10-Q 1 medp-10q_20180930.htm 10-Q medp-10q_20180930.htm

 

 

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 September 30, 2018

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 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

 

35,605,064 shares outstanding as of October 26, 2018

 

 

 

 


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 

Item Number

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

6

 

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

29

Item 1.

 

Legal Proceedings

 

29

Item 1A.

 

Risk Factors

 

29

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

Item 3.

 

Defaults Upon Senior Securities

 

31

Item 4.

 

Mine Safety Disclosures

 

31

Item 5.

 

Other Information

 

31

Item 6.

 

Exhibits

 

31

EXHIBIT INDEX

 

32

SIGNATURES

 

33

 

- 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

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,244

 

 

$

26,485

 

Restricted cash

 

 

7

 

 

 

7

 

Accounts receivable and unbilled, net (includes $2.4 million and $1.0 million with related parties at September 30, 2018 and December 31, 2017, respectively)

 

 

108,285

 

 

 

83,079

 

Prepaid expenses and other current assets

 

 

22,549

 

 

 

20,400

 

Total current assets

 

 

153,085

 

 

 

129,971

 

Property and equipment, net

 

 

52,030

 

 

 

48,739

 

Goodwill

 

 

660,981

 

 

 

660,981

 

Intangible assets, net

 

 

76,569

 

 

 

98,740

 

Deferred income taxes

 

 

446

 

 

 

6,343

 

Other assets

 

 

6,732

 

 

 

5,943

 

Total assets

 

$

949,843

 

 

$

950,717

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,602

 

 

$

16,674

 

Accrued expenses

 

 

80,328

 

 

 

23,673

 

Pre-funded study costs (includes $1.0 million with related parties at December 31, 2017)

 

 

-

 

 

 

57,406

 

Advanced billings (includes $0.2 million and $1.7 million with related parties at September 30, 2018 and December 31, 2017, respectively)

 

 

133,403

 

 

 

73,756

 

Current portion of long-term debt

 

 

-

 

 

 

16,500

 

Other current liabilities

 

 

4,794

 

 

 

4,697

 

Total current liabilities

 

 

232,127

 

 

 

192,706

 

Long-term debt, net, less current portion

 

 

113,689

 

 

 

205,111

 

Deemed landlord liability, less current portion

 

 

25,035

 

 

 

26,602

 

Deferred income tax liability

 

 

2,636

 

 

 

560

 

Deferred credit

 

 

3,953

 

 

 

11,468

 

Other long-term liabilities

 

 

11,014

 

 

 

10,740

 

Total liabilities

 

 

388,454

 

 

 

447,187

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock - $0.01 par-value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

-

 

 

 

-

 

Common stock - $0.01 par-value; 250,000,000 shares authorized at September 30, 2018 and December 31, 2017, respectively; 35,587,848 and 35,466,510 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

356

 

 

 

355

 

Treasury stock - 200,000 shares at September 30, 2018 and December 31, 2017

 

 

(6,030

)

 

 

(6,030

)

Additional paid-in capital

 

 

636,536

 

 

 

630,341

 

Accumulated deficit

 

 

(67,294

)

 

 

(120,402

)

Accumulated other comprehensive loss

 

 

(2,179

)

 

 

(734

)

Total shareholders’ equity

 

 

561,389

 

 

 

503,530

 

Total liabilities and shareholders’ equity

 

$

949,843

 

 

$

950,717

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net (includes $5.1 million and $9.2 million with related parties for the three and nine months ended September 30, 2018, respectively)

 

$

179,253

 

 

$

-

 

 

$

512,474

 

 

$

-

 

Service revenue, net (includes $2.0 million and $8.9 million with related parties for the three and nine months ended September 30, 2017, respectively)

 

 

-

 

 

 

98,681

 

 

 

-

 

 

 

287,014

 

Reimbursed out-of-pocket revenue (includes $0.2 million and $1.3 million with related parties for the three and nine months ended September 30, 2017, respectively)

 

 

-

 

 

 

11,962

 

 

 

-

 

 

 

36,456

 

Total revenue

 

 

179,253

 

 

 

110,643

 

 

 

512,474

 

 

 

323,470

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct service costs, excluding depreciation and amortization

 

 

62,520

 

 

 

53,144

 

 

 

184,339

 

 

 

156,204

 

Reimbursed out-of-pocket expenses

 

 

61,476

 

 

 

11,962

 

 

 

173,587

 

 

 

36,456

 

Total direct costs

 

 

123,996

 

 

 

65,106

 

 

 

357,926

 

 

 

192,660

 

Selling, general and administrative

 

 

18,606

 

 

 

16,606

 

 

 

55,112

 

 

 

46,515

 

Depreciation

 

 

2,343

 

 

 

2,237

 

 

 

6,883

 

 

 

6,468

 

Amortization

 

 

7,390

 

 

 

9,496

 

 

 

22,171

 

 

 

28,406

 

Total operating expenses

 

 

152,335

 

 

 

93,445

 

 

 

442,092

 

 

 

274,049

 

Income from operations

 

 

26,918

 

 

 

17,198

 

 

 

70,382

 

 

 

49,421

 

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous income (expense), net

 

 

482

 

 

 

(145

)

 

 

807

 

 

 

(642

)

Interest expense, net

 

 

(1,941

)

 

 

(1,906

)

 

 

(6,558

)

 

 

(5,508

)

Total other expense, net

 

 

(1,459

)

 

 

(2,051

)

 

 

(5,751

)

 

 

(6,150

)

Income before income taxes

 

 

25,459

 

 

 

15,147

 

 

 

64,631

 

 

 

43,271

 

Income tax provision

 

 

6,154

 

 

 

5,316

 

 

 

14,207

 

 

 

15,440

 

Net income

 

$

19,305

 

 

$

9,831

 

 

$

50,424

 

 

$

27,831

 

Net income per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.54

 

 

$

0.25

 

 

$

1.41

 

 

$

0.70

 

Diluted

 

$

0.52

 

 

$

0.25

 

 

$

1.36

 

 

$

0.69

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,569

 

 

 

38,579

 

 

 

35,525

 

 

 

39,803

 

Diluted

 

 

37,125

 

 

 

39,329

 

 

 

36,795

 

 

 

40,537

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

19,305

 

 

$

9,831

 

 

$

50,424

 

 

$

27,831

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes

 

 

(64

)

 

 

765

 

 

 

(1,445

)

 

 

2,479

 

Comprehensive income

 

$

19,241

 

 

$

10,596

 

 

$

48,979

 

 

$

30,310

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 5 -


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(Amounts in thousands)

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

50,424

 

 

$

27,831

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

6,883

 

 

 

6,468

 

Amortization

 

 

22,171

 

 

 

28,406

 

Stock-based compensation expense

 

 

4,386

 

 

 

3,215

 

Amortization of debt issuance costs and discount

 

 

471

 

 

 

498

 

Deferred income tax provision (benefit)

 

 

7,260

 

 

 

(420

)

Amortization and adjustment of deferred credit

 

 

(7,515

)

 

 

-

 

Other

 

 

487

 

 

 

(615

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and unbilled, net

 

 

(12,845

)

 

 

5,340

 

Prepaid expenses and other current assets

 

 

(2,542

)

 

 

(1,271

)

Accounts payable

 

 

(1,323

)

 

 

(467

)

Accrued expenses

 

 

21,613

 

 

 

(4,840

)

Pre-funded study costs

 

 

-

 

 

 

1,149

 

Advanced billings

 

 

28,277

 

 

 

2,381

 

Other assets and liabilities, net

 

 

(605

)

 

 

1,058

 

Net cash provided by operating activities

 

 

117,142

 

 

 

68,733

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Property and equipment expenditures

 

 

(12,575

)

 

 

(8,329

)

Acquisition of intangibles

 

 

-

 

 

 

(569

)

Other

 

 

(186

)

 

 

44

 

Net cash used in investing activities

 

 

(12,761

)

 

 

(8,854

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

1,810

 

 

 

1,187

 

Repurchases of common stock

 

 

-

 

 

 

(95,260

)

Payment of debt

 

 

(38,156

)

 

 

(9,281

)

Proceeds from revolving loan

 

 

-

 

 

 

40,000

 

Payments on revolving loan

 

 

(70,000

)

 

 

(10,000

)

Payment of deemed landlord liability

 

 

(1,387

)

 

 

(1,240

)

Net cash used in financing activities

 

 

(107,733

)

 

 

(74,594

)

EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS, AND

RESTRICTED CASH

 

 

(889

)

 

 

1,555

 

DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

 

 

(4,241

)

 

 

(13,160

)

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

 

 

26,492

 

 

 

37,407

 

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

 

$

22,251

 

 

$

24,247

 

 

See notes to condensed consolidated financial statements.

 

 

- 6 -


 

MEDPACE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2018

 

(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, coordinated central laboratory, project management, regulatory affairs, clinical monitoring, data management and analysis, pharmacovigilance new drug application submissions, and post-marketing clinical support. The Company also provides bio-analytical 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, 2017.

Secondary Offerings

During the three and nine months ended September 30, 2018, Cinven Capital Management (V) General Partner Limited (“Cinven”), sold a total of 10,399,997 and 16,399,997 shares, respectively, of the Company’s common stock as part of multiple secondary offerings (the “Offerings”). The Company incurred professional fees in connection with the Offerings of approximately $0.3 million and $0.7 million, respectively, during the three and nine months ended September 30, 2018. The fees are included within operating expenses in the accompanying consolidated statement of operations. As of August 27, 2018, Cinven does not beneficially own any shares of the Company’s outstanding common stock. The Company did not sell any shares in or receive any proceeds from the Offerings.

(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, 2017. Significant changes to our accounting policies as a result of adopting Accounting Standards Codification Topic 606 (“ASC 606”) are discussed below:

Revenue Recognition

We generally enter into contracts with customers to provide services ranging in duration from a few months to several years. The contract terms generally provide for payments based on a fixed-fee or unit-of-service arrangement. We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018. Revenue on contracts is recognized when or as we satisfy the contract performance obligations, at the amount that reflects our cumulative progress toward delivery of the performance obligation. This progress assessment is applied to the amount of consideration to which we expect to be paid for delivery of the performance obligation. Our performance obligations are generally satisfied over time and related revenue is recognized as services are provided to meet these obligations.

- 7 -


 

Contract Assumptions

An arrangement is accounted for as a contract within the scope of ASC 606 when the Company and its customers approve the contract, are committed to perform their respective obligations, each party can identify its rights regarding the goods or services to be transferred, commercial substance is present, and it is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.  

For our services to meet this criteria, contracts generally need to be written, pending regulatory hurdles required to commence work must be cleared, the study protocol must be completed, the customer must have adequate funding or reasonable path to funding to execute the contracted portion of the study, and the study must be actively moving forward. Once these criteria have been met, it is deemed that the Company and its customers are committed to perform their respective obligations. Depending on the timing of when these criteria are met, revenue recognition may vary significantly on a period over period basis.      

Accounting for contracts performed over a period of time involves the use of various assumptions to estimate total contract revenue and costs. We estimate expected costs to complete a contract and recognize contracted revenue over the life of the contract as those costs are incurred.

Cost estimates are based on a detailed project budget and are developed based on many variables, including, but not limited to, the scope of the work, the complexity of the study, the participating geographic locations and the Company’s historical experience. To assist with the estimation of costs expected at completion over the life of a project, regular contract reviews are performed in which performance to date is compared to the most current estimate to complete assumptions. The reviews include an assessment of costs incurred to date compared to expectations based on budget assumptions and other circumstances specific to the project. The total estimated costs necessary to complete is updated and any revisions to the existing cost estimate results in cumulative adjustments to the amount of revenue recognized in the period in which the revisions are identified. In the case of cost estimates related to activities legally contracted as reimbursable in nature, including but not limited to investigator fee activity, these estimates also influence our assumed contract value and assumed remaining performance obligations. Because of the uncertainties inherent in estimating the costs necessary to fulfill contractual obligations, it is possible that estimates may change in the near term, resulting in a material change in revenue reported.

Contracts generally provide for pricing modifications upon scope of work changes. We recognize revenue, at an amount to which we expect to be entitled, related to work performed in connection with scope changes when the underlying services are performed and a binding contractual commitment has been established with the customer. If our customers do not agree to contract changes upon changes in our scope of work, we could be exposed to cost overruns and reduced contract profitability. Costs are not deferred in anticipation of contracts being awarded or amendments being finalized, but are expensed as incurred.

Most contracts are terminable by the customer, either immediately or according to advance notice terms specified within the contracts. These contracts require payment of fees for services rendered through the date of termination and may require payment for subsequent services necessary to conclude the study or close out the contract. Final settlement amounts are agreed to with the customer based on remaining work to be performed. These amounts are included in revenue when we believe the amount can be estimated reliably and its realization is probable.  In evaluating the probability of recognition, we consider the contractual basis for the settlement amount and the objective evidence available to support the amount.

Certain contracts contain volume rebate arrangements with our customers that provide for rebates if certain specified spending thresholds are met. These obligations are considered as a reduction in revenue when it appears probable that the arrangement thresholds will be met, which can be at contract inception.

We occasionally enter into incentive fee arrangements with customers that provide for additional compensation if certain defined contractual milestones or performance thresholds are met. These additional fees are included in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee and when achievement of the incentive milestone is deemed probable.  These estimates are based on anticipated performance, our best judgement at the time or ultimately, upon achievement of the threshold or milestone.

We record revenue net of any tax assessments by governmental authorities that are imposed and concurrent with specific revenue generating transactions.

Performance Obligations

Substantially all of our contracts consist of a single performance obligation, as the promise to transfer the individual services described in the contracts are not separately identifiable from other promises in the contracts, and therefore not distinct. Revenue recognition is determined by assessing the progress of performance completed or delivered to date compared to total services to be delivered under the terms of the arrangement. The measures utilized to assess progress on the satisfaction of performance are specific to the performance obligation identified in the contract.  

- 8 -


 

For the majority of our contract performance obligations, we utilize the input method of cost to cost to measure progress, as the Company has determined that it is the most consistent measure of progress among contract tasks and represents the most faithful depiction of the transfer of services over the contract life. Under this method, the Company determines cost incurred to date for the services it provides compared to the total estimated costs at completion.  

For certain other contractual performance obligations, the Company has determined that an output method is the best measure of progress. These relate to certain unitized contracts, and the Company recognizes revenue in the period in which the unit is delivered compared to total contracted units.

On September 30, 2018, we had approximately $1,047.1 million of performance obligations remaining to be performed for active projects.  

Costs and Expenses

Total direct costs

The Company incurs costs associated with service delivery including direct labor and related employee benefits, laboratory supplies, and other expenses. These costs are recorded in Direct service costs, excluding depreciation and amortization as a component of Total direct costs in the accompanying condensed consolidated statements of operations.

In addition, the Company incurs expenses on behalf of its customers for various project expenditures including, but not limited to, investigator site payments, travel, meetings, printing, and shipping and handling fees that are reimbursed by our customers at cost.  These costs are included in Reimburseable out-of-pocket expenses as a component of Total direct costs in the accompanying condensed consolidated statements of operations.

Total direct costs are expensed as incurred and are not deferred in anticipation of contracts being awarded or finalization of changes in scope.

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.

Under ASC 606, the majority of the Company’s contracts will have a single performance obligation that is satisfied over time, with revenue recognized based on overall project progress measured as of the financial statement date. This represents a change in the Company’s previous revenue accounting methodology, Accounting Standards Codification Topic 605, Revenue Recognition (“ASC 605”), as a majority of contracts were accounted for under the multiple element arrangement guidance.  Under the previous revenue recognition accounting methodology, certain revenue related to reimbursable expenses was presented either as a separate line item within Reimbursable out-of-pocket revenue or net of related expenses within Service revenue, net in the condensed consolidated statements of operations.  As a result of having a single performance obligation, the Company accounts for all revenue related to reimbursable expenses on a gross basis within a single revenue line item.  Measurement of progress on contracts with customers will generally be based on the input measurement of cost incurred relative to the total expected costs to satisfy the performance obligation.  

The Company elected to utilize the modified retrospective implementation method for its transition to ASC 606 as of January 1, 2018 (the “Implementation Date”).  Under this implementation method, the Company recognized the cumulative effect of initially applying the ASC 606 revenue recognition guidance to contracts that were not completed at the Implementation Date.  At the Implementation Date, the Company elected to reflect the aggregate effect of all contract modifications that occurred before January 1, 2018 in determining the satisfied and unsatisfied performance obligations and determination of the transaction price.

The cumulative effect adjustment was recorded as a reduction to the opening balance of Accumulated deficit in the condensed consolidated balance sheets in the amount of $2.7 million, with offsetting amounts of $12.9 million to Accounts receivable and unbilled, net, $(0.7) million to Deferred income taxes, $35.4 million to Accrued expenses, $(57.4) million to Pre-funded study costs and $31.5 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 our interim financial statements filed on Form 10-Q for the quarterly period ended March 31, 2018 to correct certain immaterial misstatements. The effects of these misstatements were immaterial to our results of operations.

- 9 -


 

In connection with the implementation of ASC 606 on the modified retrospective method, we are presenting additional information to assist with the comparability of select line items of the current and prior period year to date reporting in our condensed consolidated balance sheets and condensed consolidated statements of operations.  Below we have presented the amount by which each financial statement line item is affected in the current reporting period by the application of ASC 606 as compared with the guidance that was in effect before the change (ASC 605).

 

 

Three Months Ended September 30, 2018

 

 

As Reported

 

 

Adjustments

 

 

As Revised under ASC 605

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

$

179,253

 

 

$

(179,253

)

 

$

-

 

Service revenue, net

 

-

 

 

 

123,990

 

 

 

123,990

 

Reimbursed out-of-pocket revenue

 

-

 

 

 

19,102

 

 

 

19,102

 

           Total revenue

 

179,253

 

 

 

(36,161

)

 

 

143,092

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Direct service costs, excluding depreciation and amortization

 

62,520

 

 

 

-

 

 

 

62,520

 

Reimbursed out-of-pocket expenses

 

61,476

 

 

 

(42,374

)

 

 

19,102

 

           Total direct costs

 

123,996

 

 

 

(42,374

)

 

 

81,622

 

           Total operating expenses

 

152,335

 

 

 

(42,374

)

 

 

109,961

 

Income from operations

 

26,918

 

 

 

6,213

 

 

 

33,131

 

Income before income taxes

 

25,459

 

 

 

6,213

 

 

 

31,672

 

Income tax provision

 

6,154

 

 

 

1,522

 

 

 

7,676

 

Net income

$

19,305

 

 

$

4,691

 

 

$

23,996

 

Net income per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.54

 

 

$

0.13

 

 

$

0.67

 

Diluted

$

0.52

 

 

$

0.12

 

 

$

0.64

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

35,569

 

 

 

-

 

 

 

35,569

 

Diluted

 

37,125

 

 

 

-

 

 

 

37,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

As Reported

 

 

Adjustments

 

 

As Revised under ASC 605

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

$

512,474

 

 

$

(512,474

)

 

$

-

 

Service revenue, net

 

-

 

 

 

350,210

 

 

 

350,210

 

Reimbursed out-of-pocket revenue

 

-

 

 

 

53,163

 

 

 

53,163

 

           Total revenue

 

512,474

 

 

 

(109,101

)

 

 

403,373

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Direct service costs, excluding depreciation and amortization

 

184,339

 

 

 

-

 

 

 

184,339

 

Reimbursed out-of-pocket expenses

 

173,587

 

 

 

(120,424

)

 

 

53,163

 

           Total direct costs

 

357,926

 

 

 

(120,424

)

 

 

237,502

 

           Total operating expenses

 

442,092

 

 

 

(120,424

)

 

 

321,668

 

Income from operations

 

70,382

 

 

 

11,323

 

 

 

81,705

 

Income before income taxes

 

64,631

 

 

 

11,323

 

 

 

75,954

 

Income tax provision

 

14,207

 

 

 

2,686

 

 

 

16,893

 

Net income

$

50,424

 

 

$

8,637

 

 

$

59,061

 

Net income per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.41

 

 

$

0.25

 

 

$

1.66

 

Diluted

$

1.36

 

 

$

0.24

 

 

$

1.60

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

35,525

 

 

 

-

 

 

 

35,525

 

Diluted

 

36,795

 

 

 

-

 

 

 

36,795

 

 

- 10 -


 

ASSETS

As of September 30, 2018

 

Current assets:

As Reported

 

 

Adjustments

 

 

As Revised under ASC 605

 

Accounts receivable and unbilled, net

 

108,285

 

 

 

(14,113

)

 

 

94,172

 

           Total current assets

 

153,085

 

 

 

(14,113

)

 

 

138,972

 

           Total assets

$

949,843

 

 

$

(14,113

)

 

$

935,730

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

80,328

 

 

 

(49,739

)

 

 

30,589

 

Pre-funded study costs

 

-

 

 

 

61,136

 

 

 

61,136

 

Advanced billings

 

133,403

 

 

 

(33,446

)

 

 

99,957

 

Other current liabilities

 

4,794

 

 

 

2,686

 

 

 

7,480

 

           Total current liabilities

 

232,127

 

 

 

(19,363

)

 

 

212,764

 

Deferred income tax liability

 

2,636

 

 

 

(703

)

 

 

1,933

 

           Total liabilities

 

388,454

 

 

 

(20,066

)

 

 

368,388

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

(67,294

)

 

 

5,953

 

 

 

(61,341

)

           Total shareholders’ equity

 

561,389

 

 

 

5,953

 

 

 

567,342

 

           Total liabilities and shareholders’ equity

$

949,843

 

 

$

(14,113

)

 

$

935,730

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Nine Months Ended September 30, 2018

 

 

As Reported

 

 

Adjustments

 

 

As Revised under ASC 605

 

Net income

 

50,424

 

 

 

8,637

 

 

 

59,061

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

           Accounts receivable and unbilled, net

 

(12,845

)

 

 

1,238

 

 

 

(11,607

)

           Accrued expenses

 

21,613

 

 

 

(14,393

)

 

 

7,220

 

           Pre-funded study costs

 

-

 

 

 

3,732

 

 

 

3,732

 

           Advanced billings

 

28,277

 

 

 

(1,900

)

 

 

26,377

 

           Other assets and liabilities, net

 

(605

)

 

 

2,686

 

 

 

2,081

 

Net cash provided by operating activities

 

117,142

 

 

 

-

 

 

 

117,142

 

Recently Issued Accounting Standards

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”). ASC 842 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASC 842 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.

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 will be applied on a prospective basis as of January 1, 2019 and any cumulative catch up adjustment for differences between ASC 842 and ASC 840 will be 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 will elect 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 if 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.  

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 may be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized and is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company is currently evaluating the effect this standard will have on its condensed consolidated financial statements.

- 11 -


 

 

 

(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.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 (in thousands, except for earnings per share): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

35,569

 

 

 

38,579

 

 

 

35,525

 

 

 

39,803

 

 

RSAs

 

 

141

 

 

 

62

 

 

 

144

 

 

 

60

 

 

Total weighted-average shares

 

 

35,710

 

 

 

38,641

 

 

 

35,669

 

 

 

39,863

 

 

Earnings per common share—Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,305

 

 

$

9,831

 

 

$

50,424

 

 

$

27,831

 

 

Less: Undistributed earnings allocated to RSAs

 

 

76

 

 

 

16

 

 

 

204

 

 

 

42

 

 

Net income available to common shareholders—Basic

 

$

19,229

 

 

$

9,815

 

 

$

50,220

 

 

$

27,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—Basic

 

$

0.54

 

 

$

0.25

 

 

$

1.41

 

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

35,569

 

 

 

38,579

 

 

 

35,525

 

 

 

39,803

 

 

Effect of diluted shares