year beginning April 1, 2018. We are currently evaluating the accounting, transition and disclosure requirements of the standard. Based on the analyses we have completed thus far, which includes analyzing our standard contracts from which we derive the majority of our revenues, we anticipate that the ASU will not have a significant impact on our consolidated financial statements. However, we are currently reviewing our existing non-standard customer contracts, and as a result, the impact of the ASU adoption on this portion of our revenues cannot yet be reasonably estimated. We expect the new standard will, however, require more extensive revenue-related disclosures.

In January 2016, the FASB issued ASU 2016-01 regarding Subtopic 825-10, “Financials Instruments — Overall: Recognition and Measurements of Financial Assets and Financial Liabilities”. The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. It requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the impact of adoption on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for using an approach that is similar to the existing guidance for operating leases. The standard is effective April 1, 2019, with early adoption permitted. The standard is to be applied using a modified retrospective transition method. This will place all outstanding lease commitments on our balance sheet as liabilities with an offsetting right to use asset. We are currently evaluating the impact of adoption on our consolidated financial position, results of operations, and cash flows, and believe that the new standard will have a material impact on our consolidated balance sheet.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows”, which reduces diversity in the practice of how certain transactions are classified in the statement of cash flows. The new guidance is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impact on our consolidated financial statements. We are currently reviewing the standard and anticipates updates to certain disclosures related to restricted cash as a result of implementation.

Guidance Adopted in 2017

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification on the statement of cash flows. For public companies, the new guidance became effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2016. We have elected to early adopt this standard as of March 31, 2017.

Page 9


 

Note B — Stock-Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at December 31, 2017, options exercisable for up to 19,365,000 shares of the Company’s common stock may be granted over the life of the Plan to key employees, non-employee directors, and consultants at exercise prices not less than the fair market value of the stock on the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from the date of grant with the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the Company’s Board of Directors expire at the end of five years and ten years from date of grant, respectively. All options granted in the nine months ended December 31, 2016 and 2017 were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date and are non-statutory stock options.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data, among other factors, to estimate the expected volatility, the expected dividend yield, the expected forfeiture rate and the expected option life. Upon adoption of ASU No. 2016-09 in the fourth fiscal quarter of 2017, the Company accounts for forfeitures as they occur, rather than estimated expected forfeitures. As a result, during the fourth quarter of fiscal 2017, we reclassified the excess tax benefit of $0.5 million from additional paid in capital into the income tax provision line. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option. The following assumptions were used to estimate the fair value of options granted during the three months ended December 31, 2016 and 2017 using the Black-Scholes option-pricing model:

 

 

 

Three Months Ended December 31,

 

 

 

2016

 

 

2017

 

Risk-free interest rate

 

1.26%

 

 

2.00%

 

Expected volatility

 

 

42%

 

 

40%

 

Expected dividend yield

 

 

0.00%

 

 

 

0.00%

 

Expected weighted average life of option in years

 

4.5 years

 

 

4.5 years

 

 

For the three months ended December 31, 2016 and 2017, the Company recorded share-based compensation expense of $609,000 and $852,000, respectively. For the nine months ended December 31, 2016 and 2017, the Company recorded share-based compensation expense of $1,736,000 and $2,382,000, respectively. The table below shows the amounts recognized in the unaudited consolidated financial statements for stock compensation expense for time-based options and performance-based options during the three and nine months ended December 31, 2016 and 2017, respectively.  

 

 

 

Three Months Ended

 

 

 

December 31, 2016

 

 

December 31, 2017

 

Cost of revenues

 

$

391,000

 

 

$

432,000

 

General and administrative

 

 

218,000

 

 

 

420,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

609,000

 

 

 

852,000

 

Amount of income tax benefit recognized

 

 

(234,000

)

 

 

(43,000

)

Amount charged against net income

 

$

375,000

 

 

$

809,000

 

Effect on basic earnings per share

 

$

(0.02

)

 

$

(0.04

)

Effect on diluted earnings per share

 

$

(0.02

)

 

$

(0.04

)

 

 

 

Nine Months Ended

 

 

 

December 31, 2016

 

 

December 31, 2017

 

Cost of revenues

 

$

1,123,000

 

 

$

1,326,000

 

General and administrative

 

 

613,000

 

 

 

1,056,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

1,736,000

 

 

 

2,382,000

 

Amount of income tax benefit recognized

 

 

(667,000

)

 

 

(628,000

)

Amount charged against net income

 

$

1,069,000

 

 

$

1,754,000

 

Effect on basic earnings per share

 

$

(0.05

)

 

$

(0.09

)

Effect on diluted earnings per share

 

$

(0.05

)

 

$

(0.09

)

Page 10


 

 

The following table summarizes information for all stock options for the three and nine months ended December 31, 2016 and 2017:

 

 

 

Three Months Ended December 31, 2016

 

 

Three Months Ended December 31, 2017

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

Options outstanding, beginning

 

 

1,102,919

 

 

$

32.17

 

 

 

1,068,503

 

 

$

35.28

 

Options granted

 

 

143,750

 

 

 

32.10

 

 

 

154,500

 

 

 

57.75

 

Options exercised

 

 

(4,256

)

 

 

25.86

 

 

 

(51,712

)

 

 

31.15

 

Options cancelled/forfeited

 

 

(3,550

)

 

 

37.17

 

 

 

(1,420

)

 

 

47.11

 

Options outstanding, ending

 

 

1,238,863

 

 

$

32.17

 

 

 

1,169,871

 

 

$

38.41

 

 

 

 

Nine Months Ended December 31, 2016

 

 

Nine Months Ended December 31, 2017

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

Options outstanding, beginning

 

 

1,115,465

 

 

$

29.67

 

 

 

1,143,928

 

 

$

32.02

 

Options granted

 

 

234,250

 

 

 

36.90

 

 

 

305,550

 

 

 

52.49

 

Options exercised

 

 

(95,472

)

 

 

22.05

 

 

 

(263,544

)

 

 

26.96

 

Options cancelled/forfeited

 

 

(15,380

)

 

 

36.55

 

 

 

(16,063

)

 

 

40.90

 

Options outstanding, ending

 

 

1,238,863

 

 

$

32.17

 

 

 

1,169,871

 

 

$

38.41

 

 

The following table summarizes the status of stock options outstanding and exercisable at December 31, 2017:

 

Range of Exercise Price

 

Number of

Outstanding Options

 

 

Weighted

Average

Remaining

Contractual

Life

 

 

Outstanding

Options –

Weighted

Average

Exercise Price

 

 

Exercisable

Options –

Number of

Exercisable

Options

 

 

Exercisable

Options –

Weighted

Average

Exercise

Price

 

$12.71 to $32.10

 

 

332,432

 

 

 

2.84

 

 

$

25.04

 

 

 

197,354

 

 

$

20.21

 

$32.11 to $34.78

 

 

251,836

 

 

 

2.91

 

 

$

34.51

 

 

 

79,609

 

 

$

34.34

 

$34.79 to $45.55

 

 

242,755

 

 

 

2.96

 

 

$

41.96

 

 

 

140,076

 

 

$

42.60

 

$45.56 to $57.75

 

 

342,848

 

 

 

4.74

 

 

$

52.29

 

 

 

13,282

 

 

$

22.87

 

Total

 

 

1,169,871

 

 

 

3.43

 

 

$

38.41

 

 

 

430,321

 

 

$

30.90

 

 

The following table summarizes the status of all outstanding options at December 31, 2017, and changes during the three months then ended:

 

 

 

Number of Options

 

 

Weighted Average

Exercise Price

Per Share

 

 

Weighted Average

Remaining Contractual

Life (Years)

 

 

Aggregate

Intrinsic Value as

of December 31,

2017

 

Options outstanding at October 1, 2017

 

 

1,068,503

 

 

$

35.28

 

 

 

 

 

 

 

 

 

Granted

 

 

154,500

 

 

 

57.75

 

 

 

 

 

 

 

 

 

Exercised

 

 

(51,712

)

 

 

31.15

 

 

 

 

 

 

 

 

 

Cancelled – forfeited

 

 

(1,410

)

 

 

47.18

 

 

 

 

 

 

 

 

 

Cancelled – expired

 

 

(10

)

 

 

36.93

 

 

 

 

 

 

 

 

 

Ending outstanding

 

 

1,169,871

 

 

$

38.41

 

 

 

3.43

 

 

$

17,693,629

 

Ending vested and expected to vest

 

 

1,169,871

 

 

$

38.41

 

 

 

3.43

 

 

$

17,693,629

 

Ending exercisable at December 31, 2017

 

 

430,321

 

 

$

30.90

 

 

 

2.40

 

 

$

9,467,047

 

 

The weighted-average grant-date fair value of options granted during the three months ended December 31, 2016 and 2017, was $11.99 and $21.55, respectively.

Page 11


 

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options which vest only upon the Company’s achievement of certain earnings per share targets on a calendar year basis, as determined by the Company’s Board of Directors. These options were valued in the same manner as the time-based options. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options. The Company did not recognize any stock compensation expense for the three months ended December 31, 2016, for performance-based stock options. The Company recognized $230,000 of stock compensation expense for the three months ended December 31, 2017, for performance-based stock options. The Company recognized ($47,000) and $455,000 of stock compensation expense for the nine months ended December, 31, 2016 and 2017, respectively, for performance-based stock options.

Note C — Treasury Stock

 

The Company’s Board of Directors approved the commencement of a share repurchase program in the fall of 1996. In February 2017, the Company’s Board of Directors approved a 1,000,000 share expansion to the Company’s existing stock repurchase program, increasing the total number of shares of the Company’s common stock approved for repurchase over the life of the program to 36,000,000 shares. Since the commencement of the share repurchase program, the Company has spent $431 million to repurchase 34,881,055 shares of its common stock, equal to 65% of the outstanding common stock had there been no repurchases. The average price of these repurchases was $12.36 per share. These repurchases were funded primarily by the net earnings of the Company, along with proceeds from the exercise of common stock options. During the three months ended December 31, 2017, the Company had no repurchases of common stock. During the nine months ended December 31, 2017, the Company repurchased 249,245 shares of common stock for $11.2 million at an average price of $44.88 per share. The Company had 18,866,048 shares of common stock outstanding as of December 31, 2017, net of the 34,881,055 shares of common stock in treasury.

 

 

Note D — Weighted Average Shares and Net Income Per Share

Basic weighted average common and common equivalent shares outstanding decreased from 19,426,000 for the quarter ended December 31, 2016 to 18,849,000 for the quarter ended December 31, 2017. Diluted weighted average common and common equivalent shares outstanding decreased from 19,549,000 for the quarter ended December 31, 2016 to 19,121,000 for the quarter ended December 31, 2017. Basic weighted average common and common equivalent shares outstanding decreased from 19,526,000 for the nine months ended December 31, 2016 to 18,806,000 for the nine months ended December 31, 2017. Diluted weighted average common and common equivalent shares outstanding decreased from 19,679,000 for the nine months ended December 31, 2016 to 19,029,000 for the nine months ended December 31, 2017. The net decrease in both of these weighted average share calculations is due to the repurchase of common stock as noted above, offset by an increase in shares outstanding due to the exercise of stock options under the Plan.

Net income per common and common equivalent share was computed by dividing net income by the weighted average number of common and common share equivalents outstanding during the quarter. The following table sets forth the calculations of the basic and diluted weighted average shares for the three and nine months ended December 31, 2016 and 2017:

 

 

 

Three Months Ended December 31,

 

 

 

2016

 

 

2017

 

Net Income

 

$

7,049,000

 

 

$

9,569,000

 

Basic:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,426,000

 

 

 

18,849,000

 

Net Income per share

 

$

0.36

 

 

$

0.51

 

Diluted:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,426,000

 

 

 

18,849,000

 

Treasury stock impact of stock options

 

 

123,000

 

 

 

272,000

 

Total common and common equivalent shares

 

 

19,549,000

 

 

 

19,121,000

 

Net Income per share

 

$

0.36

 

 

$

0.50

 

Page 12


 

 

 

 

Nine Months Ended December 31,

 

 

 

2016

 

 

2017

 

Net Income

 

$

21,492,000

 

 

$

26,737,000

 

Basic:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,526,000

 

 

 

18,806,000

 

Net Income per share

 

$

1.10

 

 

$

1.42

 

Diluted:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,526,000

 

 

 

18,806,000

 

Treasury stock impact of stock options

 

 

153,000

 

 

 

223,000

 

Total common and common equivalent shares

 

 

19,679,000

 

 

 

19,029,000

 

Net Income per share

 

$

1.09

 

 

$

1.41

 

 

 

Note E — Shareholder Rights Plan

During fiscal year 1997, the Company’s Board of Directors approved the adoption of a shareholder rights plan (the “Shareholder Rights Plan”). The Shareholder Rights Plan provides for a dividend distribution to the Company’s shareholders of one preferred stock purchase right for each outstanding share of the Company’s common stock held by such shareholder (as used in this Note E, the “right” or the “rights”), only in the event of certain takeover-related events. In November 2008, the Company’s Board of Directors approved an amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February 10, 2022.

The rights are designed to assure that all shareholders receive fair and equal treatment in the event of a proposed takeover of the Company, and to encourage a potential acquirer to negotiate with the Company’s Board of Directors prior to attempting a takeover. The rights are not exercisable until the occurrence of certain takeover-related events, at which time they can be exercised at an exercise price of $118 per share of common stock which carries the right, subject to subsequent adjustments. The rights trade with the Company’s common stock.

 

Generally, the Shareholder Rights Plan provides that if a person or group acquires 15% or more of the Company’s common stock without the approval of the Company’s Board of Directors, subject to certain exceptions, the holders of the rights, other than the acquiring person or group, would, under certain circumstances, have the right to purchase additional shares of the Company’s common stock having a market value equal to two times the then-current exercise price of the right.

In addition, if the Company is thereafter merged into another entity, or if 50% or more of the Company’s consolidated assets or earning power are sold, then the right will entitle its holder to buy common shares of the acquiring entity having a market value equal to two times the then-current exercise price of the right. The Company’s Board of Directors may exchange or redeem the rights under certain conditions.

 

 

Note F — Other Intangible Assets

The following table summarizes other intangible assets at March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost, Net of

 

 

 

 

 

 

 

 

 

Fiscal 2017

 

 

Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Amortization

 

 

Amortization at

 

 

Amortization at

 

Item

 

Life

 

Cost

 

 

Expense

 

 

March 31, 2017

 

 

March 31, 2017

 

Covenants Not to Compete

 

5 Years

 

$

775,000

 

 

$

 

 

$

775,000

 

 

$

 

Customer Relationships

 

18-20 Years

 

 

7,922,000

 

 

 

423,000

 

 

 

4,144,000

 

 

 

3,778,000

 

TPA Licenses

 

15 Years

 

 

204,000

 

 

 

14,000

 

 

 

131,000

 

 

 

73,000

 

Total

 

 

 

$

8,901,000

 

 

$

437,000

 

 

$

5,050,000

 

 

$

3,851,000

 

 

Page 13


 

The following table summarizes other intangible assets at December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost, Net of

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Amortization at

 

 

Amortization at

 

Item

 

Life

 

Cost

 

 

Amortization Expense

 

 

December 31, 2017

 

 

December 31, 2017

 

Covenants Not to Compete

 

5 Years

 

$

775,000

 

 

$

 

 

$

775,000

 

 

$

 

Customer Relationships

 

18-20 Years

 

 

7,922,000

 

 

 

317,000

 

 

 

4,461,000

 

 

 

3,461,000

 

TPA Licenses

 

15 Years

 

 

204,000

 

 

 

10,000

 

 

 

141,000

 

 

 

63,000

 

Total

 

 

 

$

8,901,000

 

 

$

327,000

 

 

$

5,377,000

 

 

$

3,524,000

 

 

 

Note G — Line of Credit

In September 2017, the Company renewed its line of credit agreement with a financial institution, which provides a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under the credit agreement, as amended, bear interest, at the Company’s option, at a fixed LIBOR-based rate plus 1.00% or at a fluctuating rate determined by the financial institution to be 1.00% above the daily one-month LIBOR rate. The loan covenants require the Company to (i) maintain a current assets to liabilities ratio of at least 1.25:1, (ii) maintain a current debt to tangible net worth ratio of not greater than 1.25:1 and (iii) have positive net income.  The Company is in compliance with all these covenants under the credit agreement. There were no outstanding revolving loans as of December 31, 2017, but letters of credit in the aggregate amount of $4.5 million have been issued separately 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 2018.

 

 

Note H — Contingencies, Commitments and Legal Proceedings

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 consolidated financial position or results of operations of the Company.

During the quarter ended September 30, 2017, the Company entered into a purchase agreement to acquire a 32,000 square foot building located in Milwaukie, Oregon at a purchase price of $5.8 million. The Company has paid a deposit of $150,000 towards this purchase during the quarter ended September 30, 2017. The Company expects to finance this purchase with existing cash on hand and expects to close escrow in the first quarter of 2018. This building will be used for the Company’s Symbeo business franchise, which consists of the Company’s provider reimbursement and scanning services.

 

Note I — Accounts and Taxes Payable and Accrued Liabilities

The following table sets forth accounts payable, income taxes payable, and accrued liabilities at March 31, 2017 and December 31, 2017:

 

 

 

March 31, 2017

 

 

December 31, 2017

 

Accounts payable

 

$

13,869,000

 

 

$

13,330,000

 

Income taxes payable and uncertain tax positions

 

 

2,714,000

 

 

 

3,577,000

 

Total accounts and taxes payable

 

$

16,583,000

 

 

$

16,907,000

 

 

 

 

March 31, 2017

 

 

December 31, 2017

 

Payroll, payroll taxes and employee benefits

 

$

14,465,000

 

 

$

19,261,000

 

Customer deposits

 

 

32,471,000

 

 

 

41,900,000

 

Accrued professional service fees

 

 

4,551,000

 

 

 

5,682,000

 

Self-insurance accruals

 

 

2,835,000

 

 

 

3,571,000

 

Deferred revenue

 

 

10,096,000

 

 

 

13,694,000

 

Accrued rent

 

 

5,774,000

 

 

 

5,204,000

 

Other

 

 

3,276,000

 

 

 

3,656,000

 

Total accrued liabilities

 

$

73,468,000

 

 

$

92,968,000

 

 

 

Page 14


 

Note J – Income Taxes

 

The Company’s quarterly results of operations included the impact of the enactment of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. Among numerous provisions included in the new law was the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. As a result of this federal income tax rate change, during the quarter ended December 31, 2017, the Company reported an effective tax rate of 5%. The Company continues to analyze the provisions of the Tax Cuts and Jobs Act to fully assess the impact on its consolidated financial statements. During the quarter ended December 31, 2017, the Company applied the newly enacted corporate federal income tax rate to the remeasurement of U.S. deferred tax assets and liabilities resulting in a tax benefit of $3.0 million. The decrease in net deferred tax liabilities was reasonably estimated and based on the tax rates at which they are expected to reverse in the future. The final impact may differ, possibly materially, due to, among other things, changes in interpretations, assumptions made by the Company, the issuance of federal tax regulations and guidance, and actions the Company may take as a result of the Tax Cuts and Jobs Act. Taking into account the change in the statutory federal rate as well as other permanent items, the Company expects its effective combined federal and state tax rate will be approximately 25% to 26% for the fiscal year beginning April 1, 2018. This expected effective rate assumes projected financial results consistent with recent trends and applies the new statutory rate and the impact of the Tax Cuts and Jobs Act relative to permanent differences between book and tax income.

 

 

Page 15


 

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. 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 Company’s assumption that projected financial results will be consistent with recent trends turns out to be incorrect; changes in interpretations or application of the Tax Cuts and Jobs Act through regulations and guidance that may be issued by the U.S. Department of the Treasury; general industry and economic conditions, including a decreasing number of national claims due to a 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, including but not limited to legislative and administrative law and rule implementation or change; dependence on key personnel; the impact of recently issued accounting standards on the Company’s consolidated financial statements, 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, mobile insurance claims, and group health insurance benefits. The Company’s services are provided to insurance companies, third party administrators, or 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. In November 2017, the Bureau of Labor Statistics reported a decrease in the occupational injury and illness incidence rates for 2016. This is a continuance of a long term trend of a decrease in the injury rates in the United States and, therefore, fewer claims could lead to fewer medical dollars to be reviewed.

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), which includes imaging, physical therapy, and durable medical equipment.

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.

Page 16


 

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 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 to customers. Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or 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 productions and similar methods to distribute the services and products.

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 by $12.3 million, or 9.6%, from $128.4 million in the quarter ended December 31, 2016 to $140.7 million in the quarter ended December 31, 2017. This increase was due to an increase in patient management services, which was due to an increase in TPA services partially offset by a decrease in case management services to non-TPA customers.

Cost of revenues increased by $12.3 million, or 12.0%, from $102.8 million in the quarter ended December 31, 2016 to $115.2 million in the quarter ended December 31, 2017.  This increase was primarily due to an increase of 9.6% in revenue mentioned above. Additionally, there was an increase in salaries, pharmacy service costs, and self-insured group medical costs.

General and administrative expense increased by $1.4 million, or 9.6%, from $14.1 million in the quarter ended December 31, 2016 to $15.5 million in the quarter ended December 31, 2017.  This increase was primarily due to an impairment to the investment in private equity and an increase in non-cash stock-based compensation from performance stock options.

Income tax expense decreased by $3.9 million, or 88.5%, from $4.4 million in the quarter ended December 31, 2016 to $0.5 million in the quarter ended December 31, 2017. This decrease was primarily due to the impact of the Tax Cuts and Jobs Act as the Company remeasured its U.S. deferred tax assets and liabilities at lower enacted corporate tax rates.

Weighted diluted shares decreased by 428,000 shares, or 2.2%, from 19.5 million shares in the quarter ended December 31, 2016 to 19.1 million shares in the quarter ended December 31, 2017.  This decrease was primarily due to the repurchase of 574,698 shares of common stock in the twelve months ended December 31, 2017 under our stock repurchase program.

Diluted earnings per share increased $0.14 per share, or 38.9%, from $0.36 per share in the quarter ended December 31, 2016 to $0.50 per share in the quarter ended December 31, 2017. The increase in diluted earnings per share was primarily due to an increase in net income and a decrease in weighted diluted shares.

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Results of Operations for the three months ended December 31, 2016 and 2017

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 December 31, 2016 and December 31, 2017 are as follows:

 

 

 

December 31, 2016

 

 

December 31, 2017

 

Patient management services

 

 

55.6

%

 

 

56.4

%

Network solutions services

 

 

44.4

%

 

 

43.6

%

 

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 December 31, 2016 and December 31, 2017. The Company’s past operating results are not necessarily indicative of future operating results.

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

Percentage

 

 

 

December 31, 2016

 

 

December 31, 2017

 

 

Change

 

 

Change

 

Revenue

 

$

128,403,000

 

 

$

140,734,000

 

 

$

12,331,000

 

 

 

9.6

%

Cost of revenues

 

 

102,826,000

 

 

 

115,165,000