Medpace Holdings, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. Unless noted, amounts are U.S. dollars. Medpace is a global clinical research organization providing full-service Phase I–IV development and laboratory services; it reports one operating segment. The 2016 IPO and December refinancing are significant events in the period.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net service revenue | $370.6 million | $320.1 million | +15.8% |
| Total revenue, including reimbursed expenses | $421.6 million | $359.1 million | +17.4% |
| Operating income | $52.5 million | $20.6 million | +$31.9 million |
| Net income (loss) | $13.4 million | $(8.7) million | +$22.1 million |
| Diluted EPS | $0.37 | $(0.28) | Turned profitable |
| Operating cash flow | $91.7 million | $85.9 million | +$5.9 million |
| Capital expenditures | $13.5 million | $6.5 million | +$7.1 million |
Operating income was approximately 14.2% of net service revenue, compared with 6.4% in 2015. Direct costs rose 21.3%, faster than service revenue, primarily due to staffing and project growth; direct costs were 53.6% of net service revenue versus 51.1% in 2015. Reimbursed out-of-pocket revenue and expenses each increased to $51.0 million and have no reported gross profit effect.
Net income included a $10.7 million loss on extinguishment of debt in connection with the December refinancing. Interest expense declined to $19.4 million from $27.3 million, while amortization fell to $50.7 million from $63.1 million. The effective tax rate was 38.9%; 2015’s rate was negative 10.8%, reflecting losses and tax reconciliation items.
Fourth-quarter results
Q4 2016 net service revenue was $95.4 million, compared with $85.7 million in Q4 2015. Operating income was $12.9 million versus an operating loss of $0.9 million. Net loss was $21,000, compared with a net loss of $8.6 million. The filing does not provide a clear Q4 explanation separating the impact of the refinancing charge from other quarterly items.
Liquidity, debt and business indicators
- Cash and cash equivalents were $37.1 million at year-end; restricted cash was $0.3 million. Operating cash flow was $91.7 million.
- Working capital was negative $35.4 million, with current liabilities of $168.6 million and current assets of $133.2 million.
- Gross term debt was $165.0 million, down from $390.0 million at year-end 2015. The company had no revolver borrowings and $150.0 million of undrawn revolving capacity under its new facility, which matures in December 2021. The term loan carried a 2.15% rate at year-end and bears variable interest.
- The $150 million revolver and term loan are secured and subject to financial and other covenants. The company reported compliance with all covenants at December 31, 2016. Management said liquidity sources were expected to meet needs over the next 12 months and longer term, while cautioning that cash generation and future borrowing availability are not assured.
- Net new business awards were $427.0 million, up from $359.5 million. Backlog rose 12.6% to $483.9 million; Medpace expected $265–$275 million of that balance to convert to service revenue in 2017. Management cautions that awards and backlog are not assured revenue and can be affected by cancellations, delays and scope changes.
Material changes, outlook and risks
- Service revenue growth was attributed primarily to stronger Oncology and antiviral/anti-infective activity. Headcount increased to approximately 2,500, from approximately 2,000 at year-end 2015.
- The August 2016 IPO raised approximately $173.6 million net; proceeds and cash on hand were used to repay $175.0 million of prior term debt. In December, Medpace refinanced its prior credit facilities, recording the $10.7 million debt-extinguishment loss.
- The company reported no formal financial guidance. Its stated strategy is continued organic growth, maintaining margins, expanding customer relationships and selectively evaluating complementary acquisitions.
- Key exposures include customer termination rights, project delays or cancellations, and dependence on small and mid-sized biopharma customers, which generated 87.8% of 2016 service revenue. Top ten customers accounted for 37.0% of revenue; the largest accounted for 6.0%.
- Other material risks include clinical-trial execution and regulatory compliance, patient recruitment, data privacy and cybersecurity, staffing and growth management, foreign exchange, variable interest rates, and goodwill impairment. Goodwill and intangible assets were $661.0 million and $136.1 million, respectively; the company recorded a $9.3 million Clinics goodwill impairment in 2015 and none in 2016.
- Legal proceedings were described as incidental and not expected by management to have a material effect. The filing identifies related-party transactions, including a headquarters lease from an entity owned by the CEO and service revenue from Coherus, whose board includes the CEO. The company also disclosed that the CEO and Cinven together held substantial voting influence and that Medpace qualified as a Nasdaq controlled company.
- Medpace adopted revenue-recognition guidance effective in 2018 and was still assessing its impact, including implications for performance obligations in fixed-fee contracts. Management reported effective disclosure controls; the 10-K did not include management’s internal-control assessment or an auditor attestation because of the newly public company transition period.
Important facts for investors to verify
- How much of the $483.9 million backlog converts to revenue, and whether cancellations, customer funding or study delays change conversion timing.
- Whether operating margins hold as direct costs and hiring rise, and how much reported earnings depend on noncash amortization and other unusual items.
- The debt’s variable-rate exposure, required amortization, covenant headroom and availability of the revolver.
- Collection quality and customer credit risk, including the increase in the doubtful-account allowance to $3.2 million from $1.7 million.
- The effect of the 2018 revenue-recognition standard and the company’s related-party arrangements and controlling ownership on financial reporting and governance.