Business context and reporting period
Medpace Holdings, Inc. provides global clinical research and drug and medical-device development services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company completed its IPO on August 16, 2016; its shares began trading on Nasdaq on August 11.
Key financial metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $107.8 | $92.1 | $313.3 | $263.0 |
| Service revenue, net | $94.8 | $81.6 | $275.2 | $234.4 |
| Operating income | $12.6 | $7.2 | $39.6 | $21.5 |
| Operating margin | 11.7% | 7.8% | 12.6% | 8.2% |
| Net income (loss) | $5.0 | $(0.1) | $13.4 | $(0.1) |
| Diluted EPS | $0.13 | $(0.00) | $0.39 | $(0.00) |
| Interest expense, net | $4.7 | $6.7 | $16.6 | $20.7 |
Reimbursed out-of-pocket revenue was $13.0 million in Q3 and $38.1 million for the nine months; the corresponding expenses were equal, with no direct profit contribution. Direct costs excluding depreciation and amortization were 54.0% of service revenue in Q3 and 53.6% for the nine months, versus 51.2% and 51.0% in 2015, respectively.
For the nine months, operating cash flow was $62.2 million, investing cash flow $(7.8) million and financing cash flow $(54.9) million. Cash and cash equivalents were $14.6 million at September 30, plus $3.4 million restricted cash. Current assets were $120.5 million and current liabilities $156.6 million. Gross term-loan principal was $165.0 million; the balance-sheet carrying value of long-term debt, net of discount and issuance costs, was $154.6 million. The company had no revolver borrowings and $60.0 million of undrawn capacity.
Material changes versus the prior comparable period
- Q3 revenue rose 17.0%; nine-month revenue rose 19.1%. Management attributed service-revenue growth primarily to Oncology, antiviral and anti-infective, and Cardiovascular activity.
- Operating income increased in both comparison periods and the company moved from small net losses to net income. Lower amortization and interest expense supported results; direct costs grew faster than service revenue.
- Net new business awards were $109.1 million in Q3 and $327.2 million for the nine months. Backlog was $480.4 million at September 30, up 14.0% year over year. Management expected $275 million to $285 million of backlog to convert to net service revenue over the next 12 months.
- The IPO generated approximately $173.6 million in net proceeds. Together with cash on hand, proceeds funded repayment of $175.0 million of term debt; the company subsequently repaid another $35.0 million using operating cash flow. Term-loan principal fell from $390.0 million at year-end 2015 to $165.0 million.
Outlook, commentary, risks and unusual items
The filing provides no formal revenue or earnings guidance. Management said it expects liquidity sources to fund needs over the next 12 months and longer term, while identifying investment in growth, capital expenditures, debt payments, selective acquisitions and public-company costs as expected cash needs. It estimated additional annual public-company costs of $3.0 million to $4.0 million.
- Management cautioned that backlog and awards are not reliable predictors of future revenue: contracts may be cancelled or delayed, scopes can change, and most customers can terminate without cause on typically 30 days’ notice.
- Key disclosed risks include customer and therapeutic-area concentration, difficulty converting backlog, dependence on small and mid-sized biopharmaceutical customers and their funding, pricing and execution pressures, clinical-trial and regulatory liabilities, recruitment and retention, international and currency exposure, and variable-rate debt.
- Coherus, a related party through the CEO’s board role, accounted for $18.2 million of nine-month service revenue and $4.4 million of receivables at September 30. The filing also discloses related-party leases and other transactions. The Symplmed task-order fee structure was amended during Q3, and the company recorded a $0.4 million negative service-revenue adjustment from Symplmed in the quarter.
- In connection with the IPO, modification of pre-IPO options resulted in $3.1 million of incremental stock-based compensation expense in Q3 and reclassification of a $10.5 million liability to additional paid-in capital.
- Legal proceedings were described as ordinary-course matters; management considered recognized and potential losses immaterial. Disclosure controls were assessed as effective at the reasonable-assurance level, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether backlog converts at the anticipated pace and value, including the stated $275–$285 million expected within 12 months, given cancellation and delay risks.
- How direct-cost growth, staffing and project mix affect service-revenue margins as activity expands.
- Customer concentration and the continuing scale and terms of Coherus and other related-party business.
- Debt repayment, variable-rate exposure, covenant compliance and available liquidity; the filing reports covenant compliance and a 1.20:1.00 net-debt-to-consolidated-EBITDA ratio.
- Post-IPO share ownership, including controlling stakes held by Cinven and the CEO, potential share sales after lock-up periods, and the company’s controlled-company governance exemptions.
- Potential effects of public-company expenses, option compensation, and the company’s substantial goodwill and intangible assets on future earnings and impairment risk.