crvl-10q_20160930.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 September 30, 2016

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)

 

(IRS Employer

Identification No.)

 

2010 Main Street, Suite 600

 

 

Irvine, CA

 

92614

(Address of principal executive office)

 

(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one)

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller Reporting Company

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 October 28, 2016 was 19,492,537.

 

 

 

 

 


 

CORVEL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

Page

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets – March 31, 2016 and September 30, 2016 (unaudited)

 

3

 

 

 

 

 

Consolidated Income Statements (unaudited) – Three months ended September 30, 2015 and 2016

 

4

 

 

 

 

 

Consolidated Income Statements (unaudited) – Six months ended September 30, 2015 and 2016

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) – Six months ended September 30, 2015 and 2016

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements – September 30, 2016

 

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

 

25

 

 

 

 

Item 4.

Controls and Procedures

 

25

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

25

 

 

 

 

Item 1A.

Risk Factors

 

25

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

32

 

 

 

 

Item 4.

Mine Safety Disclosures

 

32

 

 

 

 

Item 5.

Other Information

 

32

 

 

 

 

Item 6.

Exhibits

 

33

 

 

 

 

 

Signatures

 

34

 

Page 2


 

Part I - Financial Information

Item 1 - Financial Statements

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2016

 

 

September 30, 2016

 

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note A)

 

$

32,779,000

 

 

$

40,862,000

 

Customer deposits

 

 

25,649,000

 

 

 

31,189,000

 

Accounts receivable, net

 

 

59,747,000

 

 

 

60,445,000

 

Prepaid taxes and expenses

 

 

4,933,000

 

 

 

6,201,000

 

Total current assets

 

 

123,108,000

 

 

 

138,697,000

 

Property and equipment, net

 

 

53,268,000

 

 

 

57,386,000

 

Goodwill

 

 

36,814,000

 

 

 

36,814,000

 

Other intangibles, net (Note F)

 

 

4,287,000

 

 

 

4,069,000

 

Other assets

 

 

2,792,000

 

 

 

3,272,000

 

TOTAL ASSETS

 

$

220,269,000

 

 

$

240,238,000

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts and taxes payable

 

$

13,233,000

 

 

$

16,172,000

 

Accrued liabilities

 

 

67,182,000

 

 

 

70,439,000

 

Total current liabilities

 

 

80,415,000

 

 

 

86,611,000

 

Deferred income taxes

 

 

7,906,000

 

 

 

7,479,000

 

Total liabilities

 

 

88,321,000

 

 

 

94,090,000

 

Commitments and contingencies (Notes G and H)

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, $.0001 par value: 120,000,000 shares authorized at March 31, 2016 and

   September 30, 2016; 53,448,672 shares issued (19,562,413 shares outstanding, net of

   Treasury shares) and 53,540,231 shares issued (19,552,218 shares outstanding, net of

   Treasury shares) at March 31, 2016 and September 30, 2016, respectively

 

 

3,000

 

 

 

3,000

 

Paid-in capital

 

 

130,465,000

 

 

 

134,421,000

 

Treasury Stock (33,886,259 shares at March 31, 2016 and 33,988,013 shares at

   September 30, 2016)

 

 

(391,803,000

)

 

 

(396,002,000

)

Retained earnings

 

 

393,283,000

 

 

 

407,726,000

 

Total stockholders' equity

 

 

131,948,000

 

 

 

146,148,000

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

220,269,000

 

 

$

240,238,000

 

 

See accompanying notes to consolidated financial statements.

 

 

Page 3


 

CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

 

2016

 

REVENUES

 

$

124,460,000

 

 

$

128,219,000

 

Cost of revenues

 

 

97,776,000

 

 

 

102,307,000

 

Gross profit

 

 

26,684,000

 

 

 

25,912,000

 

General and administrative expenses

 

 

13,209,000

 

 

 

14,644,000

 

Income before income tax provision

 

 

13,475,000

 

 

 

11,268,000

 

Income tax provision

 

 

5,208,000

 

 

 

4,316,000

 

NET INCOME

 

$

8,267,000

 

 

$

6,952,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

0.42

 

 

$

0.36

 

Diluted

 

$

0.41

 

 

$

0.35

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

19,902,000

 

 

 

19,581,000

 

Diluted

 

 

20,063,000

 

 

 

19,733,000

 

 

See accompanying notes to consolidated financial statements.

Page 4


 

CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Six Months Ended September 30,

 

 

 

2015

 

 

2016

 

REVENUES

 

$

251,399,000

 

 

$

256,678,000

 

Cost of revenues

 

 

198,532,000

 

 

 

205,184,000

 

Gross profit

 

 

52,867,000

 

 

 

51,494,000

 

General and administrative expenses

 

 

28,171,000

 

 

 

28,105,000

 

Income before income tax provision

 

 

24,696,000

 

 

 

23,389,000

 

Income tax provision

 

 

9,529,000

 

 

 

8,946,000

 

NET INCOME

 

$

15,167,000

 

 

$

14,443,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

0.76

 

 

$

0.74

 

Diluted

 

$

0.75

 

 

$

0.73

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

20,026,000

 

 

 

19,577,000

 

Diluted

 

 

20,199,000

 

 

 

19,743,000

 

 

See accompanying notes to consolidated financial statements.

 

 

Page 5


 

CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

 

 

 

Six Months Ended September 30,

 

 

 

2015

 

 

2016

 

Cash flows from Operating Activities

 

 

 

 

 

 

 

 

NET INCOME

 

$

15,167,000

 

 

$

14,443,000

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,916,000

 

 

 

10,410,000

 

Loss (gain) on disposal of assets

 

 

(5,000

)

 

 

8,000

 

Stock compensation expense

 

 

1,104,000

 

 

 

1,128,000

 

Write-off of uncollectible accounts

 

 

897,000

 

 

 

1,080,000

 

Deferred income tax

 

 

(399,000

)

 

 

(427,000

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,585,000

)

 

 

(1,779,000

)

Customer deposits

 

 

(7,403,000

)

 

 

(5,540,000

)

Prepaid taxes and expenses

 

 

5,205,000

 

 

 

(1,268,000

)

Other assets

 

 

(571,000

)

 

 

(213,000

)

Accounts and taxes payable

 

 

(271,000

)

 

 

(552,000

)

Accrued liabilities

 

 

3,535,000

 

 

 

3,257,000

 

Net cash provided by operating activities

 

 

24,590,000

 

 

 

20,547,000

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Investment in private equity

 

 

(600,000

)

 

 

(250,000

)

Purchase of property and equipment

 

 

(8,025,000

)

 

 

(10,843,000

)

Net cash (used in) investing activities

 

 

(8,625,000

)

 

 

(11,093,000

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(18,775,000

)

 

 

(4,199,000

)

Tax effect of stock option exercises

 

 

475,000

 

 

 

869,000

 

Exercise of common stock options

 

 

1,525,000

 

 

 

1,758,000

 

Exercise of employee stock purchase options

 

 

181,000

 

 

 

201,000

 

Net cash (used in) financing activities

 

 

(16,594,000

)

 

 

(1,371,000

)

(Decrease) Increase in cash and cash equivalents

 

 

(629,000

)

 

 

8,083,000

 

Cash and cash equivalents at beginning of period

 

 

25,516,000

 

 

 

32,779,000

 

Cash and cash equivalents at end of period

 

$

24,887,000

 

 

$

40,862,000

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

6,946,000

 

 

$

9,502,000

 

Purchase of software license under finance agreement

 

$

 

 

$

3,492,000

 

 

See accompanying notes to consolidated financial statements.

 

 

 

Page 6


 

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

 

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

The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).  The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended March 31, 2016.  Accordingly, note disclosures which would substantially duplicate the disclosures contained in the March 31, 2016 audited financial statements have been omitted from these interim financial statements.

The Company evaluated all subsequent events or transactions through the date of filing this report.  During the period subsequent to the quarter ended September 30, 2016, the Company repurchased 61,880 shares of common stock for $2,197,000 at an average of $35.51 per share of common stock.  These shares of common stock were repurchased under the Company’s ongoing share repurchase program described in Note C.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 six months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017.  For further information, refer to the consolidated financial statements and notes for the fiscal year ended March 31, 2016 included in the Company's Annual Report on Form 10-K filed with the SEC on June 10, 2016.

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

Use of Estimates: The preparation of financial statements in compliance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements.  Actual results could differ from those estimates.  Significant estimates include the values assigned to intangible assets, capitalized software development, the 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 (“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 (a) 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 (b) 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 amount of the Company’s financial instruments (i.e. cash equivalents, accounts receivable, accounts payable) are all Level 1 and approximate their fair values at March 31, 2016 and September 30, 2016. The Company has no Level 2 or Level 3 financial instruments.

Page 7


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

Investment in Private Equity: The Company has made an investment of $2,250,000 into a private equity limited partnership (the “partnership”) that invests in start-up companies primarily in the data analytics industry.   The Company accounts for the investment on the cost method and will periodically review the investment for possible impairment.  There was no impairment on the investment for the year ended March 31, 2016 and for the six months ended September 30, 2016.  The investment is recorded in other assets on the accompanying consolidated balance sheets.  Management has not identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and in accordance with ASC 825-10-50-16 through 50-19, it is not practicable to estimate the fair value of the investment due to the fact the investment is in a diversified portfolio of companies whose shares are not traded on the open market.

Goodwill: The Company accounts for its business combinations in accordance with the FASB ASC 805-10 through ASC 805-50, “Business Combinations,” which requires that the purchase method of accounting be applied to all business combinations and 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 there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. For the Company’s services, as the Company’s professional staff performs work, they are contractually permitted to bill for fees earned in fraction of an hour increments worked or by units of production. The Company recognizes revenue as the time is worked 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 multiple element arrangements in accordance with the guidance included in ASC 605-25.

The multiple-deliverable arrangements consist of bundled managed care services, which includes 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 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 from when the claim is received to when the customer contract expires.

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 and cannot currently estimate the financial statement impact of adoption.

On November 20, 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 alters the presentation of deferred tax items on a classified balance sheet requiring companies to unify previously separated current and noncurrent items and present them as a single noncurrent amount. We have elected to early adopt this standard as of March 31, 2016 and have retrospectively applied the amendments to all periods presented.  

Page 8


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

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 financial statement impact of adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which lays 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 similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and 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. We are in the process of determining the effect on our consolidated financial position, results of operations and cash flows.

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, and statutory tax withholding requirements, as well as classification on the statement of cash flows. For public companies, the new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016, with early adoption permitted. We are in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, which reduces diversity in practice in 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 the Company’s consolidated financial statements.

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, 2016 or September 30, 2016. No one customer accounted for 10% or more of revenue during the three and six months ended September 30, 2015 and 2016.

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 in 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.

Page 9


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

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 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 September 2016 quarter 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.

 

 

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 September 30, 2016, 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 at the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from date of grant and the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the board of directors expire at the end of five years and ten years from date of grant, respectively.

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 option life, and the expected forfeiture rate. 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. Based upon the historical experience of options cancellations, the Company has estimated an annualized forfeiture rate of 12.28% and 13.16% for the three months ended September 30, 2015 and 2016, respectively.  Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. The following assumptions were used to estimate the fair value of options granted during the three months ended September 30, 2015 and 2016 using the Black-Scholes option-pricing model:

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

 

2016

 

Risk-free interest rate

 

 

1.61%

 

 

 

1.03

 

Expected volatility

 

 

44%

 

 

 

42%

 

Expected dividend yield

 

 

0.00%

 

 

 

0.00%

 

Expected forfeiture rate

 

 

12.28%

 

 

 

13.16%

 

Expected weighted average life of option in years

 

4.4 years

 

 

4.4 years

 

 

All options granted in the six months ended September 30, 2015 and 2016 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.

For the three months ended September 30, 2015 and 2016, the Company recorded share-based compensation expense of $488,000 and $612,000, respectively.  For the six months ended September 30, 2015 and 2016, the Company recorded share-based compensation expense of $1,104,000 and $1,128,000, respectively. The table below shows the amounts recognized in the consolidated financial statements for stock compensation expense for time-based options and performance-based options during the three and six months ended September 30, 2015 and 2016, respectively.

Page 10


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

Note B — Stock-Based Compensation and Stock Options (continued)

 

 

 

Three Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2016

 

Cost of revenues

 

$

321,000

 

 

$

395,000

 

General and administrative

 

 

167,000

 

 

 

217,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

488,000

 

 

 

612,000

 

Amount of income tax benefit recognized

 

 

(188,000

)

 

 

(234,000

)

Amount charged against net income

 

$

300,000

 

 

$

378,000

 

Effect on basic earnings per share

 

$

(0.02

)

 

$

(0.02

)

Effect on diluted earnings per share

 

$

(0.01

)

 

$

(0.02

)

 

 

 

Six Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2016

 

Cost of revenues

 

$

633,000

 

 

$

732,000

 

General and administrative

 

 

471,000

 

 

 

396,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

1,104,000

 

 

 

1,128,000

 

Amount of income tax benefit recognized

 

 

(425,000

)

 

 

(432,000

)

Amount charged against net income

 

$

679,000

 

 

$

696,000

 

Effect on basic net income per share

 

$

(0.03

)

 

$

(0.04

)

Effect on diluted net income per share

 

$

(0.03

)

 

$

(0.04

)

 

Summarized information for all stock options for the three and six months ended September 30, 2015 and 2016 follows:

 

 

 

Three Months Ended September 30, 2015

 

 

Three Months Ended September 30, 2016

 

 

 

Shares

 

 

Weighted Average Exercise Price

 

 

Shares

 

 

Weighted Average Exercise Price

 

Options outstanding, beginning

 

 

1,167,042

 

 

$

28.15

 

 

 

1,074,521

 

 

$

31.56

 

Options granted

 

 

47,300

 

 

 

33.15

 

 

 

45,600

 

 

 

43.32

 

Options exercised

 

 

(59,804

)

 

 

16.91

 

 

 

(14,593

)

 

 

20.61

 

Options cancelled/forfeited

 

 

(18,952

)

 

 

36.25

 

 

 

(2,609

)

 

 

39.33

 

Options outstanding, ending

 

 

1,135,586

 

 

$

28.81

 

 

 

1,102,919

 

 

$

32.17

 

 

 

 

Six Months Ended September 30, 2015

 

 

Six Months Ended September 30, 2016

 

 

 

Shares

 

 

Weighted Average Exercise Price

 

 

Shares

 

 

Weighted Average Exercise Price

 

Options outstanding, beginning

 

 

1,163,179

 

 

$

27.65

 

 

 

1,115,465

 

 

$

28.81

 

Options granted

 

 

87,000

 

 

 

33.85

 

 

 

90,500

 

 

 

44.52

 

Options exercised

 

 

(95,641

)

 

 

17.75

 

 

 

(91,216

)

 

 

21.87

 

Options cancelled/forfeited

 

 

(18,952

)

 

 

36.25

 

 

 

(11,830

)

 

 

36.36

 

Options outstanding, ending

 

 

1,135,586

 

 

$

28.81

 

 

 

1,102,919

 

 

$

32.17

 

 

Page 11


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

Note B — Stock-Based Compensation and Stock Options (continued)

 

The following table summarizes the status of stock options outstanding and exercisable at September 30, 2016:

 

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 $23.10

 

 

335,209

 

 

 

2.51

 

 

$

20.45

 

 

 

304,139

 

 

$

20.19

 

$23.11 to $34.77

 

 

190,134

 

 

 

2.86

 

 

$

30.75

 

 

 

118,443

 

 

$

28.96

 

$34.78 to $35.76

 

 

233,099

 

 

 

3.75

 

 

$

34.78

 

 

 

8,390

 

 

$

34.78

 

$35.77 to $46.20

 

 

344,477

 

 

 

3.72

 

 

$

43.50

 

 

 

103,684

 

 

$

43.26

 

Total

 

 

1,102,919

 

 

 

3.21

 

 

$

32.17

 

 

 

534,656

 

 

$

26.69

 

 

A summary of the status for all outstanding options at September 30, 2016, and changes during the three months then ended, is presented in the table below:

 

 

 

Number of Options

 

 

Weighted Average Exercise Price Per

Share

 

 

Weighted Average Remaining Contractual Life (Years)

 

 

Aggregate

Intrinsic Value as

of September 30,

2016

 

Options outstanding at July 1, 2016

 

 

1,074,521

 

 

$

31.56

 

 

 

 

 

 

 

 

 

Granted

 

 

45,600

 

 

 

43.32

 

 

 

 

 

 

 

 

 

Exercised

 

 

(14,593

)

 

 

20.61

 

 

 

 

 

 

 

 

 

Cancelled – forfeited

 

 

(2,110

)

 

 

39.21

 

 

 

 

 

 

 

 

 

Cancelled – expired

 

 

(499

)

 

 

39.82

 

 

 

 

 

 

 

 

 

Ending outstanding

 

 

1,102,919

 

 

$

32.17

 

 

 

3.21

 

 

$

8,387,418

 

Ending vested and expected to vest

 

 

971,976

 

 

$

31.50

 

 

 

3.09

 

 

$

8,045,668

 

Ending exercisable at September 30, 2016

 

 

534,656

 

 

$

26.69

 

 

 

2.55

 

 

$

6,712,666

 

 

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2015 and 2016, was $12.53 and $14.78, respectively.

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options under which vesting occurs only upon the Company achieving certain revenue or earnings per shares 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-vesting options. However, the Company only recognizes stock compensation to the extent that the probable targets are determined to be achieved which allow the performance options to vest.  The Company recognized ($63,000) and ($31,000) of stock compensation expense for the three months ended September 30, 2015 and 2016, respectively, for performance-based stock options.

 

 

Note C — Treasury Stock and Subsequent Event

 

The Company’s Board of Directors initially approved the commencement of a share repurchase program in the fall of 1996.  In November 2015, the Company’s Board of Directors approved a 1,000,000 share expansion to its existing stock repurchase plan, increasing the total number of shares of the Company’s common stock approved for repurchase over the life of the program to 35,000,000 shares of the Company’s common stock from the previous limit of 34,000,000 shares of the Company’s common stock.  Since the commencement of the share repurchase program, the Company has spent $396 million to repurchase 33,988,013 shares of its common stock, equal to 63% of the outstanding common stock had there been no repurchases.  The average price of these repurchases was $11.65 per share. These repurchases were funded primarily from the net earnings of the Company, along with the proceeds from the exercise of common stock options.  During the three and six months ended September 30, 2016, the Company repurchased 63,594 shares of the Company’s common stock for $2.6 million at an average price of $40.12 per share of common stock and 101,754 shares of the Company’s common stock for $4.2 million at an average price of $41.27 per share of common stock, respectively.  The Company had 19,552,218 shares of common stock outstanding as of September 30, 2016, net of the 33,988,013 shares in treasury.  During the period subsequent to the quarter ended September 30, 2016, the Company repurchased 61,880 shares of common stock for $2,197,000 at an average price of $35.51 per share of common stock.

 

Page 12


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

 

Note D — Weighted Average Shares and Net Income Per Share

Weighted average basic common shares decreased from 19,902,000 for the quarter ended September 30, 2015 to 19,581,000 for the quarter ended September 30, 2016.  Weighted average diluted common and common equivalent shares decreased from 20,063,000 for the quarter ended September 30, 2015 to 19,733,000 for the quarter ended September 30, 2016.  The net decrease in both of these weighted 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 Company’s employee stock option plan.

Net income per common and common equivalent shares was computed by dividing net income by the weighted average number of common and common stock equivalents outstanding during the quarter.  The calculations of the basic and diluted weighted shares for the three and six months ended September 30, 2015 and 2016, are as follows:

 

 

 

Three Months Ended September 30, 2016

 

 

 

2015

 

 

2016

 

Net Income

 

$

8,267,000

 

 

$

6,952,000

 

Basic:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,902,000

 

 

 

19,581,000

 

Net Income per share

 

$

0.42

 

 

$

0.36

 

Diluted:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,902,000

 

 

 

19,581,000

 

Treasury stock impact of stock options

 

 

161,000

 

 

 

152,000

 

Total common and common equivalent shares

 

 

20,063,000

 

 

 

19,733,000

 

Net Income per share

 

$

0.41

 

 

$

0.35

 

 

 

 

Six Months Ended
September 30, 2016

 

 

 

2015

 

 

2016

 

Net Income

 

$

15,167,000

 

 

$

14,443,000

 

Basic:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

20,026,000

 

 

 

19,577,000

 

Net Income per share

 

$

0.76

 

 

$

0.74

 

Diluted:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

20,026,000

 

 

 

19,577,000

 

Treasury stock impact of stock options

 

 

173,000

 

 

 

166,000

 

Total common and common equivalent shares

 

 

20,199,000

 

 

 

19,743,000

 

Net Income per share

 

$

0.75

 

 

$

0.73

 

 

 

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 provides for a dividend distribution to CorVel stockholders of one preferred stock purchase right for each outstanding share of CorVel’s common stock under certain circumstances. 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 any 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 have an exercise price of $118 per right, subject to subsequent adjustment. The rights trade with the Company’s common stock and will not be exercisable until the occurrence of certain takeover-related events.

Page 13


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

Note E — Shareholder Rights Plan (continued)

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 Board, 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

Other intangible assets consisted of the following at March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost, Net of

 

 

 

 

 

 

 

 

 

Fiscal 2016

 

 

Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Amortization

 

 

Amortization at

 

 

Amortization at

 

Item

 

Life

 

Cost

 

 

Expense

 

 

March 31, 2016

 

 

March 31, 2016

 

Covenants Not to Compete

 

5 Years

 

$

775,000

 

 

$

13,000

 

 

$

775,000

 

 

$

 

Customer Relationships

 

18-20 Years

 

 

7,922,000

 

 

 

423,000

 

 

 

3,721,000

 

 

 

4,201,000

 

TPA Licenses

 

15 Years

 

 

204,000

 

 

 

14,000

 

 

 

118,000

 

 

 

86,000

 

Total

 

 

 

$

8,901,000

 

 

$

450,000

 

 

$

4,614,000

 

 

$

4,287,000

 

 

Other intangible assets consisted of the following at September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost, Net of

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

Amortization at

 

 

Amortization at

 

Item

 

Life

 

Cost

 

 

Amortization Expense

 

 

September 30, 2016

 

 

September 30, 2016

 

Covenants Not to Compete

 

5 Years

 

$

775,000

 

 

$

 

 

$

775,000

 

 

$

 

Customer Relationships

 

18-20 Years

 

 

7,922,000

 

 

 

211,000

 

 

 

3,933,000

 

 

 

3,989,000

 

TPA Licenses

 

15 Years

 

 

204,000

 

 

 

7,000

 

 

 

124,000

 

 

 

80,000

 

Total

 

 

 

$

8,901,000

 

 

$

218,000

 

 

$

4,832,000

 

 

$

4,069,000

 

 

 

Note G — Line of Credit

In September 2016, the Company renewed a line of credit agreement. The line is with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement, as amended, bear interest, at the Company’s option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate determined by the financial institution to be 1.0% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain the current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth not greater than 1.25:1 and have positive net income. The Company is in compliance with all the covenants.  There were no outstanding revolving loans as of September 30, 2016, but letters of credit in the aggregate amount of $4.5 million have been issued separate from the line of credit and therefore do not reduce the amount of borrowings available under the revolving credit facility. The renewed credit agreement expires in September 2017.

 

 

Note H — Contingencies and Legal Proceedings

The Company is involved in litigation arising in the normal 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 the operations of the Company.

Page 14


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

 

Note I — Accounts and Taxes Payable and Accrued Liabilities

Accounts payable, income taxes payable and accrued liabilities consisted of the following at March 31, 2016 and September 30, 2016:

 

 

 

March 31, 2016

 

 

September 30, 2016

 

Accounts payable

 

$

11,191,000

 

 

$

14,130,000

 

Income taxes payable and uncertain tax positions

 

 

2,042,000

 

 

 

2,042,000

 

Total accounts and taxes payable

 

$

13,233,000

 

 

$

16,172,000

 

 

 

 

March 31, 2016

 

 

September 30, 2016

 

Payroll, payroll taxes and employee benefits

 

$

18,003,000

 

 

$

15,827,000

 

Customer deposits

 

 

25,649,000

 

 

 

31,189,000

 

Accrued professional service fees

 

 

4,692,000

 

 

 

4,895,000

 

Self-insurance accruals

 

 

3,095,000

 

 

 

2,845,000

 

Deferred revenue

 

 

7,821,000

 

 

 

8,623,000

 

Accrued rent

 

 

4,907,000

 

 

 

4,598,000

 

Other

 

 

3,015,000

 

 

 

2,462,000

 

Total accrued liabilities

 

$

67,182,000

 

 

$

70,439,000

 

 

 

 

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, except as required by law.  Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties, and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions, including a decreasing number of national claims due to decreasing number of injured workers; cost of capital and capital requirements; existing and possible litigation and legal liability in the course of operations and the Company’s ability to resolve such litigation; competition from other managed care companies; the ability to expand certain areas of the Company’s business; shifts in customer demands; the ability of the Company to produce market-competitive software; changes in operating expenses including employee wages, benefits and medical inflation; governmental and public policy changes, including but not limited to legislative and administrative law and rule implementation or change; and dependence on key personnel.

Overview

CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers’ compensation and auto claims. The Company’s services are provided to insurance companies, third party administrators (“TPA’s”), governmental entities, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims.  There is a decrease in the occupational injury and illness incidence rates as released from the United States Department of Labor in October 2016.  This is a continuance of a long term trend of a decrease in the injury rates in the United States.

Network Solutions Services

The Company’s network solutions services are designed to reduce the price paid by its customers for medical services rendered in workers’ compensation cases, auto policies, and group health policies. The network solutions offered by the Company include automated medical fee auditing, preferred provider services, retrospective utilization review, independent medical examinations, and inpatient bill review.  Network solutions services also includes revenue from the Company’s directed care network (CareIQ), including imaging and physical therapy.

Patient Management Services

In addition to its network solutions services, the Company also operates as a TPA offering a range of patient management services, which involve working on a one-on-one basis with injured employees and their various healthcare professionals, employers, and insurance company adjusters. The services are designed to monitor the medical necessity and appropriateness of healthcare services provided to workers’ compensation and other healthcare claimants and to expedite return to work. The Company offers these services on a stand-alone basis, or as an integrated component of its medical cost containment services. Patient management services include the processing of claims for self-insured payors to property and casualty insurance.

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 as we experience vacations, inclement weather, and holidays.

Organizational Structure

The Company’s management is structured geographically with regional vice-presidents who report to the Chief Executive Officer of the Company.  Each of these regional vice-presidents is responsible for all services provided by the Company in his or her

Page 16


 

particular region and for the operating results of the Company in multiple states. These regional vice-presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.

Business Enterprise Segments

The Company operates in one reportable operating segment, managed care. The Company's services are delivered to its customers through its local offices in each region and financial information for the Company's operations follows this service delivery model. All regions provide the Company's patient management and network solutions services. FASB ASC 280-10 establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company’s internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company’s operating revenue generated within the United States.

Under FASB ASC 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: 1) the nature of products and services; 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) the methods used to distribute their products or provide their services. The Company believes each of its regions meet these criteria as each provides similar services and products to similar customers using similar methods of productions and similar methods to distribute the services and products.

Summary of Quarterly Results

The Company generated revenues of $128.2 million for the quarter ended September 30, 2016, an increase of $3.8 million, or 3.0%, compared to revenues of $124.5 million for the quarter ended September 30, 2015.  This increase was due to an increase in patient management services, which was due to an increase in TPA services offset by a decrease in case management services.

Cost of revenues increased by $4.5 million, from $97.8 million in the September 30, 2015 quarter to $102.3 million in the September 30, 2016 quarter, an increase of 4.6%.  The increase in cost of revenues was due to an increase in revenues.  Additionally, the increase in cost of revenues was primarily due to an increase in salaries, directed network costs, and temporary help expenses.

General and administrative expense increased by $1.4 million, from $13.2 million in the September 30, 2015 quarter to $14.6 million in the September 30, 2016 quarter, an increase of 10.9%. This increase was primarily due to an increase in spending in legal, information systems, and marketing expenses.

Income tax expense decreased by $0.9 million, or 17.1%, from $5.2 million, in the September 30, 2015 quarter to $4.3 million in the September 30, 2016 quarter.  The decrease in income tax expense was primarily due to a decrease in pretax income from the prior year.

Weighted diluted shares decreased from 20.1 million shares in the September 30, 2015 quarter to 19.7 million shares in the September 30, 2016 quarter, a decrease of 330,000 shares, or 1.6%.  This decrease was primarily due to the repurchase of 435,823 shares of common stock in the twelve months ended September 30, 2016 under our stock repurchase program.

Diluted earnings per share decreased from $0.41 in the September 30, 2015 quarter to $0.35 in the September 30, 2016 quarter, a decrease of $0.06 per share, or 14.5%.  The decrease in diluted earnings per share was primarily due to a decrease in net income.

Results of Operations for the three months ended September 30, 2015 and 2016

The Company derives its revenues from providing patient management and network solutions services to payers of workers’ compensation benefits, auto insurance claims, and health insurance benefits.  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. Network solutions services include medical bill review, PPO management, facility claim review, provider reimbursement, professional review, pharmacy services, directed care services, Medicare solutions, and clearinghouse services.  The percentages of total revenues attributable to patient management and network solutions services for the quarters ended September 30, 2015 and September 30, 2016 are as follows:

 

 

 

September 30, 2015

 

 

September 30, 2016

 

Patient management services

 

 

54.7

%

 

 

56.1

%

Network solutions services

 

 

45.3

%

 

 

43.9

%

 

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The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company’s consolidated income statements for the three months ended September 30, 2015 and September 30, 2016. The Company’s past operating results are not necessarily indicative of future operating results.

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

Percentage

 

 

 

September 30, 2015

 

 

September 30, 2016

 

 

Change

 

 

Change

 

Revenue

 

$

124,460,000

 

 

$

128,219,000

 

 

$

3,759,000

 

 

 

3.0

%

Cost of revenues

 

 

97,776,000

 

 

 

102,307,000

 

 

 

4,531,000

 

 

 

4.6

%

Gross profit

 

 

26,684,000

 

 

 

25,912,000

 

 

 

(772,000

)

 

 

(2.9

%)

Gross profit as percentage of revenue

 

 

21.4

%

 

 

20.2

%

 

 

 

 

 

 

 

 

General and administrative

 

 

13,209,000

 

 

 

14,644,000

 

 

 

1,435,000

 

 

 

10.9

%

General and administrative as percentage of

   revenue

 

 

10.6

%

 

 

11.4

%

 

 

 

 

 

 

 

 

Income before income tax provision

 

 

13,475,000

 

 

 

11,268,000