«Some ask if this is a Business or a Passion. A business it is, but business will not take our measure, for passion wills the endurance to find our ...»
Additionally, the rate decreased during fiscal year 2015 due to review of the state tax filings and the Company’s apportionment. The Company expects the rate to normalize in the next fiscal year. The income tax provision rates were based upon management’s review of the Company’s estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses offset by tax credits.
Net Income Fiscal 2016 Compared to Fiscal 2015 The Company’s net income for fiscal years 2015 and 2016 were $28.6 million and $28.5 million, respectively, a decrease of $0.1 million. The Company’s net income was relatively unchanged due to an increase in gross profit, which was offset by an increase in general and administrative expense and an increase in the tax rate.
Fiscal 2015 Compared to Fiscal 2014 The Company’s net income for fiscal years 2014 and 2015 was $34.4 million and $28.6 million, respectively. The Company’s net income in fiscal 2015 decreased due to a decrease in gross profit margin due to an increase in lower margin TPA business.
Earnings per Share Fiscal 2016 Compared to Fiscal 2015 The Company’s diluted earnings per share for fiscal years 2015 and 2016 were $1.37 and $1.43, respectively, an increase of $0.06. The Company’s earnings per share in fiscal 2016 increased primarily due to a decrease in diluted weighted shares outstanding because of shares repurchased in the Company’s share repurchase program.
Fiscal 2015 Compared to Fiscal 2014 The Company’s diluted earnings per share for fiscal years 2014 and 2015 were $1.61 and $1.37, respectively. The Company’s earnings per share in fiscal 2015 decreased due to a decrease in net income of $5.8 million.
Liquidity and Capital Resources Introduction The Company manages its liquidity and financial position in the context of its overall business strategy. The Company continually forecasts and manages its cash, investments, working capital balances and capital structure to meet the short- and long-term obligations of its businesses while seeking to maintain liquidity and financial flexibility. Cash flows generated from operating activities are principally from earnings before non-cash expenses. The risk of decreased operating cash flow from a decline in earnings is partially mitigated by the diversity of the Company’s services, geographies and customers, and the Company has had virtually no interestbearing debt for the past 25 years.
The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, stock option exercises. The Company’s net accounts receivables have averaged below 43 days of average sales for the past two fiscal years and were at 42 days at March 31, 2016. The Company expects days sales outstanding (“DSO”) to remain in the low to mid 40-day range. Property, net of accumulated depreciation, has historically averaged approximately 11% or less of annual revenue. The Company’s historical profit margins and historical ratio of investments in assets used in the business has allowed the Company to generate sufficient cash flow to repurchase $392 million of its common stock during the past nineteen fiscal years, on inception-to-date net earnings of $393 million. The Company repurchases shares during periods of excess liquidity which has occurred in all 25 years the Company has been public. Should the Company have lower income or cash flows, it could reduce or eliminate the share repurchase program until earnings and cash flow improves. Working capital increased from $38 million to $43 million from March 31, 2015 to March 31, 2016.
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 share repurchase program, introduce new services, and continue to develop healthcare related businesses for at least the next twelve months. The Company regularly evaluates cash requirements for current operations, commitments, and for 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.
Additional equity or debt financing may not be available when needed, on terms favorable to us or at all.
As of March 31, 2016, the Company had $33 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.
In September 2015, 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 1.50% 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. There were no outstanding revolving loans as of March 31, 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 credit agreement expires in September 2016.
The Company believes that the cash balance at March 31, 2016 along with anticipated internally generated funds, and the credit facility would be sufficient to meet the Company’s expected cash requirements for at least the next twelve months.
Operating Cash Flows Fiscal 2016 Compared to Fiscal 2015 Net cash provided by operating activities was $44 million in fiscal 2015 and $51 million in fiscal 2016. This increase was primarily due to the fact that in the prior year, the Company had a higher prepaid tax balance than the current year. During fiscal 2016, the Company’s prepaid tax is closer to the actual tax liability as compared to fiscal 2015.
Fiscal 2015 Compared to Fiscal 2014 Net cash provided by operating activities was $55 million in fiscal 2014 and $44 million in fiscal 2015. Net income decreased by $5.8 million, there was also a decrease in accounts and taxes payable. This was due to a decrease in the tax rate, which was partially offset by an increase in accounts receivable.
Investing Activities Fiscal 2016 Compared to Fiscal 2015 Net cash flow used in investing activities decreased from $24 million in fiscal 2015 to $17 million in fiscal
2016. The decrease in cash flow used in investing activities was due to a decrease in property additions during fiscal 2016. In fiscal 2015, there was an increase in leasehold improvements and in the amount spent on capitalized hardware related to a new data center being built out to increase our system capacity.
Fiscal 2015 Compared to Fiscal 2014 Net cash flow used in investing activities increased from $18 million in fiscal 2014 to $24 million in fiscal
2015. The increase in cash flow used in investing activities was due to an increase in property additions in leasehold improvements and an increase in the amount spent on capitalized hardware related to a new data center being built out to increase our system capacity.
Financing Activities Fiscal 2016 Compared to Fiscal 2015 Net cash flow used in financing activities decreased from $29.4 million in fiscal 2015 to $26.7 million in fiscal 2016. The decrease in cash flow used in financing activities was due to an increase in proceeds from exercise of stock options. During fiscal 2016, the Company spent $31.5 million to repurchase 893,771 shares of its common stock (at an average price of $35.27 per share). During fiscal 2015, the Company spent $31.8 million to repurchase 845,014 shares of its common stock (at an average price of $37.63 per share).
If the Company continues to generate cash flow from operating activities, the Company may continue to repurchase shares of its common stock on the open market, if authorized by the Company’s Board of Directors, or seek to identify other businesses to acquire. In November 2015, the Board of Directors increased the number of shares authorized to be repurchased over the life of the stock repurchase program by an additional 1,000,000 shares to 35,000,000 shares. 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 March 31, 2016 to repurchase additional shares of its common stock in the future.
Fiscal 2015 Compared to Fiscal 2014 Net cash flow used in financing activities increased from $21.4 million in fiscal 2014 to $29.4 million in fiscal 2015. The increase in cash flow used in financing activities was due to an increase in the purchase of common stock under the Company’s share repurchase program. During fiscal 2015, the Company spent $31.8 million to repurchase 845,014 shares of its common stock (at an average price of $37.63 per share). During fiscal 2014, the Company spent $27.2 million to repurchase 830,460 shares of its common stock (at an average price of $32.73 per share).
Litigation. 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, in the aggregate, would be material to the financial position or results of the 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 and employee benefits, and facility leases. However, the Company generally does not believe these impacts are material to its revenues or net income.
Off-Balance Sheet Arrangements The Company is not a party to off-balance sheet arrangements as defined by the Securities and Exchange Commission. 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 to the purchases of such services; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company.
The terms of such 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 liabilities have been recorded for these obligations on the Company’s balance sheets for any of the periods presented.
Critical Accounting Policies The SEC defines critical accounting policies as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The following is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note A to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, 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.
We have identified the following accounting policies as critical to us: 1) revenue recognition, 2) allowance for uncollectible accounts, 3) goodwill and long-lived assets, 4) accrual for self-insured costs, 5) accounting for income taxes, 6) legal and other contingencies, 7) share-based compensation, and 8) software development costs.
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 the majority of its revenue from the sale of Network Solutions and Patient Management services. Network Solutions and Patient Management services may be sold individually or combined with any of the services the Company provides. When a sale combines multiple elements, the Company accounts for multiple element arrangements in accordance with the guidance included in Accounting Standard Codification (“ASC”) 605-25.