10-Q 1 crvl-10q_20190630.htm 10-Q crvl-10q_20190630.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 June 30, 2019

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value $0.0001 Per Share

 

CRVL

 

NASDAQ Global Select Market

 

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 every Interactive Data File required to be submitted 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 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

 

  

  

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 August 1, 2019, was 18,473,443.

 

 


CORVEL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets (unaudited) – June 30, 2019  and March 31, 2019

 

3

 

Consolidated Income Statements (unaudited) – Three months ended June 30, 2019 and 2018

 

4

 

Consolidated Stockholders’ Equity (unaudited) – Three months ended June 30, 2019 and 2018

 

5

 

Consolidated Statements of Cash Flows (unaudited) – Three months ended June 30, 2019 and 2018

 

6

 

Notes to Consolidated Financial Statements (unaudited) – June 30, 2019

 

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

 

22

 

 

 

 

Item 4.

Controls and Procedures

 

22

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

22

 

 

 

 

Item 1A.

Risk Factors

 

22

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

30

 

 

 

 

Item 4.

Mine Safety Disclosures

 

30

 

 

 

 

Item 5.

Other Information

 

30

 

 

 

 

Item 6.

Exhibits

 

31

 

 

 

 

 

Signatures

 

32

 

Page 2


Part I FINANCIAL INFORMATION

Item 1 – Financial Statements

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30, 2019

 

 

March 31, 2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 1)

 

$

104,425,000

 

 

$

91,713,000

 

Customer deposits

 

 

43,667,000

 

 

 

45,268,000

 

Accounts receivable, net

 

 

66,842,000

 

 

 

71,336,000

 

Prepaid taxes and expenses

 

 

6,675,000

 

 

 

7,176,000

 

Total current assets

 

 

221,609,000

 

 

 

215,493,000

 

Property and equipment, net

 

 

68,208,000

 

 

 

61,980,000

 

Right-of-use asset, net (Note 10)

 

 

96,708,000

 

 

 

 

Goodwill

 

 

36,814,000

 

 

 

36,814,000

 

Other intangibles, net

 

 

2,866,000

 

 

 

2,975,000

 

Other assets

 

 

1,659,000

 

 

 

756,000

 

TOTAL ASSETS

 

$

427,864,000

 

 

$

318,018,000

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts and taxes payable (Note 9)

 

$

23,134,000

 

 

$

11,478,000

 

Accrued liabilities (Note 9)

 

 

107,601,000

 

 

 

105,441,000

 

Total current liabilities

 

 

130,735,000

 

 

 

116,919,000

 

Deferred income taxes

 

 

5,988,000

 

 

 

6,294,000

 

Long-term operating lease liabilities (Note 10)

 

 

87,324,000

 

 

 

 

Total liabilities

 

 

224,047,000

 

 

 

123,213,000

 

Commitments and contingencies (Notes 7 and 8)

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, $.0001 par value: 120,000,000 shares authorized at June 30, 2019

   and March 31, 2019; 54,117,215 shares issued (18,529,566 shares outstanding, net of

   Treasury shares) and 54,021,032 shares issued (18,557,794 shares outstanding, net of

   Treasury shares) at June 30, 2019 and March 31, 2019, respectively

 

 

3,000

 

 

 

3,000

 

Paid-in capital

 

 

160,522,000

 

 

 

155,798,000

 

Treasury Stock (35,587,649 shares at June 30, 2019 and 35,463,238 shares at

   March 31, 2019)

 

 

(475,275,000

)

 

 

(466,156,000

)

Retained earnings

 

 

518,567,000

 

 

 

505,160,000

 

Total stockholders' equity

 

 

203,817,000

 

 

 

194,805,000

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

427,864,000

 

 

$

318,018,000

 

 

See accompanying notes to unaudited consolidated financial statements.

 

Page 3


CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

REVENUES

 

$

150,139,000

 

 

$

150,398,000

 

Cost of revenues

 

 

117,005,000

 

 

 

119,045,000

 

Gross profit

 

 

33,134,000

 

 

 

31,353,000

 

General and administrative expenses

 

 

15,752,000

 

 

 

15,937,000

 

Income before income tax provision

 

 

17,382,000

 

 

 

15,416,000

 

Income tax provision

 

 

3,975,000

 

 

 

3,638,000

 

NET INCOME

 

$

13,407,000

 

 

$

11,778,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

0.72

 

 

$

0.62

 

Diluted

 

$

0.71

 

 

$

0.62

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

18,524,000

 

 

 

18,922,000

 

Diluted

 

 

18,787,000

 

 

 

19,102,000

 

 

See accompanying notes to unaudited consolidated financial statements.

Page 4


CORVEL CORPORATION

CONSOLIDATED STOCKHOLDERS’ EQUITY – UNAUDITED

 

 

 

Three Months Ended June 30, 2019

 

 

 

Common

Shares

 

 

Stock

Amount

 

 

Paid-in-

Capital

 

 

Treasury

Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

Stockholders'

Equity

 

Balance – March 31, 2019

 

 

54,021,032

 

 

$

3,000

 

 

$

155,798,000

 

 

 

(35,463,238

)

 

$

(466,156,000

)

 

$

505,160,000

 

 

$

194,805,000

 

Stock issued under stock option plan,

   net of shares repurchased

 

 

96,183

 

 

 

 

 

 

3,499,000

 

 

 

 

 

 

 

 

 

 

 

 

3,499,000

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,225,000

 

 

 

 

 

 

 

 

 

 

 

 

1,225,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(124,411

)

 

 

(9,119,000

)

 

 

 

 

 

(9,119,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,407,000

 

 

 

13,407,000

 

Balance – June 30, 2019

 

 

54,117,215

 

 

$

3,000

 

 

$

160,522,000

 

 

 

(35,587,649

)

 

$

(475,275,000

)

 

$

518,567,000

 

 

$

203,817,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

Common

Shares

 

 

Stock

Amount

 

 

Paid-in-

Capital

 

 

Treasury

Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

Stockholders'

Equity

 

Balance – March 31, 2018

 

 

53,793,986

 

 

$

3,000

 

 

$

143,705,000

 

 

 

(34,881,079

)

 

$

(430,989,000

)

 

$

458,457,000

 

 

$

171,176,000

 

Stock issued under stock option plan,

   net of shares repurchased

 

 

45,553

 

 

 

 

 

 

1,218,000

 

 

 

 

 

 

 

 

 

 

 

 

1,218,000

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,179,000

 

 

 

 

 

 

 

 

 

 

 

 

1,179,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(66,553

)

 

 

(3,486,000

)

 

 

 

 

 

(3,486,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,778,000

 

 

 

11,778,000

 

Balance – June 30, 2018

 

 

53,839,539

 

 

$

3,000

 

 

$

146,102,000

 

 

 

(34,947,632

)

 

$

(434,475,000

)

 

$

470,235,000

 

 

$

181,865,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

Page 5


CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

NET INCOME

 

$

13,407,000

 

 

$

11,778,000

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,967,000

 

 

 

5,633,000

 

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

 

 

24,000

 

 

 

(49,000

)

Stock compensation expense

 

 

1,225,000

 

 

 

1,179,000

 

Provision for doubtful accounts

 

 

198,000

 

 

 

1,313,000

 

Deferred income tax

 

 

(306,000

)

 

 

(294,000

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,297,000

 

 

 

(2,497,000

)

Customer deposits

 

 

1,600,000

 

 

 

(199,000

)

Prepaid taxes and expenses

 

 

501,000

 

 

 

(887,000

)

Other assets

 

 

(904,000

)

 

 

17,000

 

Accounts and taxes payable

 

 

7,866,000

 

 

 

2,538,000

 

Accrued liabilities

 

 

2,160,000

 

 

 

4,274,000

 

Operating lease liability

 

 

(12,673,000

)

 

 

 

Net cash provided by operating activities

 

 

26,362,000

 

 

 

22,806,000

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(8,030,000

)

 

 

(2,969,000

)

Net cash (used in) investing activities

 

 

(8,030,000

)

 

 

(2,969,000

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(9,119,000

)

 

 

(3,486,000

)

Exercise of common stock options

 

 

3,499,000

 

 

 

1,218,000

 

Net cash (used in) financing activities

 

 

(5,620,000

)

 

 

(2,268,000

)

Increase in cash and cash equivalents

 

 

12,712,000

 

 

 

17,569,000

 

Cash and cash equivalents at beginning of period

 

 

91,713,000

 

 

 

55,771,000

 

Cash and cash equivalents at end of period

 

$

104,425,000

 

 

$

73,340,000

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

310,000

 

 

$

56,000

 

Purchase of software license under finance agreement

 

$

5,685,000

 

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Page 6


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

 

Note 1 — Summary of Significant Accounting Policies

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.

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, 2019.  Accordingly, note disclosures which would substantially duplicate the disclosures contained in the March 31, 2019 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 months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020.  For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2019 included in the Company's Annual Report on Form 10-K filed with the SEC on June 7, 2019.

Recent Accounting Pronouncements: In June 2016, the FASB issued ASU 2016-13 regarding ASC Topic 326, “Measurement of Credit Losses on Financial Instruments”. The pronouncement changes the impairment model for most financial assets and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. Subsequently, the FASB issued an amendment to clarify the implementation dates and items that fall within the scope of this pronouncement. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  We are still evaluating the timing and impact this guidance will have on our consolidated financial statements.  

In January 2017, the FASB issued ASU 2017-04 regarding ASC Topic 350, “Simplifying the Test for Goodwill Impairment”.  The pronouncement simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Under this guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We will evaluate the impact of this guidance on future annual or interim goodwill impairment tests performed.

Guidance Adopted: 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 to be applied using a modified retrospective transition method. The Company has adopted this standard as of April 1, 2019.  The adoption of this standard did not have an impact on retained earnings on the consolidated balance sheet and is not expected to have a material impact on the consolidated statements of income. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical assessments of whether contracts are or contain leases, lease classification and initial direct costs. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.  Refer to Note 10 of the accompanying consolidated financial statements for a description of the impact of this adopted guidance.

Page 7


 

Note 2 – Revenue Recognition

The Company adopted ASC 606 using the modified retrospective method for those contracts which were not substantially completed as of the transition date.  The reported results for the three months ended June 30, 2019 and 2018 reflect the application of the guidance of ASC 606.

Revenue from Contracts with Customers

Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration expected to be entitled to in exchange for those services. As the Company completes its performance obligations which are identified below, it has an unconditional right to consideration as outlined in the Company’s contracts. Generally, the Company’s accounts receivable are expected to be collected in 30 days in accordance with the underlying payment terms.

The Company generates revenue through its patient management and network solutions service lines. The Company operates in one reportable operating segment, managed care.

Patient Management Service Line

The patient management service line provides services primarily related to workers’ compensation claims management and case management. This service line also includes additional services such as accident and health claims programs. Each claim referred by the customer is considered an additional optional purchase of claims management services under the agreement with the customer. The transaction price is readily available from the contract and is fixed for each service. Revenue is recognized over time as services are provided as the performance obligations are satisfied through the effort expended to research, investigate, evaluate, document, and report the claim and control of these services is transferred to the customer. Revenue is recognized based on historical claim closure rates and claim type applied utilizing a portfolio approach based on time elapsed for these claims, generally between three and fifteen months. The Company believes this approach reasonably reflects the transfer of the claims management services to its customer.

The Company’s obligation to manage claims and cases under the patient management service line can range from less than one year to multi-year contracts. They are generally one year under the terms of the contract; however, many of these contracts contain auto-renewal provisions and the Company’s customer relationships can span multiple years. Under certain claims management agreements, the Company receives consideration from a customer at contract inception prior to transferring services to the customer, however, it would begin performing services immediately. The period between a customer’s payment of consideration and the completion of the promised services is generally less than one year. There is no difference between the amount of promised consideration and the cash selling price of the promised services. The fee is billed upfront by the Company in order to provide customers with simplified and predictable ways of purchasing its services.

The patient management service line also offers case managers who provide administration services by proactively managing medical treatment for claimants while facilitating an understanding of and participation in their rehabilitation process. Revenue for case management services is recognized over time as the performance obligations are satisfied through the effort expended to manage the medical treatment for claimants and control of these services is transferred to the customer. Case management services are generally billed based on time incurred, are considered variable consideration, and revenue is recognized at the amount at which the Company has the right to invoice for services performed. The Company believes this approach reasonably reflects the transfer of the case management service to the customer.

 

 

Network Solutions Service Line

The network solutions service line consists primarily of medical bill review and third-party services. Medical bill review services provide an analysis of medical charges for customers’ claims to identify opportunities for savings. Medical bill review services revenues are recognized at a point in time when control of the service is transferred to the customer. Revenue is recognized based upon the transfer of the results of the medical bill review service to the customer as this is the most accurate depiction of the transfer of the service to the customer. Medical bill review revenues are variable, generally based on performance metrics set forth in the underlying contracts. Each period, the Company bases its estimates on a contract-by-contract basis. The Company makes its best estimate of amounts the Company has earned and expects to be collected using historical averages and other factors to project such revenues. Variable consideration is recognized when the Company concludes that it is probable that a significant revenue reversal will not occur in future periods.

Third-party services revenue includes pharmacy, directed care services and other services, and includes amounts received from customers compensating the Company for certain third-party costs associated with providing its integrated network solutions services. The Company is considered the principal in these transactions as it directs the third party, controls the specified service, performs program utilization review, directs payment to the provider, accepts the financial risk of loss associated with services rendered and combines the services provided into an integrated solution, as specified within the Company’s customer contracts. The Company has

Page 8


 

the ability to influence contractual fees with customers and possesses the financial risk of loss in certain contractual obligations. These factors indicate the Company is the principal and, as such, it is required to recognize revenue gross and service partner vendor fees in the operating expense in the Company’s consolidated income statements.

The following table presents revenues disaggregated by service line for the three months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Patient management services

 

$

99,491,000

 

 

$

87,891,000

 

Network solutions services

 

 

50,648,000

 

 

 

62,507,000

 

Total services

 

$

150,139,000

 

 

$

150,398,000

 

 

Arrangements with Multiple Performance Obligations

 

For many of the Company’s services, the Company typically has one performance obligation; however, it also provides the customer with an option to acquire additional services. The Company offers multiple services under its patient management and network solutions service lines.  The Company typically provides a menu of offerings from which the customer may choose to purchase. The price of each service is separate and distinct and provides a separate and distinct value to the customer. Pricing is generally consistent for each service irrespective of the other services or quantities requested by the customer.

 

Contract Balances

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivables, contract assets (reported as unbilled revenues at estimated billable amounts) and contract liabilities (reported as deferred revenues) on the Company’s consolidated balance sheets. Unbilled revenues is a contract asset for revenue that has been recognized in advance of billing the customer, resulting from professional services delivered that the Company expects and is entitled to receive as consideration under certain contracts. Billing requirements vary by contract but substantially all unbilled revenues are billed within one year.

 

 

 

June 30, 2019

 

Billed receivables

 

$

57,389,000

 

Allowance for doubtful accounts

 

 

(5,508,000

)

Contract assets

 

 

14,961,000

 

Accounts receivable, net

 

$

66,842,000

 

 

When the Company receives consideration from a customer prior to transferring services to the customer under the terms of certain claims management agreements, it records deferred revenues on the Company’s consolidated balance sheets, which represents a contract liability.

 

Certain services, such as claims management, are provided under fixed-fee service agreements and require the Company to manage claims over a contract period, typically for one year with the option for auto renewal, with the fixed fee renewing on the anniversary date of such contracts.  The Company recognizes deferred revenues as revenues when it performs services and transfers control of the services to the customer and satisfies the performance obligation which it determines utilizing a portfolio approach. For all fixed fee service agreements, revenues are recognized over the expected service periods by type of claim.

 

The table below presents the deferred revenues balance and the significant activity affecting deferred revenues during the three months ended June 30, 2019:

 

 

 

June 30, 2019

 

Beginning balance at April 1, 2019 (Note 9)

 

$

16,900,000

 

Additions

 

 

7,080,000

 

Revenue recognized from beginning of period

 

 

(4,482,000

)

Revenue recognized from additions

 

 

(2,855,000

)

Ending balance at June 30, 2019 (Note 9)

 

$

16,643,000

 

 

Page 9


 

Remaining Performance Obligations

 

As of June 30, 2019, the Company had $25.3 million of remaining performance obligations related to claims and non-claims services for which the price is fixed. Remaining performance obligations consist of deferred revenues as well as certain unbilled receivables that are considered contract assets. The Company expects to recognize approximately 75% of its remaining performance obligations as revenues within one year and the remaining balance thereafter. See the discussion below regarding the practical expedients elected for the disclosure of remaining performance obligations.

 

Costs to Obtain a Contract

 

The Company has an internal sales force compensation program where remuneration is based solely on the revenues recognized in the period and does not represent an incremental cost to the Company which provides a future benefit expected to be longer than one year and would meet the criteria to be capitalized and presented as a contract asset on the Company’s consolidated balance sheets.

 

Practical Expedients Elected

 

As a practical expedient, the Company does not adjust the consideration in a contract for the effects of a significant financing component. It expects, at contract inception, that the period between a customer’s payment of consideration and the transfer of promised services to the customer will be one year or less.

 

For patient management services that are billed on a time-and-expense incurred or per unit basis and revenue is recognized over time, the Company recognizes revenue at the amount to which it has the right to invoice for services performed.

 

The Company does not disclose the value of remaining performance obligations for (i) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed, and (ii) contracts with variable consideration allocated entirely to a single performance obligation.

Note 3 — 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 June 30, 2019, options exercisable for up to 19,865,000 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 three months ended June 30, 2019 and 2018 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 and the expected option life. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures.  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 June 30, 2019 and 2018 using the Black-Scholes option-pricing model:

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Risk-free interest rate

 

2.33%

 

 

2.78%

 

Expected volatility

 

32%

 

 

40%

 

Expected dividend yield

 

 

0.00%

 

 

 

0.00%

 

Expected weighted average life of option in years

 

4.5 years

 

 

4.5 years

 

 

Page 10


 

For the three months ended June 30, 2019 and 2018, the Company recorded share-based compensation expense of $1,225,000 and $1,179,000, 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 months ended June 30, 2019 and 2018, respectively.  

 

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Cost of revenues

 

$

485,000

 

 

$

431,000

 

General and administrative

 

 

740,000

 

 

 

748,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

1,225,000

 

 

 

1,179,000

 

Amount of income tax benefit recognized

 

 

(265,000

)

 

 

(278,000

)

Amount charged against net income

 

$

960,000

 

 

$

901,000

 

Effect on basic earnings per share

 

$

(0.05

)

 

$

(0.05

)

Effect on diluted earnings per share

 

$

(0.05

)

 

$

(0.05

)

 

The following table summarizes information for all stock options for the three months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended June 30, 2019

 

 

Three Months Ended June 30, 2018

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

Options outstanding, beginning

 

 

1,058,411

 

 

$

45.17

 

 

 

1,064,439

 

 

$

39.45

 

Options granted

 

 

47,025

 

 

 

70.24

 

 

 

56,800

 

 

 

49.40

 

Options exercised

 

 

(100,955

)

 

 

38.01

 

 

 

(54,238

)

 

 

30.84

 

Options cancelled/forfeited

 

 

(3,651

)

 

 

51.43

 

 

 

(3,747

)

 

 

39.76

 

Options outstanding, ending

 

 

1,000,830

 

 

$

47.05

 

 

 

1,063,254

 

 

$

40.43

 

 

The following table summarizes the status of stock options outstanding and exercisable at June 30, 2019:

 

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 $34.78

 

 

262,396

 

 

 

2.27

 

 

$

27.56

 

 

 

201,204

 

 

$

26.12

 

$34.79 to $49.40

 

 

297,264

 

 

 

3.37

 

 

 

45.64

 

 

 

136,418

 

 

 

44.60

 

$49.41 to $59.32

 

 

366,195

 

 

 

4.01

 

 

 

58.02

 

 

 

42,247

 

 

 

57.15

 

$59.33 to $70.24

 

 

74,975

 

 

 

4.71

 

 

 

67.28

 

 

 

 

 

 

 

Total

 

 

1,000,830

 

 

 

3.42

 

 

$

47.05

 

 

 

379,869

 

 

$

36.21

 

 

Page 11


 

The following table summarizes the status of all outstanding options at June 30, 2019, 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 June 30, 2019

 

Options outstanding at April 1, 2019

 

 

1,058,411

 

 

$

45.17

 

 

 

 

 

 

 

 

 

Granted

 

 

47,025

 

 

 

70.24

 

 

 

 

 

 

 

 

 

Exercised

 

 

(100,955

)

 

 

38.01

 

 

 

 

 

 

 

 

 

Cancelled – forfeited

 

 

(3,035

)

 

 

52.74

 

 

 

 

 

 

 

 

 

Cancelled – expired

 

 

(616

)

 

 

45.19

 

 

 

 

 

 

 

 

 

Ending outstanding

 

 

1,000,830

 

 

$

47.05

 

 

 

3.42

 

 

$

39,991,982

 

Ending vested and expected to vest

 

 

954,018

 

 

$

44.52

 

 

 

3.43

 

 

$

33,210,632

 

Ending exercisable at June 30, 2019

 

 

379,869

 

 

$

36.21

 

 

 

2.69

 

 

$

19,297,711

 

 

The weighted-average grant-date fair value of options granted during the three months ended June 30, 2019 and 2018, was $21.30 and $18.12, respectively.

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 recognized $543,000 and $575,000 of stock compensation expense for the three months ended June 30, 2019 and 2018, respectively, for performance-based stock options.

 

Note 4 — Treasury Stock

 

The Company’s Board of Directors approved the commencement of a stock repurchase program in the fall of 1996.  In February 2019, 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 37,000,000 shares.  Since the commencement of the stock repurchase program, the Company has spent $475 million on the repurchase of 35,587,649 shares of its common stock, equal to 66% of the outstanding common stock had there been no repurchases.  The average price of these repurchases was $13.36 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 June 30, 2019, the Company repurchased 124,411 shares of its common stock for $9.1 million at an average price of $73.30 per share.  The Company had 18,529,566 shares of common stock outstanding as of June 30, 2019, net of the 35,587,649 shares in treasury.   During the period subsequent to the quarter ended June 30, 2019, the Company repurchased 76,805 shares of its common stock for $6,898,000 at an average price of $89.82 per share under the Company’s stock repurchase program.

 

 

Note 5 — Weighted Average Shares and Net Income Per Share

Basic weighted average common shares outstanding decreased to 18,524,000 for the quarter ended June 30, 2019 from 18,922,000 for the quarter ended June 30, 2018.  Diluted weighted average common and common equivalent shares outstanding decreased to 18,787,000 for the quarter ended June 30, 2019 from 19,102,000 for the quarter ended June 30, 2018.

Page 12


 

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 common shares for the three months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Net Income

 

$

13,407,000

 

 

$

11,778,000

 

Basic:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

18,524,000

 

 

 

18,922,000

 

Net Income per share

 

$

0.72

 

 

$

0.62

 

Diluted:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

18,524,000

 

 

 

18,922,000

 

Treasury stock impact of stock options

 

 

263,000

 

 

 

180,000

 

Total common and common equivalent shares

 

 

18,787,000

 

 

 

19,102,000

 

Net Income per share

 

$

0.71

 

 

$

0.62

 

 

Note 6 — 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, 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 7 — Line of Credit

In September 2018, 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.  There were no outstanding revolving loans as of June 30, 2019, 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 2019.

 

 

Note 8 — Contingencies 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.

Page 13


 

Note 9 — Accounts and Taxes Payable and Accrued Liabilities

The following table sets forth accounts payable, income taxes payable, and accrued liabilities at June 30, 2019 and March 31, 2019:

 

 

 

June 30, 2019

 

 

March 31, 2019

 

Accounts payable

 

$

17,932,000

 

 

$

9,925,000

 

Income taxes payable and uncertain tax positions

 

 

5,202,000

 

 

 

1,553,000

 

Total accounts and taxes payable

 

$

23,134,000

 

 

$

11,478,000

 

 

 

 

June 30, 2019

 

 

March 31, 2019

 

Payroll, payroll taxes and employee benefits

 

$

20,338,000

 

 

$

23,647,000

 

Customer deposits

 

 

43,667,000

 

 

 

45,268,000

 

Accrued professional service fees

 

 

6,282,000

 

 

 

8,377,000

 

Self-insurance accruals

 

 

3,560,000

 

 

 

3,523,000

 

Deferred revenue

 

 

16,643,000

 

 

 

16,900,000

 

Operating lease liabilities

 

 

15,185,000

 

 

 

5,708,000

 

Other

 

 

1,926,000

 

 

 

2,018,000

 

Total accrued liabilities

 

$

107,601,000

 

 

$

105,441,000

 

 

Note 10 – Leases

 

The Company determines if an arrangement is, or contains, a lease at contract inception.  These lease agreements have remaining lease terms of 1 to 15 years.  The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease commencement date.  The lease liability is initially measured at the present value of the unpaid lease payments as of the lease commencement date. Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term, and (3) lease payments.

 

ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because the Company does not generally borrow on a collateralized basis, it uses quoted interest rates obtained from financial institutions as an input to derive an appropriate incremental borrowing rate, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.

The Company’s lease agreements may include options to extend the lease following the initial term.  In most instances, the Company has determined that it is reasonably certain to exercise the option to renew; accordingly, these options are considered in determining the initial lease term.    

For lease agreements entered into or reassessed after the adoption of ASC 842, the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. Therefore, for those leases, the lease payments used to measure the lease liability include all of the fixed consideration in the contract.

Variable lease payments associated with the Company’s leases are recognized upon occurrence of the event, activity or circumstance in the lease agreement on which those payments are assessed.  

Leases with an initial term of 12 months or less are not recorded on the balance sheet.  The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Page 14


 

The components of lease expense are as follows:

 

 

 

Three Months Ended

 

 

 

June 30, 2019

 

Operating lease expense

 

$

4,261,000

 

Short-term lease expense

 

 

335,000

 

Variable lease expense

 

 

67,000

 

 

 

$

4,663,000

 

 

The following table presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets related to its operating leases:

 

 

 

June 30, 2019

 

Right-of-use asset, net

 

$

96,708,000

 

Short-term lease liability

 

$

12,414,000

 

Long-term lease liability

 

 

87,324,000

 

Total lease liabilities

 

$

99,738,000

 

Weighted average remaining lease term

 

9.06 years

 

Weighted average discount rate

 

 

4.0

%

 

Supplemental cash flow information related to operating leases for the three months ended June 30, 2019 were as follows:

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

3,746,000

 

Operating lease liabilities arising from obtaining ROU assets

 

$

101,026,000

 

Reductions to ROU assets resulting from reductions to operating lease liabilities

 

$

1,267,000

 

 

Maturities of operating lease liabilities for each of the next five years and thereafter are as follows:

 

 

 

June 30, 2019

 

2020

 

$

10,579,000

 

2021

 

 

13,787,000

 

2022

 

 

13,469,000

 

2023

 

 

13,450,000

 

2024

 

 

12,016,000

 

Thereafter

 

 

56,598,000

 

Total lease payments

 

 

119,899,000

 

Less interest

 

 

(20,161,000

)

Total lease liabilities

 

$

99,738,000

 

 

As of June 30, 2019, the Company has additional operating lease commitments that have not yet commenced of approximately $6.5 million.  These leases will commence in 2019 and have lease terms between 1 year and 11 years.

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,” “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) 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 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; the Company’s ability to continue to grow its sales of third party administrator, or TPA, services; the risk of cybersecurity incidents; 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 2018, the Bureau of Labor Statistics reported a decrease in the occupational injury and illness incidence rates for 2017. 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, 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 are responsible for all services provided by the Company in 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, 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 decreased to $150.1 million in the quarter ended June 30, 2019 from $150.4 million in the quarter ended June 30, 2018, a decrease of $0.3 million, or 0.2%.  This slight decrease was due to a decrease in network solutions services, which was offset by an increase in patient management services.

Cost of revenues decreased to $117.0 million in the quarter ended June 30, 2019 from $119.0 million in the quarter ended June 30, 2018, a decrease of $2.0 million, or 1.7%.   This decrease was primarily due to the decrease of 0.2% in revenue mentioned above, an increase in efficiencies in the Company’s TPA services and economies of scale.

General and administrative expense decreased to $15.8 million in the quarter ended June 30, 2019 from $15.9 million in the quarter ended June 30, 2018, a decrease of $0.2 million, or 1.2%. 

Income tax expense increased to $4.0 million in the quarter ended June 30, 2019 from $3.6 million in the quarter ended June 30, 2018, an increase of $0.3 million, or 9.3%.  Income before income tax provision increased to $17.4 million in the quarter ended June 30, 2019 from $15.4 million in the quarter ended June 30, 2018, an increase of $2.0 million, or 12.8%.  The effective tax rate was 22.9% for the quarter ended June 30, 2019 compared to 23.6% in the quarter ended June 30, 2018.

Weighted diluted shares decreased to 18.8 million shares in the quarter ended June 30, 2019 from 19.1 million shares in the quarter ended June 30, 2018, a decrease of 315,000 shares, or 1.6%, due to the weighted impact of options exercised partially offset by the weighted impact of shares repurchased.  

Diluted earnings per share increased to $0.71 per share in the quarter ended June 30, 2019 from $0.62 per share in the quarter ended June 30, 2018, an increase of $0.09 per share, or 14.5%. The increase in diluted earnings per share was primarily due to an increase in net income.

 

 

Page 17


 

Results of Operations for the three months ended June 30, 2019 and 2018

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, 2019 and 2018 are as follows:

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Patient management services

 

 

66.3

%

 

 

58.4

%

Network solutions services

 

 

33.7

%

 

 

41.6

%

 

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 June 30, 2019 and 2018. The Company’s past operating results are not necessarily indicative of future operating results.

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

Percentage

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

Change

 

 

Change

 

Revenue

 

$

150,139,000

 

 

$

150,398,000

 

 

$

(259,000

)

 

 

(0.2

%)

Cost of revenues

 

 

117,005,000

 

 

 

119,045,000

 

 

 

(2,040,000

)

 

 

(1.7

%)

Gross profit

 

 

33,134,000

 

 

 

31,353,000

 

 

 

1,781,000

 

 

 

5.7

%

Gross profit as percentage of revenue

 

 

22.1

%

 

 

20.8

%

 

 

 

 

 

 

 

 

General and administrative

 

 

15,752,000