Annual Statements Open main menu

Medpace Holdings, Inc. - Quarter Report: 2019 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission file number: 001-37856

 

Medpace Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

32-0434904

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5375 Medpace Way, Cincinnati, OH 45227

(Address of principal executive offices) (Zip Code)

(513) 579-9911

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 

Class

 

Number of Shares Outstanding

Common Stock $0.01 par value

 

35,818,819 shares outstanding as of April 26, 2019

 

 

 

 


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

Item Number

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

3

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

3

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018

 

5

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2019 and 2018

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

 

Controls and Procedures

 

26

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

26

Item 1.

 

Legal Proceedings

 

26

Item 1A.

 

Risk Factors

 

26

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

Item 3.

 

Defaults Upon Senior Securities

 

27

Item 4.

 

Mine Safety Disclosures

 

27

Item 5.

 

Other Information

 

27

Item 6.

 

Exhibits

 

27

EXHIBIT INDEX

 

28

SIGNATURES

 

29

 

- 2 -


 

PART I — FINANCIAL INFORMATION 

Item 1. Financial Statements

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(Amounts in thousands, except share amounts)

 

As Of

 

 

 

March 31,

 

 

December 31.

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,127

 

 

$

23,275

 

Restricted cash

 

 

-

 

 

 

7

 

Accounts receivable and unbilled, net (includes $1.7 million and $3.8 million with related parties at March 31, 2019 and December 31, 2018, respectively)

 

 

129,624

 

 

 

133,449

 

Prepaid expenses and other current assets

 

 

22,624

 

 

 

21,383

 

Total current assets

 

 

182,375

 

 

 

178,114

 

Property and equipment, net

 

 

37,639

 

 

 

52,255

 

Operating lease right-of-use assets

 

 

53,627

 

 

 

-

 

Goodwill

 

 

662,380

 

 

 

660,981

 

Intangible assets, net

 

 

63,335

 

 

 

69,179

 

Deferred income taxes

 

 

330

 

 

 

713

 

Other assets

 

 

6,831

 

 

 

6,691

 

Total assets

 

$

1,006,517

 

 

$

967,933

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable (includes $0.1 million and $0.3 million with related parties at March 31, 2019 and December 31, 2018, respectively)

 

$

13,626

 

 

$

16,737

 

Accrued expenses

 

 

82,247

 

 

 

87,493

 

Advanced billings (includes $0.5 million and $0.4 million with related parties at March 31, 2019 and December 31, 2018, respectively)

 

 

150,243

 

 

 

147,935

 

Other current liabilities

 

 

18,425

 

 

 

4,861

 

Total current liabilities

 

 

264,541

 

 

 

257,026

 

Long-term debt, net, less current portion

 

 

55,781

 

 

 

79,721

 

Operating lease liabilities

 

 

46,238

 

 

 

-

 

Deemed landlord liability, less current portion

 

 

-

 

 

 

24,484

 

Deferred income tax liability

 

 

3,435

 

 

 

439

 

Other long-term liabilities

 

 

14,625

 

 

 

16,560

 

Total liabilities

 

 

384,620

 

 

 

378,230

 

Commitments and contingencies (see Note 12)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock - $0.01 par-value; 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

-

 

 

 

-

 

Common stock - $0.01 par-value; 250,000,000 shares authorized at March 31, 2019 and December 31, 2018, respectively; 35,728,989 and 35,665,910 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

357

 

 

 

356

 

Treasury stock - 200,000 shares at March 31, 2019 and December 31, 2018, respectively

 

 

(6,030

)

 

 

(6,030

)

Additional paid-in capital

 

 

643,497

 

 

 

639,381

 

Accumulated deficit

 

 

(13,136

)

 

 

(41,487

)

Accumulated other comprehensive loss

 

 

(2,791

)

 

 

(2,517

)

Total shareholders’ equity

 

 

621,897

 

 

 

589,703

 

Total liabilities and shareholders’ equity

 

$

1,006,517

 

 

$

967,933

 

 

See notes to condensed consolidated financial statements.

 

- 3 -


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

(Amounts in thousands, except per share amounts)

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2019

 

 

2018

 

 

Revenue, net (includes $5.1 million and $1.5 million with related parties for the three months ended March 31, 2019 and 2018, respectively)

 

$

200,741

 

 

$

163,077

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Direct service costs, excluding depreciation and amortization

 

 

75,109

 

 

 

60,341

 

 

Reimbursed out-of-pocket expenses

 

 

70,594

 

 

 

56,913

 

 

Total direct costs

 

 

145,703

 

 

 

117,254

 

 

Selling, general and administrative

 

 

21,308

 

 

 

15,999

 

 

Depreciation

 

 

1,991

 

 

 

2,314

 

 

Amortization

 

 

5,844

 

 

 

7,391

 

 

Total operating expenses

 

 

174,846

 

 

 

142,958

 

 

Income from operations

 

 

25,895

 

 

 

20,119

 

 

Other expense, net:

 

 

 

 

 

 

 

 

 

Miscellaneous expense, net

 

 

(282

)

 

 

(153

)

 

Interest expense, net

 

 

(955

)

 

 

(2,309

)

 

Total other expense, net

 

 

(1,237

)

 

 

(2,462

)

 

Income before income taxes

 

 

24,658

 

 

 

17,657

 

 

Income tax provision

 

 

5,460

 

 

 

3,106

 

 

Net income

 

$

19,198

 

 

$

14,551

 

 

Net income per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.54

 

 

$

0.41

 

 

Diluted

 

$

0.51

 

 

$

0.40

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

35,698

 

 

 

35,486

 

 

Diluted

 

 

37,285

 

 

 

36,449

 

 

 

See notes to condensed consolidated financial statements.

 

- 4 -


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

(Amounts in thousands)

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2019

 

 

2018

 

 

Net income

 

$

19,198

 

 

$

14,551

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes

 

 

(274

)

 

 

629

 

 

Comprehensive income

 

$

18,924

 

 

$

15,180

 

 

 

See notes to condensed consolidated financial statements.

 

- 5 -


 

 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Deficit)

 

 

Other

 

 

 

 

 

 

 

Common

 

 

Treasury

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

BALANCE — December 31, 2017

 

$

355

 

 

$

(6,030

)

 

$

630,341

 

 

$

(120,402

)

 

$

(734

)

 

$

503,530

 

Impact to Retained Earnings from adoption of ASU 2014-09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,730

 

 

 

 

 

 

 

5,730

 

BALANCE — January 1, 2018

 

 

355

 

 

 

(6,030

)

 

 

630,341

 

 

 

(114,672

)

 

 

(734

)

 

 

509,260

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,551

 

 

 

 

 

 

 

14,551

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

629

 

 

 

629

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

1,467

 

 

 

 

 

 

 

 

 

 

 

1,467

 

Stock options exercised

 

 

 

 

 

 

 

 

 

 

566

 

 

 

 

 

 

 

 

 

 

 

566

 

BALANCE — March 31, 2018

 

$

355

 

 

$

(6,030

)

 

$

632,374

 

 

$

(100,121

)

 

$

(105

)

 

$

526,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Deficit)

 

 

Other

 

 

 

 

 

 

 

Common

 

 

Treasury

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

BALANCE — December 31, 2018

 

$

356

 

 

$

(6,030

)

 

$

639,381

 

 

$

(41,487

)

 

$

(2,517

)

 

$

589,703

 

Impact to Retained Earnings from adoption of ASU 2016-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,153

 

 

 

 

 

 

 

9,153

 

BALANCE — January 1, 2018

 

 

356

 

 

 

(6,030

)

 

 

639,381

 

 

 

(32,334

)

 

 

(2,517

)

 

 

598,856

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,198

 

 

 

 

 

 

 

19,198

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(274

)

 

 

(274

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

3,183

 

 

 

 

 

 

 

 

 

 

 

3,183

 

Stock options exercised

 

 

1

 

 

 

 

 

 

 

933

 

 

 

 

 

 

 

 

 

 

 

934

 

BALANCE — March 31, 2019

 

$

357

 

 

$

(6,030

)

 

$

643,497

 

 

$

(13,136

)

 

$

(2,791

)

 

$

621,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

- 6 -


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(Amounts in thousands)

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

19,198

 

 

$

14,551

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,991

 

 

 

2,314

 

Amortization

 

 

5,844

 

 

 

7,391

 

Stock-based compensation expense

 

 

3,183

 

 

 

1,467

 

Amortization of debt issuance costs and discount

 

 

138

 

 

 

159

 

Noncash lease expense

 

 

2,363

 

 

 

-

 

Deferred income tax provision (benefit)

 

 

656

 

 

 

(248

)

Amortization and adjustment of deferred credit

 

 

(200

)

 

 

(203

)

Other

 

 

(43

)

 

 

(32

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and unbilled, net

 

 

4,255

 

 

 

(17,760

)

Prepaid expenses and other current assets

 

 

(1,642

)

 

 

(214

)

Accounts payable

 

 

(2,684

)

 

 

699

 

Accrued expenses

 

 

(5,221

)

 

 

5,268

 

Advanced billings

 

 

2,437

 

 

 

6,817

 

Lease liabilities

 

 

(2,041

)

 

 

-

 

Other assets and liabilities, net

 

 

5,771

 

 

 

3,089

 

Net cash provided by operating activities

 

 

34,005

 

 

 

23,298

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Property and equipment expenditures

 

 

(2,520

)

 

 

(3,951

)

Other

 

 

(1,322

)

 

 

23

 

Net cash used in investing activities

 

 

(3,842

)

 

 

(3,928

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

972

 

 

 

566

 

Payment of debt

 

 

(24,000

)

 

 

(4,125

)

Payments on revolving loan

 

 

-

 

 

 

(20,000

)

Payment of deemed landlord liability

 

 

-

 

 

 

(451

)

Net cash used in financing activities

 

 

(23,028

)

 

 

(24,010

)

EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS, AND

RESTRICTED CASH

 

 

(290

)

 

 

400

 

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

 

 

6,845

 

 

 

(4,240

)

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period

 

 

23,282

 

 

 

26,492

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period

 

$

30,127

 

 

$

22,252

 

 

See notes to condensed consolidated financial statements.

 

 

- 7 -


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2019

 

(1) Basis of Presentation

Description of Business

Medpace Holdings, Inc. together with its subsidiaries, (“Medpace” or the “Company”), a Delaware corporation, is a global provider of clinical research-based drug and medical device development services. The Company partners with pharmaceutical, biotechnology, and medical device companies in the development and execution of clinical trials. The Company’s drug development services focus on full service Phase I-IV clinical development services and include development plan design, project management, regulatory affairs, clinical monitoring, data management and analysis, pharmacovigilance new drug application submissions, post-marketing clinical support, laboratory services, clinical human pharmacology, imaging services, and electrocardiography reading support for clinical trials.

The Company’s operations are principally based in North America, Europe, and Asia.

Unaudited Interim Financial Information

The interim condensed consolidated financial statements include the accounts of the Company, are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), and are unaudited. In the opinion of the Company’s management, all adjustments of a normal recurring nature necessary for a fair presentation have been reflected. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. The preparation of the interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results and outcomes could differ from management’s estimates and assumptions. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

(2) Summary of Significant Accounting Policies

Our significant accounting policies are detailed in Note 3 “Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to our accounting policies as a result of adopting Accounting Standards Codification Topic 842 (“ASC 842”) are discussed below:

Lease Recognition

The Company enters into contracts to lease facilities and equipment to be used in its operations. At contract inception, the Company determines whether a contract contains a lease within the scope of Accounting Standard Codification Topic 842, Leases (“ASC 842”), and determines the appropriate classification of the lease as either operating or finance.  

Contracts containing operating leases are recorded on the consolidated balance sheets within Operating lease right-of-use (“ROU”) assets, Other current liabilities, and Operating lease liabilities. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term as of the lease commencement date.  In addition operating ROU assets also include lease payments made and exclude lease incentives and initial direct costs incurred.  Operating lease expense for lease payments is recognized on a straight-line basis over the lease term within Total direct costs and Selling, general, and administrative expenses. Variable lease costs are primarily related to adjustments for inflation, common area maintenance and property tax and are recognized within Total direct costs and Selling, general and administrative expenses.  

Contracts containing finance leases are recognized initially in the same manner as Operating lease ROU assets and liabilities, however are recorded on the consolidated balance sheets within Property and equipment, net, Other current liabilities, and Other long-term liabilities. Finance lease assets are subsequently amortized on a straight line basis over the lease term within Depreciation expense, while the lease liability is accreted within Interest expense, net utilizing the discount rate determined at lease commencement and reduced by periodic lease payments over the lease term. Currently, the Company does not have any finance leases.

- 8 -


 

The discount rate utilized in determining the present value of future payments for both operating and finance leases, unless implicit in the lease contract, is determined based on the Company’s collateralized incremental borrowing rate based on the information available at lease commencement.  

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option as determined at lease commencement.  

Many of our lease agreements have both lease and non-lease components, which the Company has elected to treat as a single lease component for recognition purposes.  

The Company may enter into short-term leases (leases with a lease term of less than 1 year), which it has elected not to capitalize as assets and liabilities on the consolidated balance sheets, but instead recognizes lease payments within Total direct costs and Selling, general, and administrative expenses on a straight line basis over the lease term.  

Recently Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09 ‘‘Revenue from Contracts with Customers,’’ (“ASC 606”) to clarify the principles of recognizing revenue and create common revenue recognition guidance between US GAAP and International Financial Reporting Standards. The new standard became effective for the Company in the first quarter 2018.

The cumulative effect adjustment was recorded as a reduction to the opening balance of Accumulated deficit in the consolidated balance sheets in the amount of $5.7 million, with offsetting amounts of $23.9 million to Accounts receivable and unbilled, net, $(1.6) million to Deferred income taxes, $35.1 million to Accrued expenses, $(57.4) million to Pre-funded study costs and $38.9 million to Advanced billings, respectively. The amounts recorded to Accounts receivable and unbilled, net, Deferred income taxes, Accrued expenses, Pre-funded study costs, and Advanced billings reflect differences between revenue recognized and billings to customers by project as well as costs incurred but not settled as of the Implementation Date. The above disclosed cumulative effect adjustments have been revised from the amounts previously disclosed in the Company’s interim financial statements filed on Form 10-Q for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018 to correct certain immaterial misstatements to the opening balance sheet adoption impact of the standard. The effects of these misstatements were immaterial to the Company’s results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASC 842”). The guidance in ASC 842 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13) (“ASC 840”). The objective of ASC 842 is to increase transparency and comparability among organizations by requiring the recognition of Right of use assets (“ROU assets”) and Lease liabilities on the balance sheet.  In addition, ASC 842 introduces additional disclosure requirements that are meant to enable users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.  ASC 842 became effective for the Company in the first quarter 2019.

ASC 842 allows by policy election, an entity to choose its transition approach.  Entities must adopt ASC 842 on a either a modified retrospective basis to each prior reporting period presented or through an optional alternative method referred to as the “Comparatives Under ASC 840 Approach” which allows entities to apply the new requirements to only those leases that exist as of January 1, 2019.  The Company has elected to adopt ASC 842 utilizing the Comparatives Under ASC 840 Approach.  As such, ASC 842 is applied on a prospective basis as of January 1, 2019 and any cumulative catch up adjustment for differences between ASC 842 and ASC 840 were recorded upon adoption.

ASC 842 also allows for the election of certain practical expedients that are meant to ease the burden of transitioning to ASC 842 while still achieving compliance.  The Company elected the “package of three” practical expedient allowing the Company to carry forward decisions made and documented under current US GAAP, rather than reassessing all of the Company’s contracts to determine whether they are or contain leases and how they would be classified under ASC 842.  The Company has decided not to elect the hindsight practical expedient, which had it been elected, would require the Company to reassess the lease term and assessment of impairment for all of the Company’s leases using the facts and circumstances known up to the adoption date of the standard.  

ASC 842 had a material impact on our consolidated balance sheets, as all leases currently classified as operating were recognized as ROU assets and lease liabilities upon adoption.  In addition, it was determined that two contracts entered into with a related party for two of the Company’s corporate offices that were classified as deemed assets and deemed liabiltiies under ASC 840 were determined to be operating leases under ASC 842.  These deemed assets and liabilities were reclassified on the consolidated balance sheets to ROU assets and lease liabilities and an adjustment to retained earnings was recorded as a cumulative adjustment for the difference in depreciation expense and operating lease expense as of the date of adoption.  

 

- 9 -


 

The impact of the adoption of ASC 842 as of January 1, 2019 is as follows:

 

ASSETS

As of

 

 

January 1, 2019

 

 

Adjustments

 

 

December 31, 2018

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

21,013

 

 

 

(370

)

 

 

21,383

 

Total current assets

 

177,744

 

 

 

(370

)

 

 

178,114

 

Property and equipment, net

 

37,613

 

 

 

(14,642

)

 

 

52,255

 

Operating lease right-of-use assets

 

51,854

 

 

 

51,854

 

 

 

-

 

           Total assets

$

1,004,775

 

 

$

36,842

 

 

$

967,933

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

10,951

 

 

 

6,090

 

 

 

4,861

 

           Total current liabilities

 

263,116

 

 

 

6,090

 

 

 

257,026

 

Operating lease liabilities

 

45,294

 

 

 

45,294

 

 

 

-

 

Deemed landlord liability, less current portion

 

-

 

 

 

(24,484

)

 

 

24,484

 

Deferred income tax liability

 

3,158

 

 

 

2,719

 

 

 

439

 

Other long-term liabilities

 

14,630

 

 

 

(1,930

)

 

 

16,560

 

           Total liabilities

 

405,919

 

 

 

27,689

 

 

 

378,230

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

(32,334

)

 

 

9,153

 

 

 

(41,487

)

           Total shareholders’ equity

 

598,856

 

 

 

9,153

 

 

 

589,703

 

           Total liabilities and shareholders’ equity

$

1,004,775

 

 

$

36,842

 

 

$

967,933

 

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows for an entity to elect to reclassify the income tax effects on items within accumulated other comprehensive income resulting from U.S. tax reform to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company adopted this standard in the first quarter of 2019 and it has no impact on the condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies how an entity assesses goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted.  The Company adopted this standard on a prospective basis in the first quarter of 2019 and it had no impact to the condensed consolidated financial statements.

 

 

(3) Net Income Per Share

Basic and diluted earnings or loss per share (“EPS”) are computed using the two-class method, which is an earnings allocation that determines EPS for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Restricted Stock Awards (“RSAs”) are considered participating securities because they are legally issued at the date of grant and holders are entitled to receive non-forfeitable dividends during the vesting term.

The computation of diluted EPS includes additional common shares, such as unvested stock options with exercise prices less than the average market price of the Company’s common stock during the period (“in-the-money options”), which would be considered outstanding under the treasury stock method. The treasury stock method assumes that additional shares would have to be issued in cases where the exercise price of stock options is less than the value of the common stock being acquired because the cash proceeds received from the stock option holder would not be sufficient to acquire that same number of shares. The Company does not compute diluted EPS in cases where the inclusion of such additional shares would be anti-dilutive in effect.

- 10 -


 

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018 (in thousands, except for earnings per share): 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Weighted-average shares:

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

35,698

 

 

 

35,486

 

RSAs

 

 

104

 

 

 

146

 

Total weighted-average shares

 

 

35,802

 

 

 

35,632

 

Earnings per common share—Basic

 

 

 

 

 

 

 

 

Net income

 

$

19,198

 

 

$

14,551

 

Less: Undistributed earnings allocated to RSAs

 

 

56

 

 

 

60

 

Net income available to common shareholders—Basic

 

$

19,142

 

 

$

14,491

 

 

 

 

 

 

 

 

 

 

Net income per common share—Basic

 

$

0.54

 

 

$

0.41

 

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

35,698

 

 

 

35,486

 

Effect of diluted shares

 

 

1,587

 

 

 

963

 

Diluted weighted-average shares outstanding

 

 

37,285

 

 

 

36,449

 

 

 

 

 

 

 

 

 

 

Net income per common share—Diluted

 

$

0.51

 

 

$

0.40

 

 

During the three months ended March 31, 2019 and 2018, the Company had 0 and 35,000 stock options, respectively, that were excluded due to the exercise price exceeding the average fair value of the Company’s common stock during the period.

 

 

(4) Fair Value Measurements

The Company follows accounting guidance related to fair value measurements that defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy for inputs used in measuring fair value. This hierarchy maximizes the use of “observable” inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy specifies three levels based on the inputs, as follows:

Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities.

Level 2: Valuations based on directly observable inputs or unobservable inputs corroborated by market data.

Level 3: Valuations based on unobservable inputs supported by little or no market activity representing management’s determination of assumptions of how market participants would price the assets or liabilities. 

The fair value of financial instruments such as cash and cash equivalents, accounts receivable and unbilled, net, accounts payable, accrued expenses and advanced billings approximate their carrying amounts due to their short term maturities.

The Company does not have any recurring fair value measurements as of March 31, 2019. There were no transfers between Level 1, Level 2 or Level 3 during the three months ended March 31, 2019 or 2018.

 

 

(5) Contract Assets and Contract Liabilities

Contract assets and liabilities are reflected in the Company’s condensed consolidated balance sheets within the accounts reflected below.  

Contract Assets

Accounts receivable represent amounts due from the Company’s customers who are concentrated primarily in the pharmaceutical, biotechnology, and medical device industries. Unbilled represents revenue recognized to date that has not been billed or is not yet contractually billable to the customer. In general, amounts become billable upon the achievement of negotiated contractual events, in accordance with predetermined payment schedules or when a reimbursable expense has been incurred. Amounts classified to unbilled are those billable to customers within one year from the respective balance sheet date.

- 11 -


 

Accounts receivable and unbilled, net consisted of the following (in thousands):

 

 

As of

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Accounts receivable

$

107,241

 

 

$

85,120

 

Unbilled receivables

 

28,252

 

 

 

49,361

 

Less: allowance for doubtful accounts

 

(5,869

)

 

 

(1,032

)

           Total accounts receivable and unbilled, net

$

129,624

 

 

$

133,449

 

 

Unbilled receivables decreased from $49.4 million at December 31, 2018 to $28.3 million at March 31, 2019. The decrease is primarily driven by increased customer invoicing.

Contract Liabilities

Advanced billings represents cash received from customers, or billed amounts per an agreed upon payment schedule, in advance of services being performed or revenue being recognized.

Advanced billings consisted of the following (in thousands):

 

 

As of

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Advanced billings

$

150,243

 

 

$

147,935

 

 

Advanced billings increased from $147.9 million at December 31, 2018 to $150.2 million at March 31, 2019. The increase is primarily driven by billing and/or collection activity in the three months ended March 31, 2019 in advance of revenue being earned for services performed.

 

On March 31, 2019, we had approximately $1,156.2 million of performance obligations remaining to be performed for active projects.

 

(6) Intangible Assets, Net

Intangible assets, net consisted of the following (in thousands):

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Intangible assets:

 

 

 

 

 

 

 

 

Finite-lived intangible assets:

 

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

 

 

Backlog

 

$

72,630

 

 

$

72,630

 

Customer relationships

 

 

145,051

 

 

 

145,051

 

Developed technologies

 

 

54,475

 

 

 

54,475

 

Other

 

 

3,074

 

 

 

3,074

 

Total finite-lived intangible assets

 

 

275,230

 

 

 

275,230

 

Accumulated amortization:

 

 

 

 

 

 

 

 

Backlog

 

 

(72,630

)

 

 

(72,630

)

Customer relationships

 

 

(113,584

)

 

 

(110,636

)

Developed technologies

 

 

(54,475

)

 

 

(51,751

)

Other

 

 

(2,852

)

 

 

(2,680

)

Total accumulated amortization

 

 

(243,541

)

 

 

(237,697

)

Total finite-lived intangible assets, net

 

 

31,689

 

 

 

37,533

 

Trade name (indefinite-lived)

 

 

31,646

 

 

 

31,646

 

Total intangible assets, net

 

$

63,335

 

 

$

69,179

 

 

- 12 -


 

As of March 31, 2019, estimated amortization expense of the Company’s intangible assets for each of the next five years and thereafter is as follows (in thousands):

 

 

 

Amortization

 

Remainder of 2019

 

$

8,985

 

2020

 

 

7,876

 

2021

 

 

5,114

 

2022

 

 

3,353

 

2023

 

 

2,199

 

Later years

 

 

4,162

 

 

 

$

31,689

 

 

 

(7) Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Employee compensation and benefits

 

$

20,373

 

 

$

31,344

 

Project related reimbursable expenses

 

 

56,134

 

 

 

51,109

 

Other

 

 

5,740

 

 

 

5,040

 

Total accrued expenses

 

$

82,247

 

 

$

87,493

 

 

 

(8) Debt

Debt consisted of the following (in thousands):

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Term loan

 

$

56,438

 

 

$

80,438

 

Less unamortized discount

 

 

(258

)

 

 

(282

)

Less unamortized term loan debt issuance costs

 

 

(399

)

 

 

(435

)

Long-term debt, net, less current portion

 

$

55,781

 

 

$

79,721

 

 

Principal payments on debt are due as follows (in thousands):

 

2019 (remaining)

 

 

-

 

2020

 

 

-

 

2021

 

 

56,438

 

Total

 

$

56,438

 

 

The estimated fair value of the Company’s debt based on Level 2 inputs using the market approach, which is primarily based on rates at which the debt is traded among financial institutions, approximates the carrying value as of March 31, 2019 and December 31, 2018.

 

(9) Leases

 

The Company enters into leases for real estate and equipment. Real estate leases are for our corporate office space and laboratories around the world. Real estate leases have remaining lease terms of less than 1 year to 20 years. Many of the Company’s leases include options to extend the leases on a month to month basis or for set periods for up to 20 years. Many leases also include options to terminate the leases within 1 year or per other contractual terms.

 

- 13 -


 

The components of lease expense as of March 31, 2019 were as follows (in thousands):

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

Operating lease cost

$

3,117

 

Variable lease cost

 

594

 

 

Supplemental cash flow information for the three months ended March 31, 2019 related to the leases was as follows (in thousands):

 

 

Three Months Ended March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

$

2,216

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

Operating leases

 

3,952

 

 

Supplemental balance sheet information as of March 31, 2019 related to the leases was as follows (in thousands):

 

 

As of March 31, 2019

 

 

 

 

 

Operating lease right-of-use assets

$

53,627

 

 

 

 

 

Other current liabilities

$

9,340

 

Operating lease liabilities

 

46,238

 

Total operating lease liabilities

$

55,578

 

 

 

 

 

Weighted Average Remaining Lease Term (years)

 

 

 

Operating leases

  6.5

 

Weighted Average Discount Rate

 

 

 

Operating leases

 

                                                                   5.9%

 

 

Lease payments due related to lease liabilities as of March 31, 2019 were as follows (in thousands):

 

 

Operating Leases

 

Remainder of 2019

$

8,878

 

2020

 

12,220

 

2021

 

11,494

 

2022

 

8,999

 

2023

 

6,772

 

Later years

 

19,172

 

Total lease payments

 

67,535

 

Less: imputed interest

 

(11,957

)

Total

$

55,578

 

 

As of March 31, 2019, we have an additional operating lease related to a corporate office under construction, which has not yet commenced, with future payments of $124.0 million. This operating lease will commence between fiscal year 2019 and fiscal year 2020 with an initial lease term of 20 years and a renewal option for two 10-year terms at prevailing market rates.

 

Comparative period disclosures under ASC 840:

 

Rental expense under operating leases totaled $2.4 million for the three months ended March 31, 2018.

 

- 14 -


 

Future minimum rental payments for lease obligations with initial terms in excess of one year as of December 31, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

Non-Related

 

 

Total

 

 

 

Related Party

 

 

Parties Operating

 

 

Operating

 

 

 

Operating Lease

 

 

Leases

 

 

Leases

 

2019

 

$

1,987

 

 

$

6,186

 

 

$

8,173

 

2020

 

 

6,843

 

 

 

6,617

 

 

 

13,460

 

2021

 

 

6,964

 

 

 

5,873

 

 

 

12,837

 

2022

 

 

6,757

 

 

 

3,694

 

 

 

10,451

 

2023

 

 

5,229

 

 

 

3,257

 

 

 

8,486

 

Thereafter

 

 

103,870

 

 

 

5,752

 

 

 

109,622

 

Total minimum lease payments

 

$

131,650

 

 

$

31,379

 

 

$

163,029

 

 

Minimum annual payments required in conjunction with the Deemed landlord liabilities are as follows (in thousands):

 

 

 

Related Party

 

 

 

 

 

 

Total

 

 

 

Minimum Lease

 

 

Less:

 

 

Principal

 

 

 

Payments

 

 

Interest

 

 

Amounts Due

 

2019

 

$

3,918

 

 

$

1,818

 

 

$

2,100

 

2020

 

 

3,988

 

 

 

1,662

 

 

 

2,326

 

2021

 

 

4,039

 

 

 

1,490

 

 

 

2,549

 

2022

 

 

4,092

 

 

 

1,301

 

 

 

2,791

 

2023

 

 

4,145

 

 

 

1,095

 

 

 

3,050

 

Thereafter

 

 

15,697

 

 

 

1,929

 

 

 

13,768

 

Total

 

$

35,879

 

 

$

9,295

 

 

$

26,584

 

 

(10) Shareholder’s Equity and Stock-Based Compensation

The Company granted 268,617 awards to employees under the 2016 Incentive Award Plan during the three months ended March 31, 2019, consisting of 5,000 stock option awards and 164,200 restricted stock units (“RSU”) vesting after four years, 77,417 fully-vested stock option awards and 22,000 stock option awards with vesting in twelve equal monthly installments beginning on March 31, 2019. The Company granted 504,500 awards to employees under the 2016 Incentive Award Plan during the three months ended March 31, 2018, consisting of 406,500 stock option awards and 98,000 restricted stock units (“RSU”), all vesting after four years.

 

Award Activity

The following table sets forth the Company’s stock option activity:

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

Stock Options

 

 

Exercise Price

 

 

Outstanding - beginning of period

 

 

2,945,040

 

 

$

24.18

 

 

Granted

 

 

104,417

 

 

$

54.74

 

 

Exercised

 

 

(63,079

)

 

$

14.79

 

 

Forfeited/Expired

 

 

(45,097

)

 

$

24.10

 

 

Outstanding - end of period

 

 

2,941,281

 

 

$

25.47

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable - end of period

 

 

1,202,558

 

 

$

18.66

 

 

 

- 15 -


 

The following table sets forth the Company’s RSA/RSU activity:

 

 

 

Three Months Ended

 

 

 

 

March 31, 2019

 

 

 

 

Shares/Units

 

 

Outstanding and unvested - beginning of period

 

 

421,200

 

 

Granted

 

 

164,200

 

 

Vested

 

 

-

 

 

Forfeited

 

 

(15,000

)

 

Outstanding and unvested - end of period

 

 

570,400

 

 

 

 

 

 

 

 

Cumulative vested shares - end of period

 

 

1,913,916

 

 

 

Stock-based compensation expense recognized in the condensed consolidated statements of operations related to all outstanding stock based compensation awards is summarized below (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Total direct costs

 

$

1,560

 

 

$

843

 

Selling, general and administrative

 

 

1,623

 

 

 

624

 

Total stock-based compensation expense

 

$

3,183

 

 

$

1,467

 

 

(11) Income Taxes

The Company’s effective income tax rate was 22.1% and 17.6% for the three months ended March 31, 2019 and 2018, respectively. The Company’s effective income tax rate for the three months ended March 31, 2019 varied from the U.S. statutory rate of 21% primarily due to the impact of state taxes, which was partially offset with previously acquired tax attributes and windfall option exercises.

 

 

(12) Commitments and Contingencies

Legal Proceedings

The Company is involved in legal proceedings from time to time in the ordinary course of its business, including employment claims and claims related to other business transactions. The Company cannot predict with certainty the outcome of such proceedings, but it believes that adequate reserves have been recorded and losses already recognized with respect to such proceedings, which were immaterial as of March 31, 2019 and December 31, 2018.  There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these actions; however, the Company believes that such potential losses were immaterial as of March 31, 2019.

Purchase Commitments

The Company has several minimum purchase commitments for project related supplies totaling $10.1 million. In return for the commitment, Medpace receives preferential pricing. The commitments expire at various times through 2026.

 

 

(13) Related Party Transactions

Employee Loans

The Company periodically extends short term loans or advances to employees, typically upon commencement of employment.  Total receivables as a result of these employee advances of $0.2 million existed at March 31, 2019 and December 31, 2018, respectively, and are included in the Prepaid expenses and other current assets and Other assets line items of the condensed consolidated balance sheets, respectively, depending on the contractual repayment date.

- 16 -


 

Service Agreements

Cymabay Therapeutics, Inc. (“Cymabay”)

Cymabay is a clinical-stage biopharmaceutical company developing therapies to treat metabolic diseases with high unmet medical need, including serious rare and orphan disorders. During the first quarter of 2016, it was announced that a Medpace employee would join Cymabay’s board of directors. The Company and Cymabay entered into a MSA dated October 21, 2016. Subsequently, the Company and Cymabay have entered into several task orders for the Company to perform clinical trial related services. During the three months ended March 31, 2019 and 2018, the Company recognized total revenue from Cymabay of $3.1 million and $0.7 million, respectively, in the Company’s condensed consolidated statements of operations. As of March 31, 2019 and December 31, 2018, respectively, the Company had Accounts receivable and unbilled, net from Cymabay of $0.4 million and $2.5 million recorded in the condensed consolidated balance sheets.

LIB Therapeutics LLC and subsidiaries (“LIB”)

Certain executives and employees of the Company, including the chief executive officer, are members of LIB’s board of managers. The Company entered into a MSA dated November 24, 2015 with LIB, a company that engages in research, development, marketing and commercialization of pharmaceutical drugs. Subsequently, the Company and LIB have entered into several task orders for the Company to perform clinical trial related services. During the three months ended March 31, 2019 and 2018, the Company recognized total revenue from LIB of $0.7 million and $0.8 million, respectively, in the Company’s condensed consolidated statements of operations. As of March 31, 2019 and December 31, 2018, respectively, the Company had Advanced billings from LIB of $0.4 million and $0.3 million recorded in the condensed consolidated balance sheets. In addition, as of March 31, 2019 and December 31, 2018, respectively, the Company had Accounts receivable and unbilled, net from LIB of $0.5 million and $1.0 million recorded in the condensed consolidated balance sheets.

CinRX Pharma and subsidiaries (“CinRx”)

Certain executives and employees of the Company, including the chief executive officer, are members of CinRx’s board of managers and/or have equity investments in CinRx, a biotech company. The Company and CinRx have entered into several task orders for the Company to perform clinical trial related services. During the three months ended March 31, 2019 and 2018, the Company recognized total revenue from CinRx of $1.4 million and less than $0.1 million, respectively, in the Company’s consolidated statements of operations. As of March 31, 2019 and December 31, 2018 the Company had Accounts receivable and unbilled, net from CinRx of $0.8 million and $0.4 million, respectively, in the consolidated balance sheets.

The Summit, a Dolce Hotel (“The Summit”)

The Summit Hotel, located on the Medpace campus, is owned by the chief executive officer, and managed by an unrelated hospitality management entity. Medpace incurs travel lodging and meeting expenses at The Summit. As of March 31, 2019, Medpace incurred expenses of $0.1 million at The Summit.

Leased Real Estate

Headquarters Lease

The Company entered into an operating lease for its corporate headquarters with an entity that is wholly owned by the chief executive officer of the Company. The Company has evaluated its relationship with the related party and concluded that the related party is not a variable interest entity because the Company has no direct ownership interest or relationship other than the lease. The lease for headquarters is for an initial term of twelve years through November 2022 with a renewal option for one 10-year term at prevailing market rates. The Company pays rent, taxes, insurance, and maintenance expenses that arise from the use of the property. Annual base rent for its corporate headquarters allows for adjustments to the rental rate annually for increases in the consumer price index. Under ASC 842, operating lease expense recognized for the three months ended March 31, 2019 was $0.5 million. Under ASC 840, lease expense recognized for the three months ended March 31, 2018 was $0.5 million. The lease expense was allocated between Total direct costs and Selling, general and administrative in the condensed consolidated statements of operations.

In 2018, Medpace, Inc. entered into a multi-year lease agreement governing future occupancy of additional office space in Cincinnati, Ohio. The lease expires in 2040 and the Company has two 10-year options to extend the term of the lease.

- 17 -


 

ASC 842 – Operating Leases

The Company entered into two multi-year lease agreements governing the occupancy of space of two buildings in Cincinnati, Ohio with an entity that is wholly owned by the Company’s chief executive officer and certain members of his immediate family. The Company assumed occupancy in 2012 and the leases expire in 2027 with the Company having one 10-year option to extend the lease term. The Company pays rent, taxes, insurance, and maintenance expenses that arise from the use of the property. Annual base rent for the corporate headquarters allows for adjustments to the rental rate annually for increases in the consumer price index. Under ASC 842, the Company has determined that the leases are operating leases. Operating lease expense recognized for the three months ended March 31, 2019 is $0.9 million. The lease expense was allocated between Total direct costs and Selling, general and administrative in the condensed consolidated statements of operations.

ASC 840 – Deemed Assets and Deemed Landlord Liabilities

In accordance with the accounting guidance related to leases under ASC 840, the Company was deemed in substance to be the owner of the property during the construction phase and at completion. Accordingly, the Company reflected the buildings and related liabilities as deemed assets from landlord building construction in Property and equipment, net, Other current liabilities, and Deemed landlord liability, less current portion, respectively, on the condensed consolidated balance sheets. The deemed assets were being fully depreciated, on a straight line basis, over the 15-year term of the lease. Deemed landlord liabilities were recorded at their net present value when the Company enters into qualifying leases and are reduced as the Company makes periodic lease payments on the properties. Accretion expense was being recorded over the term of the lease as a component of Interest expense, net in the Company’s condensed consolidated statements of operations. The Company paid $1.0 million during the three months ended March 31, 2018. The current and long-term portions of the Deemed landlord liability at December 31, 2018 were $2.1 million and $24.5 million, respectively. The Company has recognized deemed assets, net of $14.6 million at December 31, 2018 in the condensed consolidated balance sheets.

Travel Services

The Company incurs expenses for travel services for company executives provided by a private aviation charter company that is owned by the chief executive officer and the executive vice president of operations of the Company (“private aviation charter”). The Company may contract directly with the private aviation charter for the use of its aircraft or indirectly through a third party aircraft management and jet charter company (the “Aircraft Management Company”). The travel services provided are primarily for business purposes, with certain personal travel paid for as part of the executives’ compensation arrangements. The Aircraft Management Company also makes the private aviation charter aircraft available to third parties. The Company incurred travel expenses of $0.3 million and $0.4 million during the three months ended March 31, 2019 and 2018, respectively, related to these travel services. These travel expenses are recorded in Selling, general and administrative in the Company’s condensed consolidated statements of operations. As of December 31, 2018, the Company had Accounts payable due to Reynolds of $0.2 million in the consolidated balance sheets.

 

(14) Entity Wide Disclosures

Revenue by Category

The following table disaggregates our revenue by major source (in thousands):

 

 

 

Three Months Ended

March 31, 2019

 

 

Three Months Ended

March 31, 2018

 

Therapeutic Area

 

 

 

 

 

 

 

 

Oncology

 

$

55,962

 

 

$

43,853

 

Other

 

 

51,319

 

 

 

34,217

 

Metabolic

 

 

33,742

 

 

 

28,513

 

Cardiology

 

 

20,424

 

 

 

23,736

 

AVAI

 

 

19,924

 

 

 

16,679

 

Central Nervous System

 

 

14,868

 

 

 

13,165

 

Medical Devices

 

 

4,502

 

 

 

2,914

 

      Total revenue

 

$

200,741

 

 

$

163,077

 

 

- 18 -


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and with the information under the heading “Management Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. This item and the related discussion contain forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those indicated in such forward-looking statements. Important factors that may cause such differences include, but are not limited to, those discussed under the “Forward-Looking Statements” below and “Risk Factors” in “Item 1A Risk Factors” of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained herein, including statements regarding our future results of operations and financial position, business strategy, product approvals and plans and our objectives for future operations, are forward looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “target,” and similar expressions are intended to identify forward looking statements. Forward looking statements are based largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward looking statements are subject to inherent uncertainties, risks, changes in circumstances and other important factors that are difficult to predict. Moreover, we operate in a very competitive and rapidly changing environment in which new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all important factors on our business or the extent to which any factor, or combination of such factors, may cause actual results to differ materially from those contained in any forward looking statements we may make. In light of these risks, uncertainties and assumptions, the forward looking events and circumstances discussed may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward looking statements. We caution you therefore against relying on these forward looking statements.

We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. For a further discussion of the risks relating to our business, see “Item 1A Risk Factors” of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Business Overview

We are one of the world’s leading clinical contract research organizations, or CROs, by revenue, solely focused on providing scientifically-driven outsourced clinical development services to the biotechnology, pharmaceutical and medical device industries. Our mission is to accelerate the global development of safe and effective medical therapeutics. We differentiate ourselves from our competitors by our disciplined operating model centered on providing full-service Phase I-IV clinical development services and our therapeutic expertise. We believe this combination results in timely and cost-effective delivery of clinical development services for our customers. We believe that we are a partner of choice for small- and mid-sized biopharmaceutical companies based on our ability to consistently utilize our full-service, disciplined operating model to deliver timely and high-quality results for our customers.

We focus on conducting clinical trials across all major therapeutic areas, with particular strength in Cardiology, Metabolic Disease, Oncology, Central Nervous System (“CNS”), Antiviral and Anti-infective (“AVAI”), as well as therapeutic expertise in Medical Devices. Our global platform includes approximately 3,100 employees across 36 countries, providing our customers with broad access to diverse markets and patient populations as well as local regulatory expertise and market knowledge.

How We Generate Revenue

We earn fees through the performance of services detailed in our customer contracts. Contract scope and pricing is typically based on either a fixed-fee or unit-of-service model, with consideration of activities performed by third parties, as well as ancillary costs necessary to deliver on the contract scope that are reimbursable by our customers. Our contracts can range in duration from a few months to several years. These contracts are individually priced and negotiated based on the anticipated project scope, including the complexity of the project and the performance risks inherent in the project. The majority of our contracts are structured with an upfront fee that is collected at the time of contract signing, and the balance of the fee is collected over the duration of the contract either through an arranged billing schedule or upon completion of certain performance targets or defined milestones.

- 19 -


 

Revenue, which is distinct from billing and cash receipt, is recognized based the satisfaction of the individual performance obligations identified in each contract. Substantially all of our customer contracts consist of a single performance obligation, as the promise to transfer the individual services defined in the contracts are not separately identifiable from other promises in the contract, and therefore not distinct.  Our performance obligations are generally satisfied over time and recognized as services are performed.  The progression of our contract performance obligations are measured primarily utilizing the input method of cost to cost.  Cancellation provisions in our contracts allow our customers to terminate a contract either immediately or according to advance notice terms specified within the applicable contract, which is typically 30 days. Contract cancellation may occur for various reasons, including, but not limited to, adverse patient reactions, lack of efficacy, or inadequate patient enrollment. Upon cancellation, we are entitled to fees for services rendered through the date of termination, including payment for subsequent services necessary to conclude the study or close out the contract. These fees are typically discussed and agreed upon with the customer and are realized as revenue when we believe the amount can be estimated reliably and its realization is probable.  Changes in revenue from period to period are driven primarily by new business volume and task order execution activity, project cancellations, and the mix of active studies during a given period that can vary based on therapeutic area and or study life cycle stage.

Costs and Expenses

Our costs and expenses are comprised primarily of our total direct costs, selling, general and administrative costs, depreciation and amortization and income taxes.

Total Direct Costs

Total direct costs are primarily driven by labor and related employee benefits, but also include contracted third party service related expenses, fees paid to site investigators, reimbursed out of pocket expenses, laboratory supplies and other expenses contributing to service delivery. The other costs of service delivery can include office rent, utilities, supplies and software licenses which are allocated between Total direct costs and selling, general and administrative expenses based on the estimated contribution among service delivery and support function efforts on a percentage basis. Total direct costs are expensed as incurred and are not deferred in anticipation of contracts being awarded or finalization of changes in scope. Total direct costs, as a percentage of net revenue, can vary from period to period due to project labor efficiencies, changes in workforce, compensation/bonus programs and service mix.

Selling, General and Administrative

Selling, general and administrative expenses are primarily driven by compensation and related employee benefits, as well as rent, utilities, supplies, software licenses, professional fees (e.g., legal and accounting expenses), bad debt expense, travel, marketing and other operating expenses.

Depreciation

Depreciation is provided on our property and equipment on the straight-line method at rates adequate to allocate the cost of the applicable assets over their estimated useful lives, which is three to five years for computer hardware, software, phone, and medical imaging equipment, five to seven years for furniture and fixtures and other equipment, and thirty to forty years for buildings. Leasehold improvements and deemed assets from landlord building construction are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the associated remaining lease term.

Amortization

Amortization relates to finite-lived intangible assets recognized as expense using the straight-line method or using an accelerated method over their estimated useful lives, which range in term from 5 to 15 years. 

Income Tax Provision

Income tax provision consists of federal, state and local taxes on income in multiple jurisdictions.  Our income tax is impacted by the pre-tax earnings in jurisdictions with varying tax rates and any related tax credits that may be available to us.  Our current and future provision for income taxes will vary from statutory rates due to the impact of valuation allowances in certain countries, income tax incentives, certain non-deductible expenses, and other discrete items.

Key Performance Metrics

To evaluate the performance of our business, we utilize a variety of financial and performance metrics. These key measures include new business awards, cancellations and backlog.

- 20 -


 

New Business Awards, Cancellations and Backlog

New business awards represent the value of anticipated future net revenue that has been awarded during the period that is recognized in backlog. This value is recognized upon the signing of a contract or receipt of a written pre-contract confirmation from a customer that confirms an agreement in principle on budget and scope. New business awards also include contract amendments, or changes in scope, where the customer has provided written authorization for changes in budget and scope or has approved us to perform additional work as of the measurement date. Awards may not be recognized as backlog after consideration of a number of factors, including whether (i) the relevant net revenue is expected only after a pending regulatory hurdle, which might result in cancellation of the study, (ii) the customer funding needed for commencement of the study is not believed to have been secured or (iii) study timelines are uncertain or not well defined. In addition, study amounts that extend beyond a three-year timeline are not included in backlog. The number and amount of new business awards can vary significantly from period to period, and an award’s contractual duration can range from several months to several years based on customer and project specifications.

Cancellations arise in the normal course of business and are reflected when we receive written confirmation from the customer to cease work on a contractual agreement. The majority of our customers can terminate our contracts without cause upon 30 days’ notice. Similar to new business awards, the number and amount of cancellations can vary significantly period over period due to timing of customer correspondence and study-specific circumstances.

Net new business awards represent gross new business awards received in a period offset by total cancellations in that period. Net new business awards were $248.7 million and $200.7 million for the three months ended March 31, 2019 and 2018, respectively.

Backlog represents anticipated future net revenue from net new business awards that have not commenced or are currently in process but not complete. Reported backlog will fluctuate based on new business awards, changes in the scope of existing contracts, cancellations, revenue recognition on existing contracts and foreign exchange adjustments from non-U.S. dollar denominated backlog. As of March 31, 2019, our backlog increased by $198.6 million, or 21.8%, to $1,108.1 million compared to $909.5 million as of March 31, 2018. Included within backlog as of March 31, 2019 was approximately $615 million to $635 million that we expect to convert to net revenue over the next twelve months, with the remainder expected to convert to net revenue thereafter.

The effect of foreign currency adjustments on backlog was as follows: unfavorable foreign currency adjustments of $1.8 million for the three months ended March 31, 2019 and favorable foreign currency adjustments of $3.2 million for the three months ended March 31, 2018.

Backlog and net new business award metrics may not be reliable indicators of our future period revenue as they are subject to a variety of factors that may cause material fluctuations from period to period. These factors include, but are not limited to, changes in the scope of projects, cancellations, and duration and timing of services provided.

Exchange Rate Fluctuations

The majority of our contracts and operational transactions are U.S. dollar denominated.  The Euro represents the largest foreign currency denomination of our contractual and operational exposure.  As a result, a portion of our revenue and expenses are subject to exchange rate fluctuations. We have translated the Euro into U.S. dollars using the following average exchange rates based on data obtained from www.xe.com:

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

U.S. Dollars per Euro:

 

1.14

 

 

 

1.23

 

 

- 21 -


 

Results of Operations

Three Months Ended March 31, 2019 compared to Three Months Ended March 31, 2018

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

(Amounts in thousands, except percentages)

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Revenue, net

 

$

200,741

 

 

$

163,077

 

 

$

37,664

 

 

 

23.1

%

Direct service costs, excluding depreciation and amortization

 

 

75,109

 

 

 

60,341

 

 

 

14,768

 

 

 

24.5

%

Reimbursed out-of-pocket expenses

 

 

70,594

 

 

 

56,913

 

 

 

13,681

 

 

 

24.0

%

Total direct costs

 

 

145,703

 

 

 

117,254

 

 

 

28,449

 

 

 

24.3

%

Selling, general and administrative

 

 

21,308

 

 

 

15,999

 

 

 

5,309

 

 

 

33.2

%

Depreciation

 

 

1,991

 

 

 

2,314

 

 

 

(323

)

 

 

(14.0

)%

Amortization

 

 

5,844

 

 

 

7,391

 

 

 

(1,547

)

 

 

(20.9

)%

Total operating expenses

 

 

174,846

 

 

 

142,958

 

 

 

31,888

 

 

 

22.3

%

Income from operations

 

 

25,895

 

 

 

20,119

 

 

 

5,776

 

 

 

 

 

Miscellaneous expense, net

 

 

(282

)

 

 

(153

)

 

 

(129

)

 

 

 

 

Interest expense, net

 

 

(955

)

 

 

(2,309

)

 

 

1,354

 

 

 

 

 

Income before income taxes

 

 

24,658

 

 

 

17,657

 

 

 

7,001

 

 

 

 

 

Income tax provision

 

 

5,460

 

 

 

3,106

 

 

 

2,354

 

 

 

 

 

Net income

 

$

19,198

 

 

$

14,551

 

 

$

4,647

 

 

 

 

 

 

Total revenue

Total revenue increased by $37.7 million to $200.7 million for the three months ended March 31, 2019, from $163.1 million for the three months ended March 31, 2018. The increase was primarily driven by growth within the Oncology, Metabolic and other uncategorized therapeutic areas. 

Total direct costs

Total direct costs increased by $28.4 million, to $145.7 million for the three months ended March 31, 2019 from $117.3 million for the three months ended March 31, 2018. The increase was primarily attributed to higher reimbursed out-of-pocket expenses and higher personnel costs to support the growth in service activities. Reimbursed out-of-pocket expenses, which can fluctuate significantly from period to period based on the timing of program initiation and closeout, increased $13.7 million for the three months ended March 31, 2019, compared to the same period in the prior year. The higher personnel costs portion increased by $11.3 million for the three months ended March 31, 2019, compared to the same period in the prior year.

Selling, general and administrative

Selling, general and administrative expenses increased by $5.3 million, to $21.3 million for the three months ended March 31, 2019 from $16.0 million for the three months ended March 31, 2018.  This increase was primarily driven by higher personnel costs and local non-income tax costs. The higher personnel costs portion increased by $2.7 million for the three months ended March 31, 2019, compared to the same period in the prior year. Local non-income tax costs increased by $1.7 million for the three months ended March 31, 2019, compared to the same period in the prior year. 

Depreciation and Amortization

Depreciation and amortization expense decreased by $1.9 million, to $7.8 million for the three months ended March 31, 2019 from $9.7 million for the three months ended March 31, 2018. The decrease in depreciation and amortization was primarily related to the continued amortization of our definite lived intangible assets, which are amortized on an accelerated basis.

Miscellaneous expense, net

Miscellaneous expense, net increased by $0.1 million to $0.3 million of expense for the three months ended March 31, 2019 from $0.2 million of expense for the three months ended March 31, 2018. These changes were mainly attributable to foreign exchange gains or losses that arise in connection with the revaluation of short-term intercompany balances between our domestic and international subsidiaries, gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment.

- 22 -


 

Interest expense, net

Interest expense, net decreased by $1.4 million to $1.0 million for the three months ended March 31, 2019 from $2.3 million for the three months ended March 31, 2018. The decrease in interest expense, net was related to a lower average outstanding balance under our Senior Secured Credit Facilities (as defined below).

Income tax provision

Income tax provision increased by $2.4 million, to $5.5 million for the three months ended March 31, 2019 from $3.1 million for the three months ended March 31, 2018. The overall effective tax rate for the three months ended March 31, 2019 was 22.1%, compared to an overall effective tax rate of 17.6% for the three months ended March 31, 2018. The increase was primarily attributable to an increase in pre-tax book income as well as a reduction in the benefit for uncertain tax positions compared to the same period in the prior year.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal sources of liquidity are operating cash flows and funds available for borrowing under our Senior Secured Revolving Credit Facility (as defined below). As of March 31, 2019, we had cash and cash equivalents of $30.1 million. Approximately $14.4 million of cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as of March 31, 2019. On December 8, 2016, the Company entered into a credit agreement (the “Senior Secured Credit Agreement”) consisting of a $165.0 million term loan (the “Senior Secured Term Loan Facility”) and a $150.0 million revolving credit facility (the “Senior Secured Revolving Credit Facility” and, together with the Senior Secured Term Loan Facility, the “Senior Secured Credit Facilities”). As of March 31, 2019, we had $149.8 million available for borrowing under our Senior Secured Revolving Credit Facility. Our expected primary cash needs on both a short and long-term basis are for investment in operational growth, capital expenditures, payment of debt, share repurchases, selective strategic bolt-on acquisitions, other investments, and other general corporate needs. We have historically funded our operations and growth with cash flow from operations and borrowings under our credit facilities. We expect to continue expanding our operations through organic growth and potentially highly selective bolt-on acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary, borrowings under our existing or future credit facilities. We have deemed that foreign earnings will be indefinitely reinvested and therefore we have not provided taxes on these earnings. While we do not anticipate the need to repatriate these foreign earnings for liquidity purposes given our cash flows from operations and available borrowing under existing and future credit facilities, we would incur taxes on these earnings if the need for repatriation due to liquidity purposes arises.

 

 

 

Three Months Ended

 

 

 

March 31,

 

Cash Flows (Amounts in thousands)

 

2019

 

 

2018

 

Net cash provided by operating activities

 

$

34,005

 

 

$

23,298

 

Net cash used in investing activities

 

 

(3,842

)

 

 

(3,928

)

Net cash used in financing activities

 

 

(23,028

)

 

 

(24,010

)

Effect of exchange rates on cash, cash equivalents and restricted cash

 

 

(290

)

 

 

400

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

$

6,845

 

 

$

(4,240

)

 

Cash Flow from Operating Activities

Cash flows from operations are driven mainly by net income and net movement in accounts receivable and unbilled, net, advanced billings, pre-funded liabilities, accounts payable, accrued expenses, deferred taxes and deferred credits. Accounts receivable and unbilled, net, advanced billings and pre-funded liabilities fluctuate on a regular basis as we perform our services, bill our customers and ultimately collect on those receivables. We attempt to negotiate payment terms in order to provide for payments prior to or soon after the provision of services, but this timing of collection can vary significantly on a period by period comparative basis.

Net cash flows provided by operating activities was $34.0 million for the three months ended March 31, 2019 beginning with net income of $19.2 million. Adjustments to reconcile net income to net cash provided by operating activities were $13.9 million, primarily related to amortization of intangibles of $5.8 million, depreciation of $2.0 million, stock based compensation expense of $3.2 million and noncash lease expense of $2.4 million. Changes in operating assets and liabilities provided $0.9 million in operating cash flows and was primarily driven by a change in other assets and liabilities, net of $5.8 million and decreased accounts receivable and unbilled, net of $4.3 million, offset by decreased accrued expenses of $5.2 million.  

- 23 -


 

Net cash flows provided by operating activities was $23.3 million for the three months ended March 31, 2018 beginning with net income of $14.6 million. Adjustments to reconcile net income to net cash provided by operating activities were $10.8 million, primarily related to amortization of intangibles of $7.4 million, depreciation of $2.3 million and stock based compensation expense of $1.5 million. Changes in operating assets and liabilities used $2.1 million in operating cash flows and was primarily driven by increased accounts receivable and unbilled, net of $17.8 million, offset by increased accrued expenses of $5.3 million, an increase in advanced billings of $6.8 million and an increase in other assets and liabilities, net of $3.1 million.

Cash Flow from Investing Activities

Net cash used in investing activities was $3.8 million for the three months ended March 31, 2019 primarily consisting of property and equipment expenditures.

Net cash used in investing activities was $3.9 million for the three months ended March 31, 2018 primarily consisting of property and equipment expenditures.

Cash Flow from Financing Activities

Net cash used in financing activities was $23.0 million for the three months ended March 31, 2019 primarily related to $24.0 million in principal payments on our Senior Secured Term Loan Facility.

Net cash used in financing activities was $24.0 million for the three months ended March 31, 2018 primarily related to $20.0 million in principal payments on our Senior Secured Revolving Credit Facility and $4.1 million in principal payments on our Senior Secured Term Loan Facility.

Indebtedness

As of March 31, 2019, we had total indebtedness of $56.4 million, which was attributed to outstanding borrowings on the Senior Secured Credit Facilities. There were no outstanding borrowings under the Senior Secured Revolving Credit Facility as of March 31, 2019. As of March 31, 2019, we had $0.2 million in letters of credit outstanding related to certain operating lease obligations, which are secured by the Senior Secured Revolving Credit Facility. See Note 8 to our audited consolidated financial statements on our 2018 Annual Report on Form 10-K for details regarding our Senior Secured Credit Facilities.

Contractual Obligations and Commercial Commitments

We have various contractual obligations, which are recorded as liabilities in our condensed consolidated financial statements. The following table summarizes our future payments for all contractual obligations and commercial commitments for the partial and full years subsequent to the quarter ended March 31, 2019.

There have been no material changes, except as follows, to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

 

 

Payments Due by Period

 

Contractual Obligations (In thousands)

 

Total

 

 

Remaining 2019

 

 

1-3 years

 

 

3-5 years

 

 

More than 5 years

 

Long-term debt obligations

 

$

56,438

 

 

$

-

 

 

$

56,438

 

 

$

-

 

 

$

-

 

Interest on long-term debt

 

 

7,310

 

 

 

2,047

 

 

 

5,263

 

 

 

-

 

 

-

 

Operating lease obligations

 

 

191,566

 

 

 

8,878

 

 

 

33,546

 

 

 

26,101

 

 

 

123,041

 

Deemed landlord liabilities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

255,314

 

 

$

10,925

 

 

$

95,247

 

 

$

26,101

 

 

$

123,041

 

 

Principal payments in the above table are based on the terms contained in our agreements. Interest payments are based on the interest rate in effect on March 31, 2019.

Off-Balance Sheet Arrangements

Off balance sheet arrangements refer to any transaction, agreement or other contractual arrangement to which an entity not consolidated under our entity structure exists, where we have an obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such an entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. We have no off balance sheet arrangements currently.

- 24 -


 

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience and other assumptions. Actual results could differ from our estimates. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.

There have been no significant changes in the critical accounting policies and estimates as previously described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except for the below:

Lease Recognition

The Company enters into contracts to lease facilities and equipment to be used in its operations. At contract inception, the Company determines whether a contract contains a lease within the scope of Accounting Standard Codification Topic 842, Leases (“ASC 842”), and determines the appropriate classification of the lease as either operating or finance.  

Contracts containing operating leases are recorded on the consolidated balance sheets within Operating lease right-of-use (“ROU”) assets, Other current liabilities, and Operating lease liabilities. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term as of the lease commencement date.  In addition operating ROU assets also include lease payments made and exclude lease incentives and initial direct costs incurred.  Operating lease expense for lease payments is recognized on a straight-line basis over the lease term within Total direct costs and Selling, general, and administrative expenses. Variable lease costs are primarily related to adjustments for inflation, common area maintenance and property tax and are recognized within Total direct costs and Selling, general and administrative expenses.  

Contracts containing finance leases are recognized initially in the same manner as Operating lease ROU assets and liabilities, however are recorded on the consolidated balance sheets within Property and equipment, net, Other current liabilities, and Other long-term liabilities. Finance lease assets are subsequently amortized on a straight line basis over the lease term within Depreciation expense, while the lease liability is accreted within Interest expense, net utilizing the discount rate determined at lease commencement and reduced by periodic lease payments over the lease term. Currently, the Company does not have any finance leases.

The discount rate utilized in determining the present value of future payments for both operating and finance leases, unless implicit in the lease contract, is determined based on the Company’s collateralized incremental borrowing rate based on the information available at lease commencement.  

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option as determined at lease commencement.  

Many of our lease agreements have both lease and non-lease components, which the Company has elected to treat as a single lease component for recognition purposes.  

The Company may enter into short-term leases (leases with a lease term of less than 1 year), which it has elected not to capitalize as assets and liabilities on the consolidated balance sheets, but instead recognizes lease payments within Total direct costs and Selling, general, and administrative expenses on a straight line basis over the lease term.  

Effect of Recent Accounting Pronouncements

Refer to Note 2 of the Condensed Consolidated Financial Statements for management’s discussion of the effect of recent accounting pronouncements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

- 25 -


 

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, and as previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, management has concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2019 due to a material weakness related to the implementation of ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)”.  We are in the process of remediating the material weakness, however, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. During the period, the Company has enhanced its review controls to remediate the material weakness and improve its internal control over financial reporting.

Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2019, the Company adopted ASU 2016-02 and centralized the Company's lease accounting system and processes effective January 1, 2019. This implementation resulted in a material change to the Company's internal control over financial reporting as of that date. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal control over financial reporting for the fiscal year ended December 31, 2019.

Other than described above, there were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

We are party to legal proceedings incidental to our business. While the outcome of these matters could differ from management’s expectations, we do not believe that the resolution of these matters is reasonably likely to have a material adverse effect to our financial statements.

Item 1A. Risk Factors

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no significant changes from the risk factors previously disclosed in our Annual Report.

- 26 -


 

Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds

Recent Sales of Unregistered Securities

 

Date

 

Equity Plan

 

Number of Stock Options Exercised

 

 

Exercise Price

 

 

Approximate Aggregate Purchase Price

 

January 3, 2019

 

2014 Equity Incentive Plan

 

 

8,370

 

 

$

14.41

 

 

$

120,700

 

January 4, 2019

 

2014 Equity Incentive Plan

 

 

2,222

 

 

 

14.41

 

 

 

32,100

 

January 8, 2019

 

2014 Equity Incentive Plan

 

 

7,468

 

 

 

14.41

 

 

 

107,700

 

January 10, 2019

 

2014 Equity Incentive Plan

 

 

3,703

 

 

 

14.41

 

 

 

53,400

 

February 12, 2019

 

2014 Equity Incentive Plan

 

 

1,111

 

 

 

14.41

 

 

 

16,100

 

February 26, 2019

 

2014 Equity Incentive Plan

 

 

555

 

 

 

14.41

 

 

 

8,100

 

February 27, 2019

 

2014 Equity Incentive Plan

 

 

6,342

 

 

 

14.41

 

 

 

91,400

 

February 27, 2019

 

2014 Equity Incentive Plan

 

 

555

 

 

 

16.20

 

 

 

9,100

 

February 27, 2019

 

2014 Equity Incentive Plan

 

 

6,000

 

 

 

18.23

 

 

 

109,400

 

March 1, 2019

 

2014 Equity Incentive Plan

 

 

200

 

 

 

14.41

 

 

 

2,900

 

March 5, 2019

 

2014 Equity Incentive Plan

 

 

6,055

 

 

 

14.41

 

 

 

87,300

 

March 6, 2019

 

2014 Equity Incentive Plan

 

 

6,392

 

 

 

14.41

 

 

 

92,200

 

March 7, 2019

 

2014 Equity Incentive Plan

 

 

925

 

 

 

14.41

 

 

 

13,400

 

March 8, 2019

 

2014 Equity Incentive Plan

 

 

185

 

 

 

14.41

 

 

 

2,700

 

March 13, 2019

 

2014 Equity Incentive Plan

 

 

100

 

 

 

14.41

 

 

 

1,500

 

March 14, 2019

 

2014 Equity Incentive Plan

 

 

4,300

 

 

 

14.41

 

 

 

62,000

 

March 15, 2019

 

2014 Equity Incentive Plan

 

 

2,098

 

 

 

14.41

 

 

 

30,300

 

March 18, 2019

 

2014 Equity Incentive Plan

 

 

12

 

 

 

14.41

 

 

 

200

 

March 20, 2019

 

2014 Equity Incentive Plan

 

 

5,453

 

 

 

14.41

 

 

 

78,600

 

March 22, 2019

 

2014 Equity Incentive Plan

 

 

1,033

 

 

 

14.41

 

 

 

14,900

 

Total

 

 

 

 

63,079

 

 

 

 

 

 

$

934,000

 

 

Use of Proceeds from Registered Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits in the accompanying Exhibit Index preceding the signature page are filed or furnished as a part of this report and are incorporated herein by reference.

 

 

- 27 -


 

EXHIBIT INDEX

 

 

 

 

 

Incorporated by Reference

 

 

Exhibit
Number

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

 

Filing
Date

 

Filed/
Furnished
Herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1

 

Section 1350 Certification of Chief Executive Officer

 

 

 

 

 

 

 

 

 

**

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2

 

Section 1350 Certification of Chief Financial Officer

 

 

 

 

 

 

 

 

 

**

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation

 

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Filed herewith.

 

**

Furnished herewith.

 

 

- 28 -


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

MEDPACE HOLDINGS, INC.

 

 

 

/s/ Jesse J. Geiger

 

Jesse J. Geiger

 

Chief Financial Officer, and Chief Operating Officer, Laboratory Operations

(Authorized Officer and Principal Financial Officer)

 

Date: April 30, 2019

 

- 29 -