Medpace Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. Medpace is a global clinical research organization providing drug and medical-device development services. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Service revenue, net | $93.8 | $87.8; up 6.8% |
| Total revenue | $106.6 | $99.6; up 7.1% |
| Operating income and margin | $15.9; 15.0% | $12.9; 12.9% |
| Net income and net margin | $8.4; 7.9% | $3.4; 3.5% |
| Diluted earnings per share | $0.20 | $0.11 |
| Operating cash flow | $(0.7) | $12.6 |
| Capital expenditures | $4.4 | $3.5 |
| Cash and cash equivalents at period-end | $29.3; $29.6 including restricted cash | $37.1 cash at Dec. 31, 2016 |
| Total debt at period-end | $161.9 | $165.0 term-loan principal at Dec. 31, 2016 |
Reimbursed out-of-pocket revenue was $12.8 million, matched by an equal expense and therefore with no direct effect on operating profit. Current assets were $128.3 million versus current liabilities of $150.0 million at March 31. The company reported $150 million available on its revolving credit facility, with no revolver borrowings and $0.1 million of letters of credit outstanding. Net debt, calculated as total debt less cash and cash equivalents, was approximately $132.6 million.
Changes versus the prior comparable period
- Service revenue growth was attributed primarily to Cardiovascular, Oncology, and antiviral and anti-infective work.
- Operating income increased 23.9% as revenue growth and lower amortization outweighed higher direct and administrative costs. Direct costs rose 8.8%, SG&A rose 12.2%, and amortization fell 25.4% to $9.4 million, largely reflecting accelerated amortization of finite-lived intangibles.
- Net income increased to $8.4 million from $3.4 million. Net interest expense fell to $1.8 million from $6.0 million, reflecting lower average debt and a lower effective rate under the December 2016 credit agreement. Effective tax rate declined to 38.7% from 42.2%.
- Operating cash flow shifted from $12.6 million provided to $0.7 million used. The company cited lower accrued expenses ($10.5 million), prefunded study costs ($3.5 million), and advanced billings ($5.2 million), along with higher receivables, as uses of cash.
- Net new business awards were $93.9 million, down from $106.4 million. Backlog nevertheless rose 8.0% year over year to $483.8 million; approximately $258–$268 million was expected to convert to net service revenue over the following 12 months.
Outlook, risks, and notable items
- No specific revenue, earnings, or margin guidance was provided. Management said it believes liquidity and capital resources will be sufficient for near- and longer-term needs, while cautioning that operating cash generation and future borrowing availability are not assured.
- Management expects to fund growth, capital spending, debt payments, share repurchases, and potential selective acquisitions through cash, operating cash flow, and available borrowings. Backlog and award measures are not assured indicators of future revenue; cancellations, changes in project scope, timing, and study duration can affect conversion.
- Customers generally may terminate contracts without cause on 30 days’ notice. Other material risks include the ability to generate cash to service debt, access refinancing or credit, foreign-exchange exposure, and execution of clinical studies. The filing reported no significant change to previously disclosed risk factors.
- On April 27, 2017, the board authorized a share repurchase program of up to $50 million; timing and amount are discretionary and depend on market and other conditions.
- Related-party dealings include clinical-services revenue from Coherus of $3.3 million in the quarter and a headquarters lease with an entity wholly owned by the CEO. The company also completed a January purchase of nearby real estate from a CEO-owned entity for $355,500, based on an independent broker’s opinion of value. These relationships merit review for terms and governance.
- Ordinary-course legal proceedings were described as not expected to have a material adverse effect; management said recognized losses and potential additional losses were immaterial. Disclosure controls were judged effective as of March 31, 2017.
- The company planned to adopt the new revenue-recognition standard in Q1 2018 and was still evaluating its impact, including performance obligations in fixed-fee contracts. The effect of the new lease standard was also under evaluation.
Key facts for investors to verify
- Whether the $483.8 million backlog converts as expected, given lower quarterly net awards and the risk of cancellations or scope changes.
- Whether operating cash flow rebounds and working-capital movements, especially accrued expenses and advanced billings, normalize.
- Debt amortization and interest-rate terms, covenant headroom, and the company’s ability to service debt while funding growth and the announced repurchase authorization.
- The economics, approval process, and safeguards around related-party services, leases, travel, and property transactions.
- The eventual financial and disclosure impact of adopting the revenue-recognition and lease accounting standards.