Business context and reporting period
Medpace Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. Medpace is a global clinical research organization providing Phase I–IV development services to pharmaceutical, biotechnology and medical-device companies. The filing reports full-year results and unaudited fourth-quarter data; it is not a standalone quarterly filing.
Medpace adopted ASC 606 revenue recognition in 2018 using the modified retrospective method. As a result, reported 2018 revenue and profit are not directly comparable with prior-year figures without adjustment.
Financial and operating highlights
| Metric | FY 2018 | Comparison / context |
|---|---|---|
| Revenue | $704.6 million | ASC 606 presentation. On the company’s ASC 605-revised basis, revenue was $549.4 million versus $436.2 million in 2017, an increase of 26%. |
| Operating income | $101.0 million | ASC 606 basis; ASC 605-revised amount was $111.3 million. |
| Net income | $73.2 million | Versus $39.1 million in 2017 as reported; ASC 605-revised 2018 net income was $81.6 million. |
| Diluted EPS | $1.97 | Versus $0.98 in 2017 as reported. |
| Operating cash flow | $156.6 million | Versus $97.4 million in 2017. |
| Cash and cash equivalents | $23.3 million | At year-end; includes only immaterial restricted cash. |
| Debt | $80.4 million principal | Term loan; no revolver borrowings. Net debt carrying value was $79.7 million. |
| Backlog | $1,057.9 million | ASC 606 basis; ASC 605 basis was $626.1 million, up 19.4% from $524.4 million at year-end 2017. |
Reported operating margin was approximately 14.3% of ASC 606 revenue. On the ASC 605-revised basis, operating margin was approximately 20.3%; these figures reflect different revenue presentation and should not be compared without that context. Capital expenditures were $16.0 million. Operating cash flow less capital expenditures was approximately $140.6 million, calculated from the reported amounts.
Fourth-quarter 2018 revenue was $192.1 million, operating income $30.7 million and net income $22.8 million; diluted EPS was $0.61. Fourth-quarter 2017 figures were $112.7 million, $15.4 million, $11.3 million and $0.30, respectively. Revenue growth comparisons are affected by ASC 606 adoption.
Material changes versus the prior period
- ASC 606 changed revenue presentation, including gross presentation of reimbursable expenses, and affected the timing and measurement of contract revenue. The company’s ASC 605-revised 2018 revenue comparison indicates 26% growth over 2017.
- Operating cash flow increased to $156.6 million from $97.4 million. Cash was also supported by higher advanced billings, while accounts receivable and unbilled balances rose to $133.4 million from $83.1 million.
- Principal debt fell to $80.4 million from $222.6 million at the end of 2017, following $72.2 million of term-loan payments and repayment of $70.0 million drawn on the revolver.
- Net new business awards were $899.4 million under ASC 606. The company expected $580–$600 million of year-end backlog to convert to 2019 revenue.
Outlook, risks and unusual items
The filing gives no formal revenue or earnings guidance. Management said existing cash, operating cash flow and available borrowing capacity should fund liquidity needs over the next 12 months and longer term, while cautioning that future cash generation and borrowing availability are not assured. The company had $149.8 million available under its revolving credit facility and reported compliance with debt covenants at year-end.
- Revenue controls: Management concluded internal control over financial reporting was ineffective at December 31, 2018 because of a material weakness in implementing ASC 606 and applying the new revenue policies. Disclosure controls were also deemed ineffective. Management was developing a remediation plan; the auditor did not attest to control effectiveness.
- Customer and backlog risk: Small and mid-sized biopharmaceutical companies generated 69% and 24% of 2018 revenue, respectively. Most contracts can be terminated without cause, so backlog conversion is uncertain.
- Other exposures: Fixed-fee cost overruns, clinical-trial delays or cancellations, patient safety and regulatory compliance, data security, foreign currency movements and variable-rate debt may affect results. A 10% currency-rate change was estimated to alter 2018 pretax income by about $5.1 million.
- Contingencies and unusual matters: Management did not expect pending legal matters to materially affect the financial statements. An IRC Section 382 ownership shift following Cinven share sales limited use of acquired tax attributes; about $7.4 million of deferred tax assets and $6.9 million of deferred credit were removed. FINRA was reviewing trading around the July 30, 2018 second-quarter results announcement; the outcome was unknown.
- Governance: CEO and founder August Troendle controlled approximately 24.5% of outstanding shares at year-end. Related-party relationships and transactions are disclosed in the filing.
Most important facts for investors to verify
- Reconcile ASC 606 results with the ASC 605-revised figures when assessing year-over-year growth and margins.
- Track remediation of the material weakness and confirm that revenue recognition controls operate effectively.
- Assess whether the $580–$600 million of expected 2019 backlog conversion materialized, considering cancellations and project timing.
- Review receivables, advanced billings and operating cash flow quality, alongside customer funding and concentration risks.
- Monitor debt repayment, variable interest costs, covenant headroom, and developments in the FINRA review.