Medpace Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Medpace is a global clinical research organization providing Phase I–IV development services to pharmaceutical, biotechnology, and medical-device companies. Amounts below are in millions except per-share data.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $214.1 | $170.1 | $414.8 | $333.2 |
| Operating income | $35.3 | $23.3 | $61.2 | $43.5 |
| Operating margin | 16.5% | 13.7% | 14.7% | 13.0% |
| Net income | $27.5 | $16.6 | $46.7 | $31.1 |
| Net margin | 12.8% | 9.7% | 11.2% | 9.3% |
| Diluted EPS | $0.73 | $0.45 | $1.24 | $0.85 |
- Q2 revenue grew 25.8% year over year; first-half revenue grew 24.5%. Management attributed growth principally to Oncology and other therapeutic areas. Oncology revenue rose to $64.6 million in Q2 from $43.0 million a year earlier.
- Q2 total direct costs increased 28.8% to $150.3 million, faster than revenue, mainly due to higher reimbursable out-of-pocket expenses and personnel costs. SG&A rose 14.9% to $23.6 million. Lower amortization helped results: Q2 amortization fell 59.5% to $3.0 million, primarily reflecting continued amortization of finite-lived intangible assets.
- Operating cash flow was $80.6 million in the first half, versus $64.6 million in 2018. Investing cash outflow was $7.3 million, principally capital expenditures; financing cash outflow was $76.5 million, primarily term-loan repayment. Cash decreased $3.2 million to $20.1 million.
- At June 30, cash was $20.1 million, current assets $194.3 million, and current liabilities $296.1 million. The company reported no debt after paying off its remaining term-loan obligations in Q2, and $149.8 million available under its revolving facility. Shareholders’ equity was $658.1 million.
- Operating lease liabilities totaled $53.9 million, with $51.8 million of right-of-use assets. The filing also describes an office lease expected to commence in 2020, with future payments of $124.0 million and an initial 20-year term.
Material changes and operating indicators
- Net new business awards were $279.2 million in Q2 and $527.9 million in the first half, compared with $239.9 million and $440.7 million, respectively, in 2018.
- Backlog was $1,171.7 million at June 30, up 19.6% from $979.7 million a year earlier. The company expected $665–$685 million of backlog to convert to revenue over the following 12 months. Separately, remaining performance obligations for active projects were approximately $1,286.6 million.
- Advanced billings increased to $165.4 million from $147.9 million at year-end, while accounts receivable and unbilled balances rose to $149.9 million from $133.4 million. Management said the increase in advanced billings reflected billing or collections before revenue was earned; unbilled receivables declined, primarily due to increased invoicing.
- ASC 842 lease accounting was adopted in Q1 2019, adding operating lease assets and liabilities to the balance sheet. The company recorded a $9.2 million cumulative adjustment to retained earnings related to adoption and reclassification of certain related-party deemed leases.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or other financial guidance. Management said it expects to fund growth, capital expenditures, selective bolt-on acquisitions, and other needs through operating cash flow, cash on hand, and, if needed, borrowing availability.
- Management cautioned that awards and backlog may not reliably predict future revenue. Results can be affected by project scope changes, cancellations, timing of services, and study mix; customers generally can terminate contracts with 30 days’ notice.
- Foreign exchange exposure is primarily associated with the euro. Backlog had unfavorable currency adjustments of $0.8 million in Q2 and $2.6 million in the first half of 2019.
- Internal control over financial reporting remained ineffective due to a material weakness related to implementation of the revenue-recognition standard, ASC 606. Management said remediation was in process; the weakness would not be considered remediated until controls operate effectively for a sufficient period and testing supports that conclusion.
- Related-party dealings include clinical-trial services for companies connected to executives, real-estate leases involving the CEO or family, and executive travel services from a company owned by executives. The filing reports these arrangements and related revenue, expenses, and balances.
- Legal proceedings and potential losses were described as immaterial at June 30, 2019. The company also had $10.4 million in minimum purchase commitments for project supplies, expiring at various times through 2026.
Key facts for investors to verify
- Whether revenue growth, awards, and backlog convert into recognized revenue and cash as expected, considering cancellation rights and study timing.
- Whether direct-cost growth and higher personnel and reimbursable costs affect margins as activity expands.
- The sustainability of cash generation and liquidity after term-loan repayment, including availability and terms of the revolving facility.
- The scale and duration of lease commitments, especially the $124.0 million future-payment lease and related-party leases.
- Progress and testing results for remediation of the ASC 606 material weakness, and the effect of related-party transactions.