Business context and reporting period
Medpace Holdings, Inc. is a global clinical research organization serving pharmaceutical, biotechnology and medical-device companies. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018.
Effective January 1, 2018, Medpace adopted ASC 606 using the modified retrospective method. Revenue and reimbursable expenses are generally presented gross under the new standard, versus the prior presentation that reported some reimbursable amounts separately or net. Accordingly, reported year-over-year revenue and margin comparisons are not directly comparable without adjustment.
Key financial metrics
Amounts below are in millions except per-share data and percentages. “ASC 605 comparison” refers to the filing’s recast 2018 figures using the former accounting presentation.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue, as reported under ASC 606 | $179.3 | $110.6 | $512.5 | $323.5 |
| Revenue, ASC 605 comparison | $143.1 | $110.6 | $403.4 | $323.5 |
| Operating income, as reported | $26.9 | $17.2 | $70.4 | $49.4 |
| Operating income, ASC 605 comparison | $33.1 | $17.2 | $81.7 | $49.4 |
| Net income, as reported | $19.3 | $9.8 | $50.4 | $27.8 |
| Net income, ASC 605 comparison | $24.0 | $9.8 | $59.1 | $27.8 |
| Diluted EPS, as reported | $0.52 | $0.25 | $1.36 | $0.69 |
- On the ASC 605 comparison basis, revenue increased 29% in Q3 and 25% year to date. ASC 606 added $36.2 million and $109.1 million, respectively, to reported 2018 revenue versus that presentation.
- ASC 605 comparison operating margins were approximately 23.2% in Q3 2018 versus 15.5% in Q3 2017, and 20.3% for the first nine months of 2018 versus 15.3% in 2017. The filing’s reported ASC 606 operating margins were 15.0% and 13.7%, respectively; presentation differences make direct comparison inappropriate.
- Operating cash flow was $117.1 million for the first nine months, versus $68.7 million a year earlier. Capital expenditures were $12.6 million; investing cash outflow was $12.8 million.
- Cash and cash equivalents were $22.2 million at September 30, 2018, including $9.6 million held by foreign subsidiaries. The revolving facility had $149.8 million available; no revolver borrowings were outstanding.
- Total debt principal was $114.5 million, down from $222.6 million at December 31, 2017. Nine-month financing cash outflow of $107.7 million primarily reflected $70.0 million of revolver repayments and $38.2 million of term-loan repayments. Scheduled principal payments are $15.5 million in 2020 and $99.0 million in 2021.
- Current assets were $153.1 million and current liabilities $232.1 million. Advanced billings were $133.4 million, while accounts receivable and unbilled revenue totaled $108.3 million.
- The effective tax rate was 24.2% for Q3 and 22.0% year to date, compared with 35.1% and 35.7% in 2017. Management attributed the decrease mainly to U.S. tax reform and other tax items.
Material changes versus the prior comparable period
- ASC 606 adoption increased reported revenue and direct costs by presenting reimbursable project expenses gross. On the former ASC 605 basis, growth was driven mainly by Oncology, AVAI and other therapeutic areas, as well as higher service activity.
- On the ASC 605 comparison basis, nine-month direct service costs increased 18%, reflecting personnel, laboratory and contracted-service costs. SG&A increased $8.6 million, with higher personnel, bad-debt, offering, exit and recruitment costs among the drivers.
- Cash from operations rose substantially, supported in part by increases in accrued expenses and advanced billings, partly offset by growth in receivables and unbilled revenue.
- Medpace completed significant debt reduction. In 2017, financing cash outflow had instead been dominated by $95.3 million of share repurchases.
- Cinven sold its remaining shares in August 2018 and no longer beneficially owned Medpace stock. Medpace received no proceeds from the secondary offerings. The company ceased to be a Nasdaq “controlled company”; certain governance requirements have a phase-in period.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management describes plans for organic growth and potentially selective bolt-on acquisitions, funded by operating cash flow, existing cash and available borrowing capacity.
- Net new business awards were $227.6 million for Q3 and $668.3 million for the first nine months on an ASC 606 basis. ASC 606 backlog was $1,024.5 million at quarter-end; the filing also reports $1,047.1 million of remaining performance obligations for active projects. On an ASC 605 basis, backlog was $608.7 million, up 19.4% from $510.0 million a year earlier. Management cautions that awards and backlog may not reliably predict future revenue because of cancellations, scope changes and timing.
- Most contracts can be terminated by customers, typically on 30 days’ notice. Revenue and profitability depend on estimates of costs to complete projects; revisions can produce material revenue adjustments. Unapproved scope changes may cause cost overruns or reduced margins.
- Other exposures include foreign-exchange movements, customer collection and funding risks, and uncertainty in estimating project costs and contract settlements. Management says legal matters and potential losses were immaterial at September 30, 2018.
- ASC 606 adoption reduced opening accumulated deficit by $2.7 million. Management revised certain provisional tax estimates under the Tax Cuts and Jobs Act; the accounting for some tax effects, including GILTI, remained subject to policy decisions or further guidance.
- Related-party arrangements include the CEO-owned headquarters lease, leases involving entities connected to the CEO and family, and executive-related private aviation services. The filing reports $1.0 million of nine-month aviation travel expense and $1.6 million of headquarters lease expense.
- Management concluded disclosure controls were effective at the reasonable-assurance level. It reported no significant risk-factor changes other than the loss of controlled-company status and related governance transition.
Most important facts for investors to verify
- Use the filing’s ASC 605 recast when assessing underlying year-over-year revenue, operating income and net income growth; reported ASC 606 figures include a significant gross-presentation effect.
- Assess cash conversion and working-capital quality, particularly the contribution from accrued expenses and advanced billings and the increase in receivables and unbilled revenue.
- Evaluate backlog and awards alongside cancellations, contract duration and conversion timing; management warns these metrics are not dependable revenue forecasts.
- Review debt repayment capacity and upcoming maturities, as well as the variable-rate exposure of the credit facilities.
- Monitor cost-to-complete estimates, customer-approved scope changes, tax judgments and governance compliance following the change in controlled-company status.