Medpace Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Medpace is a global clinical research organization providing drug and medical-device development services.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net service revenue | $94.6 | $92.6 | $188.3 | $180.4 |
| Total revenue | $106.2 | $106.0 | $212.8 | $205.5 |
| Income from operations | $16.3 | $14.1 | $32.2 | $27.0 |
| Net income | $9.6 | $5.0 | $18.0 | $8.4 |
| Diluted EPS | $0.23 | $0.15 | $0.44 | $0.26 |
| Operating margin, based on total revenue | 15.3% | 13.3% | 15.1% | 13.1% |
| Net margin, based on total revenue | 9.0% | 4.7% | 8.5% | 4.1% |
- Q2 total revenue was nearly flat (+0.2%); service revenue rose 2.1%, while reimbursed out-of-pocket revenue fell 12.4%. For the first half, total revenue grew 3.5% and service revenue grew 4.4%.
- Operating income increased 15% in Q2 and 19% for the first half. Net income rose 93% and 114%, respectively. Lower amortization and substantially lower interest expense supported earnings growth.
- Direct costs increased 5.5% in Q2 and 7.1% in the first half, reflecting additional personnel, laboratory costs and office rent. First-half SG&A rose 5.6%, primarily from personnel costs, partly offset by lower bad-debt expense. Reimbursed expenses matched reimbursed revenue and had no stated net impact.
Cash flow, balance sheet and capital
- First-half operating cash flow was $29.7 million, versus $20.5 million. Investing cash outflow was $6.5 million, including $6.0 million of property and equipment spending; financing cash outflow was $32.5 million, principally $26.4 million of share repurchases and $6.2 million of debt payments.
- Cash, cash equivalents and restricted cash totaled $29.3 million at June 30, down $8.1 million from year-end. Cash and cash equivalents were $29.1 million; approximately $9.3 million was held by foreign subsidiaries.
- Debt was $158.8 million, substantially the term loan; $0.2 million was drawn on the revolving facility, with $149.8 million available. Current and long-term debt, net of discounts and issuance costs, were $14.4 million and $143.2 million. Scheduled principal includes $99.0 million due in 2021.
- Current assets were $123.1 million and current liabilities $155.3 million. The company reported total shareholders’ equity of $607.4 million.
- The company repurchased 1.04 million shares for $26.4 million at an average $25.30 per share under its $50 million authorization, which expires in April 2018 or when exhausted. Approximately $23.6 million remained authorized at June 30.
Backlog, outlook and notable items
- Backlog was $495.9 million at June 30, up 6.5% from $465.7 million a year earlier. Management expected approximately $265 million to $275 million to convert to net service revenue over the next 12 months. Net new business awards were $105.3 million in Q2 and $199.2 million for the first half, below the respective 2016 amounts of $111.7 million and $218.1 million. The filing cautions that awards and backlog are not reliable indicators of future revenue because of changes in scope, cancellations, timing and other factors.
- No specific earnings or revenue guidance is provided. Management said it expects to fund operations, growth, capital spending, debt payments and potential selective acquisitions through operating cash flow, existing cash and available borrowing capacity, and believes liquidity is sufficient for near- and longer-term needs. It also cautions that cash generation or future borrowing availability may prove insufficient.
- In May, Medpace acquired bankrupt NephroGenex through an exchange of its unsecured claim for the company’s equity. The asset purchase included $22.2 million of deferred tax assets, partly offset by valuation allowances, and resulted in a $21.4 million deferred credit to be recognized in income tax provision as the tax assets are realized. The acquisition contributed a favorable tax effect; its future realization is uncertain.
- The six-month effective tax rate was 36.0%, versus 40.6% in 2016; management cited higher projected pretax income, favorable effects from domestic uncertain tax positions and acquired tax attributes. The tax rate for Q2 was 33.4%, versus 39.4%.
- A new risk disclosure notes that Cinven-affiliated holders pledged 22,999,997 shares, approximately 56.4% of shares outstanding at June 21, as collateral for their separate $150 million borrowing. Medpace is not a borrower or party to that agreement. Foreclosure could affect controlled-company status, governance compliance, control under Medpace’s credit facilities and the share price.
- Related-party matters include the CEO-owned headquarters landlord, leases involving entities owned by the CEO and family, executive-related aviation services, and service contracts with companies linked to directors or executives. The CEO sold his entire Xenon equity position during Q2. Legal matters were described as ordinary-course and not expected to have a material adverse effect; the company said no material changes to previously disclosed risk factors other than the pledge-related disclosure.
Important facts for investors to verify
- Whether service revenue growth, award trends and backlog conversion support sustained operating growth, given Q2’s nearly flat total revenue and lower first-half awards.
- The assumptions, valuation allowances and timing for realization of NephroGenex tax attributes and recognition of the deferred credit.
- Debt repayment capacity, including the 2021 maturity concentration, and the effect of repurchases on cash and liquidity.
- Potential consequences of foreclosure on Cinven’s pledged shares, including ownership control, credit-agreement provisions and public-market share supply.
- Revenue, receivables, advances and study-cost balances involving related parties, and the continuing governance and disclosure implications of those relationships.