MEDPACE HOLDINGS, INC. 
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 endedDecember 31, 2022 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 endedDecember 31, 2022 . 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 endedDecember 31, 2022 .
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, are forward looking statements. Forward looking statements include, without limitation, statements regarding our results of operations; financial position and performance; liquidity and our ability to fund our business operations and initiatives; capital expenditure and debt service obligations; business strategies, plans and goals, including those related to marketing, acquisitions and expansion of our business; product approvals and plans; industry trends; general economic conditions, including inflation and other pricing pressures that could decrease our operating margins; expectations regarding consumer behaviors and trends; our culture and operating philosophy; human resource management; arrangements with and delivery of our services to the customers; conversion of backlog; dividend policy; legal proceedings; and our objectives for future operations. The words "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "target," "likely," 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 our financial condition 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 our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 and "Part II - Other Information, Item 1A Risk Factors" herein.
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 Oncology, Metabolic Disease, Cardiology, Central Nervous System, or CNS, and Antiviral and Anti-infective, or AVAI. Our global platform includes approximately 5,400 employees across 40 countries as ofMarch 31, 2023 , providing our customers with broad access to diverse markets and patient populations as well as local regulatory expertise and market knowledge. -18-
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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. Revenue, which is distinct from billing and cash receipt, is recognized based on 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 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 of 15 years.
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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.
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$555.8 million and$423.0 million for the three months endedMarch 31, 2023 and 2022, 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 ofMarch 31, 2023 , our backlog increased by$372.1 million , or 17.8%, to$2,460.1 million compared to$2,088.0 million as ofMarch 31, 2022 . Included within backlog as ofMarch 31, 2023 was approximately$1,320.0 million to$1,340.0 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: favorable foreign currency adjustments of$3.0 million for the three months endedMarch 31, 2023 and favorable foreign currency adjustments of$1.2 million for the three months endedMarch 31, 2022 . 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 areU.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 -20-
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expenses are subject to exchange rate fluctuations. We have translated the Euro intoU.S. dollars using the following average exchange rates based on data obtained from www.xe.com: Three Months Ended March 31, 2023 2022 U.S. Dollars per Euro: 1.07 1.12 Results of Operations
Three Months Ended
Three Months Ended March 31,
(Amounts in thousands, except percentages) 2023 2022 Change % Change
Revenue, net $ 434,074 $ 330,947 $ 103,127 31.2 %
Direct service costs, excluding depreciation
and amortization 151,068 125,434 25,634 20.4 %
Reimbursed out-of-pocket expenses 152,817 106,836 45,981 43.0 %
Total direct costs 303,885 232,270 71,615 30.8 %
Selling, general and administrative 38,027 29,366 8,661 29.5 %
Depreciation 5,408 4,270 1,138 26.7 %
Amortization 550 838 (288) (34.4) %
Total operating expenses 347,870 266,744 81,126 30.4 %
Income from operations 86,204 64,203 22,001
Miscellaneous income, net 687 1,067 (380)
Interest (expense) income, net (861) 54 (915)
Income before income taxes 86,030 65,324 20,706
Income tax provision 13,136 4,013 9,123
Net income $ 72,894 $ 61,311 $ 11,583
Total revenue
Total revenue increased by $103.1 million to $434.1 million for the three months
ended March 31, 2023 , from $330.9 million for the three months ended March 31,
2022 . The increase for the three months ended March 31, 2023 was primarily
driven by growth within the Oncology, Metabolic, Cardiology and other
therapeutic areas, compared to the same period in the prior year.
Total direct costs
Total direct costs increased by$71.6 million , to$303.9 million for the three months endedMarch 31, 2023 from$232.3 million for the three months endedMarch 31, 2022 . 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$46.0 million for the three months endedMarch 31, 2023 , compared to the same period in the prior year. The higher personnel costs portion increased by$19.5 million for the three months endedMarch 31, 2023 , compared to the same periods in the prior year.
Selling, general and administrative
Selling, general and administrative expenses increased by$8.7 million , to$38.0 million for the three months endedMarch 31, 2023 from$29.4 million for the three months endedMarch 31, 2022 . The increase was primarily attributed to higher personnel costs to support the growth in service activities. The higher personnel costs portion increased by$4.9 million for the three months endedMarch 31, 2023 , compared to the same periods in the prior year. -21-
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Depreciation and Amortization
Depreciation and amortization expense of$6.0 million for the three months endedMarch 31, 2023 remained relatively consistent with$5.1 million for the three months endedMarch 31, 2022 . Miscellaneous income, net Miscellaneous income, net decreased by$0.4 million to$0.7 million for the three months endedMarch 31, 2023 from$1.1 million for the three months endedMarch 31, 2022 . These changes were mainly attributable to foreign exchange gains and losses that arise in connection with the revaluation of short-term intercompany balances between our domestic and international subsidiaries and 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.
Income tax provision
Income tax provision increased by$9.1 million , to$13.1 million for the three months endedMarch 31, 2023 from$4.0 million for the three months endedMarch 31, 2022 . The overall effective tax rate for the three months endedMarch 31, 2023 was 15.3%, compared to an overall effective tax rate of 6.1% for the three months endedMarch 31, 2022 . The increase in the income tax provision and overall effective tax rate was primarily attributable to the increase in pre-tax book income and a decrease in excess tax benefits recognized from share based compensation and benefits from uncertain tax positions compared to the same periods 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 from borrowings under our unsecured credit facility consisting of up to a$150.0 million revolving line of credit which we entered into onSeptember 30, 2019 (the "Credit Facility"), and has subsequently been amended. As ofMarch 31, 2023 , we had cash and cash equivalents of$46.9 million which increased from$28.3 million as ofDecember 31, 2022 . Approximately$15.6 million of cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as ofMarch 31, 2023 . As ofMarch 31, 2023 , we had$34.8 million available for borrowing under the Credit Facility. Our expected primary cash needs on both a short and long-term basis are for investment in operational growth, capital expenditures, credit facility repayments, 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. As ofMarch 31, 2023 , cash commitments to support operating business needs include lease liabilities discussed in Note 8 of the Condensed Consolidated Financial Statements, short-term debt discussed in Note 7 of the Condensed Consolidated Financial Statements, purchase commitments discussed in Note 11 of the Condensed Consolidated Financial Statements and capital expenditures primarily related to infrastructure investments in our facilities, equipment and technology. Capital spending as a percentage of revenue decreased by 61 basis points to 2.19% in the three months endedMarch 31, 2023 , compared to the same period in the prior year. 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 or other debt. 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 borrowings under existing and future credit facilities, we would incur taxes on these earnings if the need for repatriation due to liquidity purposes arises.
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