Medpace Holdings, Inc. — Q3 2019 Form 10-Q
Business context and period. Medpace is a global contract research organization providing clinical development services to pharmaceutical, biotechnology, and medical-device companies. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in millions, except per-share data.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $216.2 | $179.3 | $631.1 | $512.5 |
| Operating income | $30.0 | $26.9 | $91.1 | $70.4 |
| Operating margin | 13.9% | 15.0% | 14.4% | 13.7% |
| Net income | $24.0 | $19.3 | $70.6 | $50.4 |
| Diluted EPS | $0.63 | $0.52 | $1.88 | $1.36 |
| Operating cash flow | Not separately presented | Not separately presented | $144.9 | $117.1 |
- Q3 revenue rose 20.6% and nine-month revenue rose 23.1%. Growth was primarily attributed to Oncology and other therapeutic areas.
- Q3 direct costs grew 22.6%, faster than revenue; SG&A rose 56.5%, partly reflecting higher personnel costs and a $5.1 million stock-compensation charge related to an MPI tender offer for vested employee options. Q3 operating margin consequently declined year over year, despite higher operating income.
- Nine-month net cash provided by operations was $144.9 million; investing used $13.4 million, primarily for property and equipment, and financing used $74.8 million, mainly for debt repayment. Cash increased by $56.0 million to $79.3 million.
- At September 30, cash was $79.3 million, current assets $250.4 million, and current liabilities $314.4 million. The balance-sheet current ratio was approximately 0.80; customer advance billings were $169.5 million.
- Medpace repaid its term loan during Q2 and reported no debt outstanding at September 30. A new unsecured revolving facility provides up to $50.0 million; $49.8 million was available, with $0.2 million in letters of credit outstanding. The facility bears interest at LIBOR plus 1.00% and expires 364 days after September 30, 2019.
Material changes and operating indicators
- Net new business awards were $285.4 million for Q3 and $813.3 million for nine months, versus $227.6 million and $668.3 million, respectively, in 2018.
- Backlog reached $1.229 billion, up 19.9% from $1.025 billion a year earlier. Management expected approximately $675–$695 million to convert to revenue over the following 12 months. The filing also reported approximately $1.36 billion of remaining performance obligations for active projects.
- Unbilled receivables declined to $27.0 million from $49.4 million at year-end, primarily due to increased customer invoicing; advanced billings increased to $169.5 million from $147.9 million.
- ASC 842 adoption in Q1 added operating lease right-of-use assets and liabilities. At September 30, operating lease liabilities totaled $56.3 million. A separate office lease, expected to commence in 2020, carries $124.0 million of future payments over an initial 20-year term.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue or earnings guidance. Management said it expects to fund growth, capital expenditures, potential selective acquisitions, share repurchases, and general corporate needs with cash, operating cash flow, and, if needed, credit-facility borrowings.
- Management cautioned that awards and backlog are not necessarily reliable predictors of future revenue. Customers generally may cancel contracts on notice, and cancellations, study timing, project scope, therapeutic-area mix, and foreign exchange can affect results. The euro is the largest foreign-currency exposure identified.
- Operating lease commitments totaled $193.2 million, including the $124.0 million lease not yet commenced. The company also had $11.1 million of minimum purchase commitments for project supplies.
- Management reported a material weakness in internal control over financial reporting related to implementation of ASC 606 revenue accounting. Enhanced review controls were being implemented; the weakness would not be considered remediated until controls operated effectively for a sufficient period and were tested. Management also identified a material change in controls from centralized lease accounting following ASC 842 adoption.
- Legal matters and potential losses were described as immaterial as of September 30, 2019. Related-party arrangements include service revenue, property leases, travel services, and the MPI option tender offer; the filing reports the tender offer generated $5.1 million of stock-based compensation expense.
- Reported effective tax rates were 18.6% for Q3 and 20.3% for nine months, with share-based compensation tax benefits contributing to the lower rates.
Investor verification points
- Review the drivers and sustainability of revenue growth, backlog conversion, awards, cancellations, and the distinction between backlog and remaining performance obligations.
- Assess the effect of personnel and stock-based compensation costs on margins, including the MPI tender-offer charge.
- Confirm progress in remediating the ASC 606-related material weakness and the effectiveness of the new review controls.
- Evaluate liquidity and cash generation alongside the short-dated $50 million credit facility, substantial lease commitments, and planned growth spending.
- Review related-party transactions and governance, including executive-linked property leases, service relationships, and the option tender offer.