Medpace Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Medpace provides full-service clinical research and drug and medical-device development services. Comparisons are with Q1 2019 unless otherwise noted. Amounts below are in millions except per-share data.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date | Change |
|---|---|---|---|
| Revenue | $230.9 | $200.7 | +15.0% |
| Operating income | $35.5 | $25.9 | +37.1% |
| Operating margin | 15.4% | 12.9% | +2.5 percentage points |
| Net income | $29.0 | $19.2 | +50.8% |
| Net margin | 12.5% | 9.6% | +3.0 percentage points |
| Diluted EPS | $0.76 | $0.51 | +$0.25 |
| Operating cash flow | $49.1 | $34.0 | +$15.1 |
| Cash and cash equivalents | $134.0 | $131.9 at Dec. 31, 2019 | +$2.1 |
| Debt borrowings | None | — | $49.8 available on revolving facility |
Total direct costs rose 13.8% to $165.8 million, including $77.0 million of reimbursed out-of-pocket expenses. SG&A increased 17.9% to $25.1 million; depreciation and amortization together fell to $4.5 million from $7.8 million, largely reflecting continued amortization of finite-lived intangibles. The filing does not present a gross-margin measure.
Cash used in investing was $5.5 million, primarily property and equipment expenditures. Financing used $40.4 million, mainly reflecting $41.8 million of cash share repurchases. Current assets were $303.0 million versus current liabilities of $338.7 million; current liabilities include $189.6 million of advanced billings. Operating lease liabilities totaled $64.0 million. The company also disclosed $125.9 million of future payments for leases not yet commenced, including $124.0 million for a Cincinnati office lease.
Material changes and operating indicators
- Revenue growth was driven primarily by Oncology, AVAI and other uncategorized therapeutic areas. Oncology revenue was $69.2 million versus $56.0 million; AVAI revenue was $25.1 million versus $19.9 million.
- Net new business awards were $246.9 million, compared with $248.7 million in Q1 2019. Backlog grew 16.8% year over year to $1.294 billion at March 31, 2020; unfavorable foreign-exchange effects were $3.9 million in the quarter. Management cautioned that backlog and awards are not reliable indicators of future revenue.
- Remaining performance obligations for active projects were approximately $1.3 billion. This measure is disclosed separately from backlog.
- The board added $50.0 million to the repurchase authorization, bringing total authorization to $100.0 million. The company repurchased 661,637 shares for $43.2 million during the quarter; $56.8 million remained authorized.
- The effective tax rate declined to 20.6% from 22.1%, primarily due to FDII and share-based compensation tax benefits. The company adopted the expected-credit-loss accounting standard in Q1; it had no financial-statement impact.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic had already significantly adversely affected Q1 and expected increasing adverse effects on future results. Site disruption, travel restrictions and slower patient recruitment reduced trial starts and slowed new awards. Management warned of possible cancellations and client funding constraints, particularly among smaller clients, and said the future financial impact could not be reasonably estimated but would likely be material. Some staff reductions were implemented; labs remained operational with safety modifications, and remote and virtual monitoring approaches were used.
- No numerical earnings or revenue guidance is provided in the filing. Management expects to fund operations and growth with cash, operating cash flow and, if needed, credit-facility borrowings; it also described possible selective bolt-on acquisitions and investments.
- The unsecured revolving credit facility is up to $50.0 million and was extended to March 31, 2021. There were no borrowings at quarter end; $0.2 million of letters of credit was outstanding.
- Legal matters in the ordinary course were described as immaterial, with reserves recorded; management considered potential additional losses immaterial. Minimum purchase commitments for project supplies totaled $11.8 million.
- Related-party arrangements include customer relationships and leases involving the CEO or other executives. The Cincinnati office lease not yet commenced represents a substantial long-term commitment.
Important facts for investors to verify
- How COVID-19 affected subsequent trial starts, site activity, recruitment, cancellations, awards and conversion of backlog, particularly for smaller clients.
- Whether reported backlog and performance obligations convert to revenue on expected timing and margins, given their different definitions and the company’s cancellation exposure.
- The sustainability of Q1 margin expansion, including the impact of personnel and reimbursed costs and lower amortization expense.
- The pace and pricing of further share repurchases, and the effect on liquidity alongside capital expenditures and the future office-lease commitment.
- The terms, business rationale and governance safeguards for related-party customers, executive-linked leases and travel services.