CORVEL CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

This report may include certain forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including (without limitation)
statements with respect to anticipated future operating and financial
performance, including the impact of COVID-19, growth and acquisition
opportunities and other similar forecasts and statements of expectation. Words
such as "expects," "anticipates," "intends," "plans," "predicts," "believes,"
"seeks," "estimates," "potential," "continue," "strive," "ongoing," "may,"
"will," "would," "could," "should," as well as variations of these words and
similar expressions, are intended to identify these forward-looking statements.
Forward-looking statements made by the Company and its management are based on
estimates, projections, beliefs, and assumptions of management at the time of
such statements and are not guarantees of future performance.

The Company disclaims any obligations to update or revise any forward-looking
statement based on the occurrence of future events, the receipt of new
information or otherwise. Actual future performance, outcomes, and results may
differ materially from those expressed in forward-looking statements made by the
Company and its management as a result of a number of risks, uncertainties and
assumptions. Representative examples of these factors include (without
limitation) the impact of global pandemics, such as COVID-19; general industry
and economic conditions, including a decreasing number of national claims due to
a decreasing number of injured workers; competition from other managed care
companies and third party administrators; our ability to renew or maintain
contracts with our customers on favorable terms or at all; our ability to expand
certain areas of our business; growth in our sale of third-party administrator
("TPA") services; shifts in customer demands; increases in operating expenses
including employee wages, benefits, and medical inflation; our ability to
produce market-competitive software; cost of capital and capital requirements;
our ability to attract and retain key personnel; the impact of possible
cybersecurity incidents on our business; possible litigation and legal liability
in the course of operations and our ability to resolve such litigation; changes
in regulations affecting the workers' compensation, insurance and healthcare
industries in general; governmental and public policy changes, including but not
limited to legislative and administrative law and rule implementation or change;
the impact of recently issued accounting standards on our consolidated financial
statements; the availability of financing in the amounts, at the times, and on
the terms necessary to support our future business; and the other risks
identified in Part II, Item 1A of this report.

Overview

CorVel Corporation is an independent nationwide provider of medical cost
containment and managed care services designed to address the escalating medical
costs of workers' compensation benefits, automobile insurance claims, and group
health insurance benefits. The Company's services are provided to insurance
companies, TPAs, governmental entities, and self-administered employers to
assist them in managing the medical costs and monitoring the quality of care
associated with healthcare claims. In November 2021, the Bureau of Labor
Statistics reported that the occupational injury and illness incidence rate for
2020 decreased by 5.7% from the prior year.

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 professional nurse review,
true line item review, expert fee negotiations, specialty networks, preferred
provider organization ("PPO") management, medical bill repricing, automated
adjudication, and electronic reimbursement. Network solutions services also
includes revenue from the Company's directed care network (known as CareIQ),
including imaging, physical therapy, durable medical equipment, and translation
and transportation.

Patient Management Services

In addition to its network solutions services, the Company provides a unique
approach to patient management through the TPA services it offers. Patient
management services include claims management and all services sold to claims
management customers, as well as case management, the Company's 24/7 virtual
care platform with nurse triage, utilization management, vocational
rehabilitation, and disability, liability claims, and auto claims management.
This integrated service model controls claims costs by advocating medical
management at the onset of a claimant's injury to decrease administrative costs
and to shorten the duration of the claimant's disability. This automated
solution offers a personalized treatment program for each injured worker, using
precise treatment protocols to meet the changing needs of patients on an ongoing
basis. The Company offers these services on a stand-alone basis or as an
integrated component of its medical cost containment services.

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Organizational Structure

The Company's management is structured geographically with regional vice
presidents who are responsible for all services provided by the Company within
his or her particular region and responsible for the operating results of the
Company in multiple states. These regional vice presidents have area and
district managers who are also responsible for all services provided by the
Company in their given area and district.

Business Enterprise Segments

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

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

Because we believe we meet each of the criteria set forth above and each of our
regions have similar economic characteristics, we aggregate our results of
operations in one reportable operating segment, managed care.

Seasonality

While we are not directly impacted by seasonal shifts, we are affected by the
change in working days in a given quarter. There are generally fewer working
days for our employees to generate revenue in the third fiscal quarter due to
employee vacations, inclement weather, and holidays.

Summary of Quarterly Results

The Company's revenues increased to $177.4 million in the quarter ended
September 30, 2022 from $157.7 million in the quarter ended September 30, 2021,
an increase of $19.7 million, or 12.5%. This increase resulted primarily from
both patient management and network solutions activity with existing customers
and, to a lesser extent, an increase in new customers.

Cost of revenues increased to $141.3 million in the quarter ended September 30,
2022 from $121.1 million in the quarter ended September 30, 2021, an increase of
$20.3 million, or 16.7%. This increase was primarily due to the increase of
12.5% in revenue mentioned above. Additionally, there was an increase in
salaries of 19.4% resulting from increased average headcount of 13% in field
operations and growth in average annual salary increases due to wage inflation.

General and administrative expense increased to $17.5 million in the quarter
ended September 30, 2022 from $16.7 million in the quarter ended September 30,
2021, an increase of $0.9 million, or 5.3%. This increase was primarily due to
an increase in corporate system costs.

Income tax expense was $3.9 million in the quarters ended September 30, 2022 and
2021. Income before income tax provision decreased to $18.5 million in the
quarter ended September 30, 2022 from $20.0 million in the quarter ended
September 30, 2021, a decrease of $1.5 million, or 7.3%. The effective tax rate
was 21.0% for the quarter ended September 30, 2022 compared to 19.7% in the
quarter ended September 30, 2021.

Diluted weighted average common and common equivalent shares decreased to 17.7
million shares for the quarter ended September 30, 2022 from 18.2 million shares
for the quarter ended September 30, 2021, a decrease of 582,000 shares, or 3.2%,
due to the weighted impact of shares repurchased partially offset by the
weighted impact of options exercised.

Diluted earnings per share decreased to $0.83 per share in the quarter ended
September 30, 2022 from $0.88 per share in the quarter ended September 30, 2021,
a decrease of $0.05 per share, or 5.7%. The decrease in diluted earnings per
share was primarily due to a decrease in net income, which was slightly offset
by a decrease in weighted diluted shares.


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Results of Operations for the three months ended September 30, 2022 and 2021

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 September 30, 2022 and 2021 are as follows:

                               September 30, 2022       September 30, 2021
Patient management services                   67.3 %                   66.4 %
Network solutions services                    32.7 %                   33.6 %




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 September 30, 2022 and 2021. The
Company's past operating results are not necessarily indicative of future
operating results.

                              Three Months Ended       Three Months Ended                       Percentage
                              September 30, 2022       September 30, 2021         Change          Change
Revenue                      $        177,426,000     $        157,743,000     $ 19,683,000            12.5 %
Cost of revenues                      141,332,000              121,082,000       20,250,000            16.7 %
Gross profit                           36,094,000               36,661,000         (567,000 )          (1.5 %)
Gross profit as percentage
of revenue                                   20.3 %                   23.2 %
General and administrative             17,549,000               16,658,000          891,000             5.3 %
General and administrative
as percentage of
  revenue                                     9.9 %                   10.6 %
Income before income tax
provision                              18,545,000               20,003,000       (1,458,000 )          (7.3 %)
Income before income tax
provision
  as percentage of revenue                   10.5 %                   12.7 %
Income tax provision                    3,889,000                3,931,000          (42,000 )          (1.1 %)
Net income                   $         14,656,000     $         16,072,000     $ (1,416,000 )          (8.8 %)
Weighted Average Shares
Basic                                  17,386,000               17,841,000         (455,000 )          (2.6 %)
Diluted                                17,650,000               18,232,000         (582,000 )          (3.2 %)
Earnings Per Share
Basic                        $               0.84     $               0.90     $      (0.06 )          (6.7 %)
Diluted                      $               0.83     $               0.88     $      (0.05 )          (5.7 %)


Revenues

Change in revenue to the quarter ended September 30, 2022 from the quarter ended
September 30, 2021

Revenues increased to $177.4 million in the quarter ended September 30, 2022
from $157.7 million in the quarter ended September 30, 2021, an increase of
$19.7 million, or 12.5%. Patient management services revenues increased to
$119.5 million from $104.7 million, an increase of 14.1%. This increase is
primarily due to higher revenue from the Company's TPA and related services.
Total new claims increased by 7% during the September 30, 2022 quarter compared
to the September 30, 2021 quarter. Network solutions services revenues increased
to $58.0 million from $53.1 million, an increase of 9.2%. This increase is
primarily due to increases in enhanced bill review programs services, which
resulted in higher revenue per bill. Most of the increase came from growth with
existing customers and, to a lesser extent, growth with new customers.

Cost of Revenues

The Company's cost of revenues consists of direct expenses, costs directly
attributable to the generation of revenue, and indirect costs which are incurred
to support the operations in the field offices which generate the revenue.
Direct expenses primarily include (i) case manager and bill review analysts'
salaries, along with related payroll taxes and fringe benefits, and (ii) costs
associated with independent medical examinations (known as IME), prescription
drugs, and MRI, physical therapy, and durable medical equipment providers. Most
of the Company's revenues are generated in offices which provide both patient
management services and network solutions services. The largest of the field
indirect costs are (i) manager salaries and bonuses, (ii) account executive base
pay and commissions, (iii) salaries of administrative and clerical support,
field systems personnel and PPO network developers, along with related payroll
taxes and fringe benefits, and (iv) office rent. Approximately 35% of the costs
incurred in the field are considered field indirect costs, which support both
the patient management services and network solutions operations of the
Company's field operations.

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Change in cost of revenues to the quarter ended September 30, 2022 from the
quarter ended September 30, 2021

Cost of revenues increased to $141.3 million in the quarter ended September 30,
2022 from $121.1 million in the quarter ended September 30, 2021, an increase of
$20.3 million, or 16.7%. The increase in cost of revenues was primarily due to
the increase in total revenues of 12.5%. Additionally, there was an increase in
salaries of 19.4% resulting from increased average headcount of 13% in field
operations and growth in average annual salary increases due to wage inflation.
Headcount increased due to an increase in new business and volume of business.

General and Administrative Expense

For the quarter ended September 30, 2022, general and administrative expense
consisted of approximately 52% of corporate systems costs, which include the
corporate systems support, implementation and training, rules engine
development, national IT strategy and planning, depreciation of hardware costs
in the Company's corporate offices and backup data center, the Company's
nationwide area network, and other systems related costs. The Company includes
all IT-related costs managed by the corporate office in general and
administrative expense whereas the field IT-related costs are included in the
cost of revenues. The remaining general and administrative costs consist of
national marketing, national sales support, corporate legal, corporate
insurance, human resources, accounting, product management, new business
development, and other general corporate expenses.

Change in general and administrative expense to the quarter ended September 30,
2022 from the quarter ended September 30, 2021

General and administrative expense increased to $17.5 million in the quarter
ended September 30, 2022 from $16.7 million in the quarter ended September 30,
2021, an increase of $0.9 million, or 5.3%. This increase was primarily due to
an increase in corporate system costs.

Income Tax Provision

Change in income tax expense to the quarter ended September 30, 2022 from the
quarter ended September 30, 2021

Income tax expense was $3.9 million in the quarters ended September 30, 2022 and
2021. Income before income tax provision decreased to $18.5 million in the
quarter ended September 30, 2022 from $20.0 million in the quarter ended
September 30, 2021, a decrease of $1.5 million, or 7.3%. The effective tax rate
was 21.0% for the quarter ended September 30, 2022 compared to 19.7% in the
quarter ended September 30, 2021. The effective tax rate is less than the
statutory tax rate primarily due to the impact of stock option exercises for
both periods.

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Results of Operations for the six months ended September 30, 2022 and 2021

The following table sets forth, for the periods indicated, the dollar amounts,
dollar and percent changes, share changes, and the percentage of revenues
represented by certain items reflected in the Company's consolidated income
statements for the six months ended September 30, 2022 and 2021. The Company's
past operating results are not necessarily indicative of future operating
results.


                              Six Months Ended        Six Months Ended                        Percentage
                             September 30, 2022      September 30, 2021         Change          Change
Revenue                      $       353,733,000     $       310,363,000     $ 43,370,000            14.0 %
Cost of revenues                     277,770,000             236,489,000       41,281,000            17.5 %
Gross profit                          75,963,000              73,874,000        2,089,000             2.8 %
Gross profit as percentage
of revenue                                  21.5 %                  23.8 %
General and administrative            36,219,000              33,303,000        2,916,000             8.8 %
General and administrative
as percentage of
  revenue                                   10.2 %                  10.7 %
Income before income tax
provision                             39,744,000              40,571,000         (827,000 )          (2.0 %)
Income before income tax
provision as
  percentage of revenue                     11.2 %                  13.1 %
Income tax provision                   8,397,000               7,656,000          741,000             9.7 %
Net income                   $        31,347,000     $        32,915,000     $ (1,568,000 )          (4.8 %)
Weighted Average Shares
Basic                                 17,446,000              17,869,000         (423,000 )          (2.4 %)
Diluted                               17,726,000              18,226,000         (500,000 )          (2.7 %)
Earnings Per Share
Basic                        $              1.80     $              1.84     $      (0.04 )          (2.2 %)
Diluted                      $              1.77     $              1.81     $      (0.04 )          (2.2 %)




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Revenues

Change in revenue to the six months ended September 30, 2022 from the six months
ended September 30, 2021

Revenues increased to $353.7 million for the six months ended September 30, 2022
from $310.4 million for the six months ended September 30, 2021, an increase of
$43.4 million, or 14.0%. Patient management services revenues increased to
$234.3 million from $205.1 million, an increase of 14.2%. This increase is
primarily due to higher revenue from the Company's TPA and related services.
Total new claims increased by 8% during the six months ended September 30, 2022
compared to the six months ended September 30, 2021. Network solutions services
revenues increased to $119.5 million from $105.2 million, an increase of 13.5%.
This increase is primarily due to increases in enhanced bill review programs
services, which resulted in higher revenue per bill. Most of the increase came
from growth with existing customers and, to a lesser extent, growth with new
customers.

Cost of Revenues

Change in cost of revenues to the six months ended September 30, 2022 from the
six months ended September 30, 2021

Cost of revenues increased to $277.8 million in the six months ended September
30, 2022 from $236.5 million in the six months ended September 30, 2021, an
increase of $41.3 million, or 17.5%. The increase in cost of revenues was
primarily due to the increase in total revenues of 14.0%. Additionally, there
was an increase in salaries of 19.8% resulting from increased average headcount
of 14% in field operations and growth in average annual salary increases due to
wage inflation. Headcount increased due to an increase in new business and
volume of business.

General and Administrative Expense

Change in administrative expense to the six months ended September 30, 2022 from
the six months ended September 30, 2021

General and administrative expense increased to $36.2 million in the six months
ended September 30, 2022 from $33.3 million in the six months ended September
30, 2021, an increase of $2.9 million, or 8.8%. This increase was primarily due
to an increase in legal, marketing and corporate system costs.

Income Tax Provision

Change in income tax expense to the six months ended September 30, 2022 from the
six months ended September 30, 2021

Income tax expense increased to $8.4 million for the six months ended September
30, 2022 from $7.7 million for the six months ended September 30, 2021, an
increase of $0.7 million, or 9.7%. Income before income tax provision decreased
to $39.7 million in the six months ended September 30, 2022 from $40.6 million
in the six months ended September 30, 2021, a decrease of $0.8 million, or 2.0%.
The income tax expense as a percentage of income before income taxes, also known
as the effective tax rate, was 21.1% for the six months ended September 30, 2022
and 18.9% for the six months ended September 30, 2021. For the six months ended
September 30, 2022 compared to the six months ended September 30, 2021, the
effective tax rate is less than the statutory tax rate primarily because of the
impact of the stock option exercises, that however had a less significant impact
in the current year compared to prior year.

Liquidity and Capital Resources

The Company has historically funded its operations and capital expenditures
primarily from cash flow from operations, and to a lesser extent, proceeds from
stock option exercises. Working capital decreased to $72.9 million as of
September 30, 2022 from $93.6 million as of March 31, 2022, a decrease of $20.8
million. Cash decreased to $75.6 million as of September 30, 2022 from $97.5
million as of March 31, 2022, a decrease of $21.9 million. This is primarily due
to the increase in spending to repurchase shares of the Company's common stock.
The Company did not apply for governmental loans to support the Company's
operations, but has taken advantage of certain aspects of the CARES Act such as
the deferral of payroll tax deposits. The Company deferred a total of $10.4
million in payroll tax deposits, half of which was paid during the December 31,
2021 quarter, and the other half of which will be paid back by the end of
calendar year 2022.

The Company is not a party to off-balance sheet arrangements as defined by the
rules of the SEC. However, from time to time the Company enters into certain
types of contracts that contingently require the Company to indemnify parties
against third-party claims. The contracts primarily relate to: (i) certain
contracts to perform services, under which the Company may provide customary
indemnification for the purchases of such services, (ii) certain real estate
leases, under which the Company may be required to indemnify property owners for
environmental and other liabilities, and other claims arising from the Company's
use of the applicable premises, and (iii) certain agreements with the Company's
officers, directors and employees, under which the Company may be required to

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indemnify such persons for liabilities arising out of certain actions taken by
such persons, acting in their respective capacities within the Company. The
terms of such customary obligations vary by contract and in most instances a
specific or maximum dollar amount is not explicitly stated therein. Generally,
amounts under these contracts cannot be reasonably estimated until a specific
claim is asserted. Consequently, no material liabilities have been recorded for
these obligations on the Company's balance sheets for any of the periods
presented.

The Company believes that cash from operations and funds from exercises of stock
options granted to employees are adequate to fund existing obligations,
repurchase shares of the Company's common stock under its current stock
repurchase program, introduce new services, and continue to develop the
Company's healthcare related services for at least the next twelve months.
Should the Company have lower income or cash flows, it could reduce or eliminate
repurchases under the stock repurchase program until earnings and cash flow have
returned to comfortable levels. The Company regularly evaluates cash
requirements for current operations, commitments, capital acquisitions, and
other strategic transactions. The Company may elect to raise additional funds
for these purposes, through debt or equity financings or otherwise, as
appropriate. However, additional equity or debt financing may not be available
when needed, with terms favorable to the Company or at all.

As of September 30, 2022, the Company had $75.6 million in cash and cash
equivalents, invested primarily in short term, interest bearing, highly liquid
investment grade securities with maturities of 90 days or less.

The Company believes that its cash and cash equivalents, along with cash
generated by ongoing operations, will be sufficient to satisfy its cash
requirements over the next 12 months and beyond.

Operating Activities

Six months ended September 30, 2022 compared to six months ended September 30,
2021

Net cash provided by operating activities increased to $39.8 million in the six
months ended September 30, 2022 from $35.2 million in the six months ended
September 30, 2021, an increase of $4.6 million. The increase in cash flow from
operating activities was primarily due to the timing of payroll tax payments.

Investing Activities

Six months ended September 30, 2022 compared to six months ended September 30,
2021

Net cash flow used in investing activities increased to $13.4 million in the six
months ended September 30, 2022 from $11.6 million in the six months ended
September 30, 2021, an increase of $1.8 million. Capital purchases were $13.4
million for the six months ended September 30, 2022 and $11.6 million for the
six months ended September 30, 2021. The Company increased its spending
primarily on developed software and reduced its spending on furniture and
leasehold improvements as the Company reduces its lease footprint.

Financing Activities

Six months ended September 30, 2022 compared to six months ended September 30,
2021

Net cash flow used in financing activities increased to $48.2 million for the
six months ended September 30, 2022 from $32.2 million for the six months ended
September 30, 2021, an increase of $16.0 million. The increase in net cash used
in financing activities was primarily due to an increase in spending on share
repurchases to $52.3 million for the six months ended September 30, 2022. The
Company spent $39.8 million on share repurchases for the six months ended
September 30, 2021. The Company has historically used cash provided by operating
activities and from the exercise of stock options to repurchase stock. The
Company expects that it may use some of the cash on the balance sheet at
September 30, 2022 to repurchase additional shares of its common stock in the
future.

Litigation

From time to time, the Company is involved in litigation arising in the ordinary
course of business. The Company believes that resolution of these matters will
not result in any payment that, individually, or in the aggregate, would be
material to the financial position or results of operations of the Company.

Inflation

The Company experiences pricing pressures in the form of competitive prices. The
Company is also impacted by rising costs for certain inflation-sensitive
operating expenses such as labor, employee benefits, and facility leases. The
Company believes inflation could have a material impact to pricing and operating
expenses in future periods due to the state of the economy and current inflation
rates.

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Critical Accounting Policies and Estimates

The SEC defines critical accounting policies as those that require application
of management's most difficult, subjective, or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.

The Company's significant accounting policies which have the greatest potential
impact on its financial statements are more fully described in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of its Annual Report on Form 10-K for the fiscal year ended March 31,
2022, filed with the SEC on May 27, 2022. No changes in critical accounting
policies have been made since the filing of that Annual Report on Form 10-K. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States of
America ("GAAP"), with no need for management's judgment in their application.
There are also areas in which management's judgment in selecting an available
alternative would not produce a materially different result. Actual results
could differ from the estimates we use in applying our critical accounting
policies. We are not currently aware of any reasonably likely events or
circumstances that would result in materially different amounts being reported.

Recent Accounting Standards Update

See Note 1 - Summary of Significant Accounting Policies to the accompanying
unaudited consolidated financial statements contained elsewhere in this report
for information about recently issued and adopted accounting pronouncements.