Medpace Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; amounts below are in millions except per-share data. Medpace is a global clinical research organization serving pharmaceutical, biotechnology, and medical-device customers.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $110.6 | $107.8 | $323.5 | $313.3 |
| Service revenue, net | $98.7 | $94.8 | $287.0 | $275.2 |
| Income from operations | $17.2 | $12.6 | $49.4 | $39.6 |
| Net income | $9.8 | $5.0 | $27.8 | $13.4 |
| Diluted EPS | $0.25 | $0.13 | $0.69 | $0.39 |
| Operating cash flow | — | — | $68.7 | $62.7 |
- Q3 revenue rose 2.6% year over year; service revenue increased 4.1%. For nine months, total revenue rose 3.2% and service revenue 4.3%. Management attributed service-revenue growth primarily to Oncology, Metabolic, and other therapeutic areas.
- Operating margin, calculated on reported total revenue, was approximately 15.5% in Q3 2017 versus 11.7% in Q3 2016; for nine months, approximately 15.3% versus 12.6%. Net margin on total revenue was approximately 8.9% and 4.7% for the respective quarters, and 8.6% and 4.3% for the nine-month periods.
- Profit growth reflected higher service revenue, lower amortization as acquired finite-lived intangibles continued to amortize, and lower interest expense. Nine-month interest expense declined to $5.5 million from $16.6 million, primarily due to lower average term-loan balances and a lower effective rate under the December 2016 credit agreement. Direct costs rose 5.9% for the nine months, faster than service revenue, largely on personnel, laboratory, and rent costs.
- Nine-month investing cash outflow was $8.9 million, mainly capital expenditures and an intangible-asset acquisition. Financing cash outflow was $74.6 million, including $95.2 million of share repurchases, offset partly by $40.0 million of revolver borrowings. Cash, cash equivalents, and restricted cash decreased $13.2 million during the period.
- At September 30, cash and cash equivalents were $24.2 million, including approximately $0.1 million restricted; $12.6 million was held by foreign subsidiaries. Gross debt was $185.7 million, including $30.0 million drawn on the revolver; $119.7 million remained available under the $150 million facility. Management said liquidity was expected to meet needs for the next 12 months and longer term, while noting cash-flow and refinancing risks.
Material changes and business indicators
- Backlog was $510.0 million at September 30, up $29.6 million, or 6.2%, from September 30, 2016. The company expected approximately $275–$285 million to convert to net service revenue over the following 12 months. Net new business awards were $112.1 million in Q3 versus $109.1 million a year earlier, but $311.3 million for nine months versus $327.2 million.
- In August, Medpace repurchased 2.0 million shares from Cinven for approximately $60.5 million ($30.27 per share), funded with cash and $40.0 million in revolver borrowings. Separately, it repurchased 1.34 million shares for $34.7 million under its $50 million repurchase program during the first nine months. Total 2017 repurchases were approximately $95.2 million.
- Compared with December 31, 2016, cash declined from $37.1 million to $24.2 million, while debt increased from $163.6 million in reported carrying value (including current debt) to $184.6 million net carrying value; gross principal was $185.7 million. Intangible assets declined to $108.2 million from $136.1 million, largely reflecting amortization.
- The May acquisition of bankrupt NephroGenex was accounted for as an asset purchase. Medpace exchanged its creditor claim and approximately $1.2 million of consideration for the company, including tax attributes. A $21.4 million deferred credit was recorded and is to be recognized in income-tax provision as related tax assets and credits are realized; the acquisition is not presented as ordinary operating revenue.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management described plans for organic growth and potentially selective bolt-on acquisitions, funded by operating cash flow, cash, and available borrowing capacity. Backlog and awards are not assured revenue and can change with cancellations, scope changes, timing, and foreign exchange.
- The company planned to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method. It expected most contracts to have a single performance obligation recognized over time based on project progress; reimbursable expenses were expected to be reported gross in a single revenue line with related costs gross in direct costs. The financial impact was still under evaluation.
- Management cited ordinary-course legal proceedings and believed potential losses beyond amounts recorded were immaterial at September 30, 2017. It reported no material change in risk factors from its prior annual report, except as disclosed in its Q2 2017 report. Disclosure controls were assessed as effective; no material internal-control change was reported.
- Related-party matters include the Cinven share repurchase, a headquarters lease with an entity wholly owned by the CEO, leases involving an entity owned by the CEO and family members, and clinical-services revenue from companies with executive or employee relationships. The filing reports these arrangements and related amounts.
Important facts for investors to verify
- Whether backlog conversion, new awards, and cancellations support continued service-revenue growth; the filing cautions these measures may not reliably predict future revenue.
- Whether operating-cost growth, especially personnel and laboratory costs, remains aligned with service-revenue growth.
- Debt maturities, interest costs, revolver availability, and the effect of substantial buybacks on cash and leverage.
- The timing and realizability of NephroGenex tax attributes and the corresponding deferred-credit recognition.
- The eventual impact of the 2018 revenue-standard adoption on reported revenue, reimbursable expenses, margins, and comparability.
- The terms, approvals, and ongoing economics of material related-party transactions.