Medpace Holdings, Inc. — Q1 2019 Form 10-Q
Business and period: Medpace provides clinical research and drug and medical-device development services to pharmaceutical, biotechnology and medical-device companies. This unaudited report covers the three months ended March 31, 2019; comparative results are for Q1 2018.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $200.7 million | $163.1 million; up 23.1% |
| Operating income / margin | $25.9 million / 12.9% | $20.1 million / 12.3% |
| Net income | $19.2 million | $14.6 million; up 31.9% |
| Diluted EPS | $0.51 | $0.40 |
| Operating cash flow | $34.0 million | $23.3 million |
| Cash and cash equivalents | $30.1 million | $23.3 million at Dec. 31, 2018 |
| Debt | $56.4 million term loan; no revolver borrowings | $80.4 million term loan at Dec. 31, 2018 |
Revenue growth was driven primarily by Oncology, Metabolic and other therapeutic areas. Operating expenses rose 22.3%, including higher personnel costs and reimbursable project expenses; SG&A rose 33.2%, partly due to personnel and local non-income taxes. Lower amortization and interest expense supported earnings. The effective tax rate increased to 22.1% from 17.6%.
Investing cash outflow was $3.8 million, mainly capital expenditures; financing cash outflow was $23.0 million, primarily the $24.0 million term-loan repayment. The company reported $149.8 million available under its revolving facility. Current assets were $182.4 million versus current liabilities of $264.5 million; current liabilities include $150.2 million of advance billings.
Changes, outlook and risks
- Net new business awards were $248.7 million, versus $200.7 million a year earlier. Backlog was $1.108 billion at March 31, up 21.8% from $909.5 million a year earlier; management expected $615–$635 million to convert to revenue in the next 12 months. The filing cautions that awards and backlog may not reliably predict future revenue because of cancellations, scope changes and timing.
- Remaining performance obligations for active projects were approximately $1.156 billion. This measure is disclosed separately from backlog.
- ASC 842 lease accounting was adopted in Q1, adding $53.6 million of operating lease right-of-use assets and $55.6 million of lease liabilities at March 31. An additional office lease not yet commenced carries $124.0 million of future payments and a 20-year initial term.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It described anticipated funding needs for operational growth, capital spending, debt payments, share repurchases and selective acquisitions, expected to be funded primarily by operating cash flow and existing liquidity.
- Customer contracts can generally be terminated on short notice, and cancellations, trial execution, enrollment, therapeutic-area mix and foreign exchange can affect results. The euro is the largest foreign-currency exposure; the average euro rate was $1.14 versus $1.23 a year earlier.
- Internal control over financial reporting remained ineffective because of a material weakness related to implementation of ASC 606 revenue accounting. Management said remediation was underway but not complete. Legal matters and potential losses were described as immaterial; minimum purchase commitments totaled $10.1 million through 2026.
Investor facts to verify
- Whether backlog and new-award growth convert into recognized revenue, given termination rights and project timing.
- Progress and testing results for remediation of the ASC 606-related material weakness.
- Lease exposure, including the future office lease and related-party property arrangements.
- Collection quality: the allowance for doubtful accounts rose to $5.9 million from $1.0 million at year-end, while net receivables and unbilled balances were $129.6 million.
- Related-party activity: Q1 related-party revenue was $5.1 million; certain executives have ties to customers, and the CEO owns or is associated with leased property and service providers.