Medpace Holdings, Inc. — Q1 2018 Form 10-Q
Business and period: Medpace is a global clinical contract research organization serving pharmaceutical, biotechnology, and medical-device companies. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Dollar figures are in millions unless noted.
Financial performance
- Revenue: Reported revenue was $163.1, versus $106.6 in Q1 2017. The comparison is substantially affected by adopting ASC 606: reimbursable expenses are now presented gross in a single revenue line. On the company’s ASC 605-comparable presentation, Q1 2018 revenue was $123.4, up 15.8% from $106.6. Management attributed the underlying increase mainly to Oncology, Cardiovascular, and Metabolic growth.
- Profit and margins: As reported under ASC 606, operating income was $20.1 and net income was $14.6, compared with $15.9 and $8.4, respectively, in Q1 2017. On the ASC 605-comparable basis, operating income was $22.4 and net income was $16.3. Comparable operating margin was approximately 18.1%, versus 15.0%; comparable net margin was approximately 13.2%, versus 7.9%. Reported margins are not directly comparable because ASC 606 increased gross presentation of pass-through costs.
- Per-share results: Reported diluted EPS was $0.40, versus $0.20. On the ASC 605-comparable basis, Q1 2018 diluted EPS was $0.45.
- Cash flow: Operating cash flow was $23.3, compared with cash used of $0.7 in Q1 2017. Capital expenditures were $4.0, implying approximate operating cash flow less capital expenditures of $19.3. Cash and restricted cash decreased by $4.2 to $22.3, primarily reflecting debt repayments and other financing outflows.
- Debt and liquidity: Total debt principal was $198.5, including $50.0 outstanding on the revolver; cash was $22.2. The company reported $99.7 available under its revolving facility. Current assets were $153.8 and current liabilities $232.5 (current ratio approximately 0.66x); current liabilities include substantial advanced billings, so the ratio should be interpreted in that context. Interest expense rose to $2.3 from $1.8, which management attributed to higher average revolver borrowings and variable rates.
- Other metrics: ASC 605-basis net new business awards were $128.2, compared with $93.9. ASC 605-basis backlog was $547.3 at March 31, up 13.1% year over year; approximately $295–$305 was expected to convert to net service revenue over the next 12 months. Separately, the filing reports approximately $915 of remaining performance obligations for active projects under the new revenue standard; this measure is not the same as backlog.
Material changes and unusual items
- Medpace adopted ASC 606 on January 1, 2018 using the modified retrospective method. The transition reduced opening accumulated deficit by $9.7 and changed the presentation and timing of revenue and contract-related balances. For Q1, the ASC 605 reconciliation shows revenue of $123.4 and net income of $16.3, versus ASC 606 reported revenue of $163.1 and net income of $14.6.
- The effective tax rate fell to 17.6% from 38.7%, primarily reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act, together with benefits from uncertain tax positions and acquired tax attributes. The company had not yet selected an accounting policy for certain future GILTI-related deferred taxes and included an estimate of current GILTI impact in its 2018 provision.
- Accrued expenses rose to $63.6 from $23.7, while advanced billings rose to $126.4 from $73.8; both comparisons are affected by ASC 606 adoption and related balance-sheet reclassifications.
- The filing discloses related-party arrangements, including a headquarters lease with an entity wholly owned by the CEO, deemed landlord liabilities tied to properties involving the CEO and family, and executive travel services from an executive-owned aviation company. Q1 travel expense under the aviation arrangement was $0.4. These arrangements warrant review alongside the related-party revenue and balance disclosures.
Outlook, commentary, and risks
The filing provides no specific revenue or earnings guidance. Management said it expects to fund operational growth, capital expenditures, debt payments, potential selective bolt-on acquisitions, and other corporate needs with operating cash flow, cash on hand, and, if needed, credit facilities. It cited growth in service activity and noted that awards and backlog can fluctuate and are not reliable standalone indicators of future revenue.
Key risks include estimation of total contract costs and progress under ASC 606, which can cause cumulative revenue adjustments; customer scope changes that are not agreed to can create cost overruns and lower profitability; and customers can generally terminate contracts, often on 30 days’ notice. Variable-rate debt exposes the company to higher interest costs. Management reported no significant changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no legal proceedings believed reasonably likely to materially adversely affect the financial statements. Disclosure controls were deemed effective at March 31, 2018; the company was still evaluating the operating effectiveness of changes to revenue-recognition controls.
Important facts for investors to verify
- Reconcile ASC 606 reported results with ASC 605-comparable revenue, profit, and margins; distinguish pass-through gross-up from underlying growth.
- Review the definitions and assumptions behind the $547.3 backlog, awards, and $915 remaining performance obligations, including cancellation and conversion timing.
- Assess receivable and unbilled growth, advanced billings, and the cash-flow impact of contract timing and collections.
- Confirm debt amortization, revolver availability, variable-rate exposure, and the company’s capacity to meet scheduled principal and interest payments.
- Examine revenue-estimation judgments, contract cost overruns, customer termination rights, tax estimates, and disclosed related-party transactions.