Medpace Holdings, Inc. annual report, FY2019

Medpace Holdings, Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. Medpace is a global, full-service clinical research organization focused on Phase I–IV development services. This is an annual report, not a standalone quarterly filing; fourth-quarter results are noted below.

Financial performance and liquidity

Metric	FY 2019	FY 2018
Revenue	$861.0 million	$704.6 million
Operating income	$127.3 million	$101.0 million
Operating margin	14.8%	14.3%
Net income	$100.4 million	$73.2 million
Diluted EPS	$2.67	$1.97
Operating cash flow	$201.9 million	$156.6 million
Capital expenditures	$17.9 million	$16.0 million

Revenue increased 22.2% as reported, primarily reflecting stronger activity in Oncology and other therapeutic areas. Comparability is materially affected by the adoption of ASC 606; see “Material changes” below.
Direct costs were $615.3 million, including $294.3 million of reimbursed out-of-pocket expenses. SG&A was $95.2 million; depreciation and amortization totaled $23.2 million.
Net income rose 37.2%. The effective tax rate declined to 19.5% from 22.1%, mainly due to excess tax benefits on share-based compensation and FDII tax benefits.
Operating cash flow grew to $201.9 million. Cash and equivalents were $131.9 million at year-end, compared with $23.3 million a year earlier. Working capital was negative $26.0 million, largely in a business model with substantial customer advance billings.
No debt was outstanding at year-end. A new unsecured revolving credit facility provides up to $50 million; $49.8 million was available, with $0.2 million in letters of credit. The facility bears interest at LIBOR plus 1.00% and was scheduled to expire 364 days after September 30, 2019.
Fourth-quarter revenue was $229.9 million, operating income $36.1 million, and net income $29.8 million; diluted EPS was $0.78. Versus Q4 2018, reported revenue increased 19.7% and net income increased 31.0%.

Material changes versus the prior comparable period

ASC 606 presentation reports reimbursable expenses gross in revenue and costs, unlike the prior ASC 605 presentation. The filing restates FY 2018 revenue under ASC 605 to $549.4 million, versus $704.6 million as reported under ASC 606; FY 2018 net income under ASC 605 would have been $81.6 million, versus $73.2 million as reported. Therefore, reported revenue growth and margins are not directly comparable across accounting presentations.
Net new business awards on an ASC 606 basis increased to $1,094.4 million from $899.4 million. Year-end backlog grew 21.3% to $1,283.2 million from $1,057.9 million.
Employee count rose to approximately 3,500 from 2,900. Stock-based compensation expense increased to $20.7 million from $6.5 million, including $5.1 million related to a tender offer and option reissuance involving related party Medpace Investors, LLC.
Medpace repaid its prior term loan and terminated its prior secured facilities in 2019, replacing them with the smaller unsecured revolving facility. Interest expense fell to $1.6 million from $8.2 million.
Adoption of ASC 842 added operating lease right-of-use assets of $52.2 million and lease liabilities of $56.2 million at year-end. The prior-year balance sheet did not present these amounts in the same way.

Outlook, commentary, risks and unusual items

Management expects approximately $695 million to $715 million of year-end backlog to convert to revenue in 2020; the remainder is expected in later years. The filing provides no formal revenue, earnings, or margin guidance.
Management says existing cash, operating cash flows, and available borrowing capacity should fund needs over the next 12 months and longer term, while cautioning that future cash generation and borrowing availability are not assured.
Key risks include customer cancellations or delays (most contracts can be terminated without cause on 30 days’ notice), backlog conversion uncertainty, and reliance on small and mid-sized biopharmaceutical customers. These customer groups represented 71% and 19% of 2019 revenue, respectively.
The top 10 customers generated 28.8% of revenue; the largest customer generated 7.0%. Foreign exchange is also relevant: a 10% currency-rate change was estimated to change 2019 pretax income by approximately $6.7 million.
Other disclosed risks include competitive pricing and staffing constraints, trial quality and patient safety, data privacy and cybersecurity, international regulation, and customers’ access to capital. Revenue estimates depend on management’s estimates of costs to complete contracts; this was the auditor’s critical audit matter.
Related-party arrangements include leases of Cincinnati facilities and travel services involving the CEO or executives, and clinical services provided to companies with executive or employee connections. Management stated pending legal matters were not expected to have a material adverse effect; no material off-balance-sheet arrangements were reported.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls and remediation of the prior-year material weakness related to revenue recognition. The company ceased to be an emerging growth company for 2019.

Important facts for investors to verify

Compare growth and margins on a consistent ASC 606 basis; reported FY 2018 figures differ substantially from the filing’s ASC 605 presentation.
Track whether the $695–$715 million expected 2020 backlog conversion is achieved, and monitor cancellations, customer funding, and award trends.
Assess cash generation alongside negative working capital, customer advance billings, and the growth in receivables and accrued project costs.
Confirm the status and renewal or replacement of the $50 million revolving facility, given its stated 364-day term, and review lease commitments, including the new Cincinnati office lease.
Review the $5.1 million related-party option reissuance expense, other related-party dealings, and customer concentration.