Medpace Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Medpace is a global clinical research organization providing drug and medical-device development services. Financial amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue, as reported under ASC 606 | $170.1 | $106.2 | $333.2 | $212.8 |
| Revenue, 2018 recast under prior ASC 605 | $136.8 | $106.2 | $260.3 | $212.8 |
| Operating income, as reported | $23.3 | $16.3 | $43.5 | $32.2 |
| Operating income, 2018 recast under ASC 605 | $26.2 | $16.3 | $48.6 | $32.2 |
| Net income, as reported | $16.6 | $9.6 | $31.1 | $18.0 |
| Diluted EPS, as reported | $0.45 | $0.23 | $0.85 | $0.44 |
On the comparable ASC 605 presentation, revenue rose 60.2% in Q2 and 56.6% for the half year; operating income increased 43.4% and 50.7%, respectively. The ASC 606 presentation reports higher revenue partly because reimbursable expenses are now presented gross with related costs. Management’s reconciliation also shows ASC 606 reduced 2018 net income versus the prior-standard presentation by $2.2 million for Q2 and $3.9 million for the first half. Revenue timing is affected by the new standard, so reported year-over-year figures are not directly comparable without the recast.
Reported operating margin was approximately 13.7% in Q2 and 13.0% for the first half; on the ASC 605 recast, it was approximately 19.1% and 18.7%, respectively. The different revenue presentation materially affects these ratios.
- Cash flow: First-half operating cash flow was $64.6, versus $29.7 in 2017. Investing outflow was $10.0, mainly capital expenditures of $9.8; financing outflow was $58.0, principally $50.0 of revolving-credit repayments and $8.3 of term-loan payments. Cash and restricted cash decreased $4.3 to $22.2.
- Liquidity: Current assets were $158.5 and current liabilities $233.2 at June 30, including $120.9 of advanced billings. Revolver availability was $129.8. Cash included approximately $11.0 held by foreign subsidiaries.
- Debt: Total debt principal was $164.4, including $20.0 outstanding on the revolving facility and $144.4 on the term loan. Debt net of cash was approximately $142.1. Remaining 2018 principal payments were $8.3.
- Balance sheet: Total assets were $968.2, shareholders’ equity $540.1, and goodwill $661.0. Accounts receivable and unbilled receivables totaled $115.4, up from $83.1 at year-end 2017.
- Tax: Effective tax rates were 23.0% for Q2 and 20.6% for the first half, compared with 33.4% and 36.0% a year earlier; the filing cites the lower U.S. corporate tax rate and other tax items.
Changes, outlook, and risks
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It changed revenue timing and gross presentation of reimbursable expenses; the opening accumulated-deficit adjustment was $2.7. The company revised certain adoption figures for immaterial misstatements, which it said did not materially affect results.
- Growth excluding the ASC 606 presentation effect was attributed to therapeutic-area activity, including AVAI, metabolic and other areas in Q2, and oncology, cardiology and other areas for the first half. Direct service costs also rose with personnel, laboratory and contracted-service costs. SG&A increased, partly due to personnel, bad debt, secondary-offering costs and exit charges.
- Net new business awards were $239.9 for Q2 and $440.7 for the first half under ASC 606. ASC 606 backlog was $979.7 at June 30; the filing separately reports approximately $1,014.2 of remaining performance obligations for active projects. Under ASC 605, backlog was $583.6, up 17.7% year over year; $335–$345 was expected to convert to net service revenue over the next 12 months. Management cautions that awards and backlog may not reliably predict future revenue.
- No specific earnings or revenue guidance was provided. Management expects to fund operations, growth and capital needs through operating cash flow, existing cash and available borrowing capacity; it may pursue selective acquisitions and investments.
- Key operating risks include customer termination rights (typically on 30 days’ notice), cancellations, changing study scope, cost-to-complete estimates and the possibility customers do not approve price changes for added work. These factors can affect revenue and contract profitability. Foreign exchange exposure includes the euro; management reported no material change in market-risk disclosures.
- Legal matters in the ordinary course were described as immaterial, and the company reported no significant change to previously disclosed risk factors. Disclosure controls were judged effective; revenue-recognition processes were updated for ASC 606.
- Cinven sold 6.0 million shares in secondary offerings; Medpace sold no shares and received no proceeds. Cinven held 29.3% at June 30. The filing also discloses related-party arrangements, including leases with entities associated with the CEO and executive travel services.
Important facts for investors to verify
- Use the ASC 605 recast when assessing operating growth and margins against 2017; distinguish it from the ASC 606 reported revenue and profit figures.
- Review cash conversion and working-capital movements, particularly the growth in receivables, accrued project expenses and advanced billings.
- Track debt repayment, variable-rate interest costs, and the availability and terms of the revolving facility.
- Assess the quality and conversion timing of awards, backlog and remaining performance obligations; these measures have differing definitions and are not guarantees of revenue.
- Examine the assumptions behind project cost estimates, cancellation settlements, tax estimates and related-party transactions.