Medpace Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Management's Report on Internal Control Over Financial Reporting Management of Medpace Holdings, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements in the consolidated financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making these assessments, management used the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on management’s assessment and the criteria in the COSO framework, management has concluded that the Company’s internal control over financial reporting as of December 31, 2020 was effective. The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report included herein. - 49 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Medpace Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Medpace Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations , comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases , using the Comparatives Under ASC 840 Option transition approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition — Clinical Research– Refer to Note 2 to the financial statements Critical Audit Matter Description - 50 - The Company recognizes contract revenue over the contract term as the service progresses, because the transfer of control to the customer is continuous. Substantially all of the Company’s clinical research contracts consist of a single performance obligation as the promise to transfer individual services described in the contracts are not separately identifiable from other promises in the contracts, and therefore not distinct. The accounting for these contracts involves judgment, particularly as it relates to the process of estimating costs to complete a contract for the performance obligation, which includes direct costs, reimbursable out-of-pocket costs, and reimbursable investigator site payments. Contract costs are recognized as incurred, and revenue recognition is based on cost incurred to date for the services provided compared to the total estimated costs to complete a contract. Given the judgments necessary to estimate costs to complete a contract for the performance obligation used to recognize revenue for certain clinical research contracts over time, auditing such estimates required extensive audit effort due to the complexity of contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s estimates of costs to complete a contract for the performance obligation used to recognize revenue for certain clinical research contracts included the following, among others: • We tested the effectiveness of controls over revenue recognized throughout the contract term, including management’s controls over estimates of future services to be delivered and costs to be incurred under the contract. • We selected a sample of contracts and performed the following: • Evaluated whether the contracts were properly included in management’s calculation of contract revenue based on the terms and conditions of each selected contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation. • Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any pricing modifications and scope changes that were agreed upon with the customers. • Tested management’s identification of distinct performance obligations by evaluating whether the progress of performance completed or delivered to date compared to total services to be delivered under the terms of the arrangement. • Tested the accuracy and completeness of the total contract costs incurred to date for the performance obligation. • Evaluated the estimates of costs to complete a contract for the performance obligation by: • Comparing costs incurred to date to the costs management estimated to be incurred to date. • Evaluating management’s ability to achieve the estimates of total contract cost by performing corroborating inquiries with the Company’s project managers and financial analysts, and comparing the estimates to management’s work plans and cost estimates. • Comparing management’s estimates for the selected contracts to costs of similar performance obligations, when applicable. • Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation. • We selected a sample of contracts and evaluated management’s ability to estimate total contract costs accurately by comparing actual costs to management’s historical estimates. /s/ Deloitte & Touche LLP Cincinnati, Ohio February 16, 2021 We have served as the Company's auditor since 2002. - 51 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Medpace Holdings, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Medpace Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 16, 2021, expressed an unqualified opinion on those financial statements, and included an explanatory paragraph related to the Company’s change in method of accounting for leases in fiscal year 2019. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Cincinnati, Ohio February 16, 2021 - 52 - MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share amounts) As Of December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 277,766 $ 131,920 Accounts receivable and unbilled, net (includes $ 2.6 million and $ 1.9 million with related parties at December 31, 2020 and 2019, respectively) 160,962 155,662 Prepaid expenses and other current assets 34,923 29,446 Total current assets 473,651 317,028 Property and equipment, net 85,017 47,292 Operating lease right-of-use assets 113,809 52,152 Goodwill 662,396 662,396 Intangible assets, net 46,474 54,350 Deferred income taxes 536 376 Other assets 8,794 9,477 Total assets $ 1,390,677 $ 1,143,071 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable (includes $ 0.2 million and $ 0.2 million with related parties at December 31, 2020 and 2019, respectively) $ 26,552 $ 22,404 Accrued expenses 134,367 109,252 Advanced billings (includes $ 6.5 million and $ 3.0 million with related parties at December 31, 2020 and 2019, respectively) 255,664 192,359 Other current liabilities 23,527 18,987 Total current liabilities 440,110 343,002 Operating lease liabilities 115,143 45,212 Deferred income tax liability 13,551 12,849 Other long-term liabilities 16,094 15,725 Total liabilities 584,898 416,788 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 December 31, 2020 and 2019, respectively - - Common stock - $ 0.01 par-value; 250,000,000 shares authorized at December 31, 2020 and 2019, respectively; 35,519,989 and 36,065,278 shares issued and outstanding at December 31, 2020 and 2019, respectively 355 360 Treasury stock - 185,000 and 200,000 shares at December 31, 2020 and 2019, respectively ( 5,578 ) ( 6,030 ) Additional paid-in capital 695,904 666,585 Retained earnings 115,229 68,109 Accumulated other comprehensive loss ( 131 ) ( 2,741 ) Total shareholders’ equity 805,779 726,283 Total liabilities and shareholders’ equity $ 1,390,677 $ 1,143,071 See notes to consolidated financial statements. - 53 - MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) Year Ended December 31, 2020 2019 2018 Revenue, net (includes $ 15.9 million, $ 18.9 million and $ 15.1 million with related parties for the years ended December 31, 2020, 2019 and 2018, respectively) $ 925,925 $ 860,969 $ 704,589 Operating expenses: Direct service costs, excluding depreciation and amortization 354,426 321,006 252,284 Reimbursed out-of-pocket expenses 292,773 294,266 236,775 Total direct costs 647,199 615,272 489,059 Selling, general and administrative 92,156 95,245 75,681 Depreciation 11,652 8,360 9,240 Amortization 7,876 14,829 29,561 Total operating expenses 758,883 733,706 603,541 Income from operations 167,042 127,263 101,048 Other expense, net: Miscellaneous income (expense), net 1,183 ( 863 ) 1,060 Interest income (expense), net 307 ( 1,568 ) ( 8,157 ) Total other income (expense), net 1,490 ( 2,431 ) ( 7,097 ) Income before income taxes 168,532 124,832 93,951 Income tax provision 23,148 24,389 20,766 Net income $ 145,384 $ 100,443 $ 73,185 Net income per share attributable to common shareholders: Basic $ 4.07 $ 2.79 $ 2.05 Diluted $ 3.84 $ 2.67 $ 1.97 Weighted average common shares outstanding: Basic 35,635 35,881 35,547 Diluted 37,708 37,576 36,912 See notes to consolidated financial statements. - 54 - MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) Year Ended December 31, 2020 2019 2018 Net income $ 145,384 $ 100,443 $ 73,185 Other comprehensive income (loss) Foreign currency translation adjustments, net of taxes 2,610 ( 224 ) ( 1,783 ) Comprehensive income $ 147,994 $ 100,219 $ 71,402 See notes to consolidated financial statements. - 55 - MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Amounts in thousands) (Accumulated Accumulated Additional Deficit) Other Common Treasury Paid-In Retained Comprehensive Stock Stock Capital Earnings 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 73,185 73,185 Foreign currency translation ( 1,783 ) ( 1,783 ) Stock-based compensation expense 6,499 6,499 Stock options exercised 1 2,541 2,542 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, 2019 356 ( 6,030 ) 639,381 ( 32,334 ) ( 2,517 ) 598,856 Net income 100,443 100,443 Foreign currency translation ( 224 ) ( 224 ) Stock-based compensation expense 20,741 20,741 Stock options exercised 4 6,463 6,467 BALANCE — December 31, 2019 $ 360 $ ( 6,030 ) $ 666,585 $ 68,109 $ ( 2,741 ) $ 726,283 Net income 145,384 145,384 Foreign currency translation 2,610 2,610 Stock-based compensation expense 13,784 13,784 Stock options exercised 5 452 15,535 15,992 Repurchases of common stock ( 10 ) $ ( 98,264 ) ( 98,274 ) BALANCE — December 31, 2020 $ 355 $ ( 5,578 ) $ 695,904 $ 115,229 $ ( 131 ) $ 805,779 See notes to consolidated financial statements. - 56 - MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 145,384 $ 100,443 $ 73,185 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 11,652 8,360 9,240 Amortization 7,876 14,829 29,561 Stock-based compensation expense 13,784 20,741 6,499 Amortization of debt issuance costs and discount - 954 615 Noncash lease expense 13,924 9,949 - Deferred income tax provision 527 10,050 3,942 Amortization and adjustment of deferred credit ( 706 ) ( 801 ) ( 7,712 ) Other ( 22 ) 1,754 1,653 Changes in assets and liabilities: Accounts receivable and unbilled, net ( 5,530 ) ( 21,256 ) ( 27,047 ) Prepaid expenses and other current assets ( 3,724 ) ( 7,381 ) ( 1,241 ) Accounts payable ( 2,597 ) 4,730 1,342 Accrued expenses 24,231 21,824 29,029 Advanced billings 63,407 44,584 35,593 Lease liabilities ( 11,506 ) ( 9,034 ) - Other assets and liabilities, net 1,976 2,121 1,925 Net cash provided by operating activities 258,676 201,867 156,584 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment expenditures ( 31,340 ) ( 17,912 ) ( 16,024 ) Other 126 ( 1,232 ) ( 949 ) Net cash used in investing activities ( 31,214 ) ( 19,144 ) ( 16,973 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock option exercises 15,992 6,520 2,489 Repurchases of common stock ( 98,274 ) - - Payment of debt - ( 80,438 ) ( 72,188 ) Payments on revolving loan - - ( 70,000 ) Payment of deemed landlord liability - - ( 1,881 ) Net cash used in financing activities ( 82,282 ) ( 73,918 ) ( 141,580 ) EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 666 ( 167 ) ( 1,241 ) INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 145,846 108,638 ( 3,210 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 131,920 23,282 26,492 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period $ 277,766 $ 131,920 $ 23,282 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION— Cash paid during the period for income taxes $ 23,105 $ 13,235 $ 23,311 Cash paid during the period for interest $ 104 $ 1,489 $ 7,589 Acquisition of property and equipment—non-cash $ 18,980 $ 2,529 $ 1,551 See notes to consolidated financial statements. - 57 - MEDPACE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020 and 2019, and for the Years Ended December 31, 2020, 2019 and 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. Share Repurchases In the first quarter of 2018, the Board of Directors approved a share repurchase program authorizing up to $ 50.0 million in share repurchases. In the first quarter of 2020, the Board of Directors approved an increase in the stock repurchase authorization by $ 50.0 million. In the fourth quarter of 2020, the Board approved the stock repurchase authorization up to $ 150.0 million. For the year ended December 31, 2020, the Company repurchased 1,183,095 shares for $ 98.3 million. As of December 31, 2020, we have remaining authorization of $ 102.6 million remaining under the repurchases program. Repurchases under the share repurchase program are executed in the open market or negotiated transactions under trading plans established pursuant to Rule 10b5-1. The Company constructively retired the repurchased shares associated with these approved share repurchase programs, with all amounts paid in excess of par value reflected within Retained earnings in the Company’s consolidated balance sheets. The repurchase program may be suspended or discontinued at any time without notice. Secondary Offering During the year ended December 31, 2018, Cinven sold a total of 16,399,997 shares of the Company’s common stock as part of multiple secondary offerings. The Company incurred professional fees in connection with the secondary offerings of $ 0.7 million during the year ended December 31, 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 secondary offerings. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and include the accounts and operations of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. - 58 - Significant items that are subject to management estimates and assumptions include revenue, net, allowances for doubtful accounts, acquisition purchase price allocations, long-lived asset impairment and useful lives, exit liabilities, stock-based compensation, uncertain income tax positions and contingencies. Reportable Segments The Company emphasizes its full service outsourcing model, providing services focused on the development, management and execution of clinical trials. As part of this full service approach, the Company utilizes centralized systems, customer interface technology, support functions and processes that cross service offerings and align resources to deliver efficient clinical trial services. Given the full service approach, the chief executive officer, who is the chief operating decision maker (“CODM”) assesses the allocation of resources based on key metrics including revenue, backlog, and net awards by service offering and consolidated profitability and consolidated cash flows. Based on the Company’s full service model, internal management and reporting structure, and key metrics used by the CODM to make resource allocation decisions, management has determined that the Company’s operations consist of a single operating segment. Therefore, results of operations are presented as a single reportable segment. Foreign Currencies Assets and liabilities recorded in foreign currencies on foreign subsidiary financial statements are translated at the exchange rate on the balance sheet date, while equity accounts are translated at historical exchange rates. Revenue and expenses are recorded at average rates of exchange during the year. Translation adjustments are recorded to Accumulated other comprehensive loss in the consolidated statements of shareholders’ equity and consolidated statements of comprehensive income. Separately, net realized gains and losses on foreign currency transactions are included in Miscellaneous income (expense), net, on the consolidated statements of operations. Foreign currency transactions resulted in a net gain/(loss) of $ 0.5 million, ($ 0.6 ) million, and $ 0.4 million during the years ended December 31, 2020, 2019, and 2018, respectively. Revenue Recognition The Company generally enters 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. The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers, which the Company adopted on January 1, 2018 using the modified retrospective implementation method. Revenue on contracts is recognized when or as the Company satisfies the contract performance obligations, at the amount that reflects the Company’s cumulative progress toward delivery of the performance obligation. This progress assessment is applied to the amount of consideration to which the Company expects to be paid for delivery of the performance obligation. The Company’s performance obligations are generally satisfied over time and related revenue is recognized as services are provided to meet these obligations. 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 the Company’s 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. - 59 - Accounting for contracts performed over a period of time involves the use of various assumptions to estimate tota l contract revenue and costs. The Company estimate s expected costs to complete a contract and recognize s 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 the Company’s 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. The Company recognizes revenue, at an amount to which it expects 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 the Company’s customers do not agree to contract changes upon changes in the Company’s scope of work, the Company 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 the Company believes the amount can be estimated reliably and its realization is probable. In evaluating the probability of recognition, the Company considers 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. Total revenue is presented net of rebates of $ 4.8 million, $ 6.2 million and $ 1.2 million in the consolidated statements of operations during the years ended December 31, 2020, 2019 and 2018, respectively. The Company occasionally enters 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, the Company’s best judgment at the time or ultimately, upon achievement of the threshold or milestone. The Company records revenue net of any tax assessments by governmental authorities that are imposed and concurrent with specific revenue generating transactions. Performance Obligations Substantially all of the Company’s 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. - 60 - For the majority of the Company’s contract performance obligations, it utilizes 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. As of December 31, 2020 and 2019, the Company had approximately $ 1.6 billion and $ 1.4 billion of performance obligations remaining to be performed for active projects. Concentration of Credit Risk Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents and accounts receivable. The cash and cash equivalent balances are held and maintained with financial institutions with reputable credit ratings and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company generally does not require collateral or other securities to support customer receivables. In the years ended December 31, 2020, 2019 and 2018, credit losses have been immaterial and within management’s expectations. At December 31, 2020 and 2019, there were no customers accounting for more than 10% of the Company’s accounts receivable. Costs and Expenses 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 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 its customers at cost. These costs are included in Reimbursable out-of-pocket expenses as a component of Total direct costs in the accompanying 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. Selling, general and administrative includes administrative payroll and related employee benefits, sales and marketing expenses, administrative travel, and other expenses not directly related to service delivery. Rent, utilities, supplies, and software license expenses are allocated between Total direct costs, and Selling, general and administrative based on the estimated contribution among service delivery and support function efforts on a percentage basis. Depreciation and amortization is reported separately in the accompanying consolidated statements of operations. Costs of sales and marketing activities not subject to recovery pursuant to customer contracts, such as feasibility assessments and negotiation of contracts, are expensed as incurred and recorded as a component of Selling, general and administrative in the accompanying consolidated statements of operations. Advertising expenses are recorded as a component of Selling, general and administrative expenses in the accompanying consolidated statements of operations. Total advertising expenses of $ 0.7 million, $ 0.7 million and $ 0.8 million were incurred during the years ended December 31, 2020, 2019 and 2018, respectively. Income Taxes The Company’s consolidated US federal income tax return is comprised of its US subsidiaries, one of its foreign branches located in Korea and certain foreign subsidiaries. The Company provides for income taxes on all transactions that have been recognized in the consolidated financial statements in accordance with accounting guidance governing income tax accounting. Accordingly, the impact of changes in income tax laws on deferred tax assets and deferred tax liabilities are recognized in net earnings in the period during which such changes are enacted. - 61 - The Company records deferred tax assets and liabilities based on temporary differences between the financial statement bases and tax bases of assets and liabilities. Deferred tax assets are recorded for tax benefit carryforwards using tax rates anticipated to be in effect in the year in which the temporary differences are expected to reverse. If it does not appear more likely than not that the full value of a deferred tax asset will be realized, the Company records a valuation allowance against the deferred tax asset, with an offsetting charge to the Company’s income tax provision or benefit. The value of the Company’s deferred tax assets is estimated based on, among other things, the Company’s ability to generate a sufficient level of future taxable income. In estimating future taxable income, the Company has considered both positive and negative evidence, such as historical and forecasted results of operations, and has considered the implementation of prudent and feasible tax planning strategies. The Company’s accounting position is that unremitted foreign earnings are indefinitely reinvested. Therefore, the Company has not recorded deferred foreign withholding taxes on the unremitted foreign earnings. Refer to Note 11 for further information regarding this assertion. The Company follows accounting guidance related to accounting for uncertainty in income taxes which requires significant judgment in determining what constitutes an individual tax position as well as assessing the possible outcome of each tax position. Changes in judgments as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate, and, consequently, the Company’s consolidated financial results. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. The Company determines its liability for uncertain tax positions globally. If the payment of these amounts ultimately proves to be unnecessary, the reversal of liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer necessary. If the calculation of the liability related to uncertain tax positions proves to be more or less than the ultimate assessment, a tax expense or tax benefit would result. Interest and penalties associated with uncertain tax positions are recognized as components of the Company’s Income tax provision. Research and Development Credits Research and development credits are available to the Company under tax laws in certain jurisdictions, based on qualifying research and development spend as defined under those tax laws. Certain tax jurisdictions provide refundable credits that are not wholly dependent on the Company’s income tax status or income tax position. In these circumstances the benefit of the credits is recorded as a reduction of operating expense. When they are wholly dependent upon the Company’s income tax position, research and development credits are recognized as a reduction of income tax expense. Stock-Based Compensation The Company has stock-based employee compensation plans for which it incurs compensation expense. Equity Awards In connection with the Company's initial public offering (IPO), the Board approved the formation of the 2016 Incentive Award Plan (the “2016 Plan”), which replaced our 2014 Equity Incentive Plan (the “2014 Plan”). The 2016 Plan provides for long-term equity incentive compensation for key employees, officers and non-employee directors. A variety of discretionary awards (collectively, the “Awards”) for employees and non-employee directors are authorized under the 2016 Plan, including vested common shares, stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), or other cash based or stock dividend equivalent awards. The vesting of such awards may be conditioned upon either a specified period of time or the attainment of specific performance goals as determined by the administrator of the 2016 Plan. The option price and term are also subject to determination by the administrator with respect to each grant. Option prices are generally expected to be set at the market price of our common stock at the date of grant and option terms are not expected to exceed ten years. All outstanding Awards under the 2016 Plan are equity classified awards. - 62 - The Company created the 2014 Plan, providing for the future issuance of vested shares, stock options, RSAs and RSUs in Medpace Holdings, Inc.’s common stock (the “2014 Plan Awards”). The 2014 Plan Awards were subject to either equity or liability-classification pursuant to the terms of the participant’s award agreement and the 2014 Plan based on accounting guidance which governs such transactions. All outstanding Awards under the 2014 Plan are equity classified awards. Stock-based compensation expense for both the 2016 Plan and 2014 Plan is calculated using the fair value method on the grant date. The Company expenses stock-based compensation over the term of the award based on the vesting described in the award agreement. Stock-based compensation expense is allocated between Total direct costs, and Selling, general and administrative in the consolidated statements of operations based on the underlying classification and scope of work for the employees receiving the Awards. 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. The Company’s 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 RSUs and 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. This 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 years ended December 31, 2020, 2019 and 2018 (in thousands, except for earnings per share): Year Ended December 31, 2020 2019 2018 Weighted-average shares: Common shares outstanding 35,635 35,881 35,547 RSAs 112 100 142 Total weighted-average shares 35,747 35,981 35,689 Earnings per common share—Basic Net income $ 145,384 $ 100,443 $ 73,185 Less: Undistributed earnings allocated to RSAs 459 279 291 Net income available to common shareholders—Basic $ 144,925 $ 100,164 $ 72,894 Net income per common share—Basic $ 4.07 $ 2.79 $ 2.05 Basic weighted-average common shares outstanding 35,635 35,881 35,547 Effect of diluted shares 2,073 1,695 1,365 Diluted weighted-average shares outstanding 37,708 37,576 36,912 Net income per common share—Diluted $ 3.84 $ 2.67 $ 1.97 - 63 - For the years ended December 31, 2020, 2019 and 2018, the computation of diluted EPS excludes the effect of (in thousands) 204 , 248 and 121 stock options, respectively, due to each respective period’s average fair value of the Company’s common stock not exceeding the exercise prices. 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 December 31, 2020. There were no transfers between Level 1, Level 2, or Level 3 during the years ended December 31, 2020, 2019 and 2018. Cash and Cash Equivalents, including Restricted Cash Cash and cash equivalents, including restricted cash, are invested in demand deposits and money market funds, all of which have an original maturity of three months or less. Restricted cash consists of customer funds received in advance and subject to specific restrictions, as well as amounts placed in escrow for contingent payments resulting from acquisitions or other contractual arrangements. Accounts Receivable and Unbilled, Net Accounts receivable represent amounts due from the Company’s customers who are concentrated primarily in the pharmaceutical, biotechnology, and medical device industries. Unbilled services represent revenue recognized to date that is currently not billable to the customer pursuant to contractual terms. In general, amounts become billable upon the achievement of negotiated contractual events or in accordance with predetermined payment schedules. Amounts classified to unbilled services are those billable to customers within one year from the respective balance sheet date. The Company grants credit terms to its customers prior to signing a service contract and monitors the creditworthiness of its customers on an ongoing basis. The Company maintains an allowance for doubtful accounts based on specific identification of accounts receivable that are at risk of not being collected. Uncollectible accounts receivable are written off only after all reasonable collection efforts have been exhausted. Moreover, in some cases the Company requires advance payment from its customers for a portion of the study contract price upon the signing of a service contract. These advance payments are deferred and recognized as revenue as services are performed. Inventory Inventory, which consists primarily of laboratory supplies, is valued at the lower of cost or market. Inventory is stated at purchased cost using the first-in, first out (FIFO) cost method. The inventory balance is included in Prepaid expenses and other current assets in the consolidated balance sheets. - 64 - Property and Equipment Property and equipment is recorded at cost. Depreciation is provided 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. The Company capitalizes costs of computer software developed for internal use and amortizes these costs on a straight-line basis over the estimated useful life, not to exceed three years . Leasehold improvements and deemed assets from landlord building construction are capitalized and amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the associated remaining lease term. Repairs and maintenance are expensed as incurred. Leases 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, they 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 one 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. Goodwill and Intangible Assets Goodwill Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. The carrying value of goodwill is reviewed at least annually for impairment, or as indicators of potential impairment - 65 - are identified, at the reporting unit level. The reporting units are Phase I-IV cl inical research services and Laboratories as of December 31, 2020 . The Company performs its annual impairment tests during the fourth quarter each year, comparing the fair value of each of our reporting units with its carrying amount, inclusive of goodwill. A goodwill impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. Fair value is estimated using a combination of the income approach, a discounted cash flow analysis, and the market approach, utilizing the guideline company method. There was no indication of impairment related to goodwill based on the fourth quarter 2020 assessment. Intangible Assets The Company has an indefinite lived intangible asset related to its trade name. The carrying value of the trade name asset is reviewed at least annually for impairment, or as indicators of potential impairment are identified. The Company performs its annual impairment test in the fourth quarter each year in conjunction with its annual assessment of goodwill. The assessment consists of comparing the carrying value of the indefinite lived intangible asset to its estimated fair value, utilizing the relief from royalty method, an income approach valuation. There was no indication of impairment related to the trade name asset based on the fourth quarter 2020 assessment. Finite-lived intangible assets consist mainly of the value assigned to customer relationships and developed technologies. Finite-lived intangible assets are amortized straight-line or using an accelerated method over their estimated useful lives, which range in term from five to fifteen years . Impairment of Long-Lived Assets Long-lived assets, primarily property and equipment and finite-lived intangible assets, are reviewed for impairment and the reasonableness of the estimated useful lives whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable or that a change in useful life may be appropriate. Recoverability for long-lived assets is determined by comparing the forecasted undiscounted cash flows of the operation to which the assets relate to the carrying amount of the assets. If the undiscounted cash flows are less than the carrying amount of the assets, then the Company reduces the carrying value of the assets to estimated fair values, which are primarily based upon forecasted discounted cash flows. Fair value of long-lived assets is determined based on a combination of discounted cash flows and market multiples. Advanced Billings 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. Other Current Liabilities and Other Long-Term Liabilities Deferred credit represents tax credits recognized initially in conjunction with the Nephrogenex asset acquisition that will be recognized within Income tax provision in proportion to the realization of the deferred tax assets and federal tax credits prospectively. Asset retirement obligations, to the extent they exist, are recorded at their net present value and accreted to the Company’s estimate of liability at the time the obligation would be required to be satisfied. Recently Adopted Accounting Standards In May 2014, the 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 of 2018. - 66 - 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 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 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. - 67 - In connection with the implementation of ASC 606 on the modified retrospective method, the Company is presenting additional information to assist with the comparability of select line items of the current and prior period year to date reporting in its consolidated balance sheets and consolidated statements of operations. Below the Company has 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). Year Ended December 31, 2018 As Reported Adjustments As Revised under ASC 605 Revenue: Revenue, net $ 704,589 $ ( 704,589 ) $ - Service revenue, net - 478,063 478,063 Reimbursed out-of-pocket revenue - 71,305 71,305 Total revenue 704,589 ( 155,221 ) 549,368 Operating expenses: Direct service costs, excluding depreciation and amortization 252,284 - 252,284 Reimbursed out-of-pocket expenses 236,775 ( 165,470 ) 71,305 Total direct costs 489,059 ( 165,470 ) 323,589 Total operating expenses 603,541 ( 165,470 ) 438,071 Income from operations 101,048 10,249 111,297 Income before income taxes 93,951 10,249 104,200 Income tax provision 20,766 1,882 22,648 Net income $ 73,185 $ 8,367 $ 81,552 Net income per share attributable to common shareholders: Basic $ 2.05 $ 0.24 $ 2.29 Diluted $ 1.97 $ 0.23 $ 2.20 Weighted average common shares outstanding: Basic 35,547 - 35,547 Diluted 36,912 - 36,912 - 68 - ASSETS As of December 31, 2018 Current assets: As Reported Adjustments As Revised under ASC 605 Accounts receivable and unbilled, net 133,449 ( 28,729 ) 104,720 Prepaid expenses and other current assets 21,383 1,147 22,530 Total current assets 178,114 ( 27,582 ) 150,532 Deferred income taxes 713 ( 389 ) 324 Total assets $ 967,933 $ ( 27,971 ) $ 939,962 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accrued expenses 87,493 ( 51,109 ) 36,384 Pre-funded study costs - 61,156 61,156 Advanced billings 147,935 ( 41,732 ) 106,203 Other current liabilities 4,861 ( 590 ) 4,271 Total current liabilities 257,026 ( 32,275 ) 224,751 Deferred income tax liability 439 2,049 2,488 Other long-term liabilities 16,560 ( 382 ) 16,178 Total liabilities 378,230 ( 30,608 ) 347,622 Shareholders’ equity: Accumulated deficit ( 41,487 ) 2,637 ( 38,850 ) Total shareholders’ equity 589,703 2,637 592,340 Total liabilities and shareholders’ equity $ 967,933 $ ( 27,971 ) $ 939,962 CASH FLOWS FROM OPERATING ACTIVITIES: Year Ended December 31, 2018 As Reported Adjustments As Revised under ASC 605 Net income 73,185 8,367 81,552 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax provision 3,942 4,002 7,944 Changes in assets and liabilities: Accounts receivable and unbilled, net ( 27,047 ) 4,842 ( 22,205 ) Prepaid expenses and other current assets ( 1,241 ) ( 1,147 ) ( 2,388 ) Accrued expenses 29,029 ( 15,967 ) 13,062 Pre-funded study costs - 3,782 3,782 Advanced billings 35,593 ( 2,907 ) 32,686 Other assets and liabilities, net 1,925 ( 972 ) 953 Net cash provided by operating activities 156,584 - 156,584 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 of 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 Option” transition 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 Option. 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. - 69 - ASC 842 also allows for the election of certain practical expedients that are meant to ease the burden of transitioning to ASC 842 whi le still achieving compliance. The Company elected the “package of three” practical expedient allowing the Company to carry forward decisions made and documented under current U.S. GAAP, rather than reassessing all of the Company’s contracts to determine whether they are or contain leases and how they woul d 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 liabilities 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. 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 had no impact on the 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 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 consolidated financial statements. - 70 - In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” intended to provide financial statement users with more decision-useful information about expected credit losses and other commitments to extend credit held by the reporting entity. The standard replaces the incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The Company adopted this standard in the first quarter of 2020 and it had no material impact to the consolidated financial statements. 3. CONTRACT ASSETS AND CONTRACT LIABILITIES Contract assets and liabilities are reflected in the Company’s 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. Accounts receivable and unbilled, net consisted of the following (in thousands): As of December 31, December 31, 2020 2019 Accounts receivable $ 137,912 $ 127,877 Unbilled receivables 23,396 28,368 Less: allowance for doubtful accounts ( 346 ) ( 583 ) Total accounts receivable and unbilled, net $ 160,962 $ 155,662 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. During the year ended December 31, 2020, the Company recognized approximately $ 165.6 million of revenue that was included in the Advanced billings balance at the beginning of the year. Advanced billings consisted of the following (in thousands): As of December 31, December 31, 2020 2019 Advanced billings $ 255,664 $ 192,359 - 71 - A rollforward of allowance for doubtful account activity is as follows: Year Ended December 31, 2020 2019 2018 Allowance for doubtful accounts - beginning balance $ ( 583 ) $ ( 1,032 ) $ ( 673 ) Current year provision ( 167 ) ( 263 ) ( 791 ) Write-offs, recoveries and the effects of foreign currency exchange 404 712 432 Allowance for doubtful accounts - ending balance $ ( 346 ) $ ( 583 ) $ ( 1,032 ) 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following at December 31 (in thousands): 2020 2019 Land $ 2,492 $ 1,577 Equipment 24,049 20,225 Furniture, fixtures, and leasehold improvements 61,238 24,624 Computer hardware, software, and phone equipment 18,111 15,958 Buildings 14,309 13,272 Construction-in-progress 3,926 3,265 Property and equipment at cost 124,125 78,921 Less: Accumulated depreciation ( 39,108 ) ( 31,629 ) Property and equipment, net $ 85,017 $ 47,292 Depreciation expense was $ 11.7 million, $ 8.4 million and $ 9.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. 5. GOODWILL AND INTANGIBLE ASSETS Goodwill Total assets carried on the balance sheet and not remeasured to fair value on a recurring basis, identified as Level 3 measurements, as of December 31, 2020 are $ 694.0 million, comprised of $ 662.4 million of goodwill and $ 31.6 million of identified indefinite-lived intangible assets. Accumulated goodwill impairment losses to date amounts to $ 9.3 million, all of which was recognized in 2015. - 72 - Intangible Assets, Net Intangible assets, net consisted of the following at December 31 (in thousands): 2020 2019 Intangible assets: Finite-lived intangible assets: Carrying amount: Customer relationships $ 145,051 $ 145,051 Other 3,074 3,074 Total finite-lived intangible assets 148,125 148,125 Accumulated amortization: Customer relationships ( 130,223 ) ( 122,426 ) Other ( 3,074 ) ( 2,995 ) Total accumulated amortization ( 133,297 ) ( 125,421 ) Total finite-lived intangible assets, net 14,828 22,704 Trade name (indefinite-lived) 31,646 31,646 Total intangible assets, net $ 46,474 $ 54,350 As of December 31, 2020, estimated amortization expense of the Company’s intangible assets for each of the next five years and thereafter is as follows (in thousands): Amortization 2021 $ 5,114 2022 3,353 2023 2,199 2024 1,443 2025 946 Later years 1,773 $ 14,828 6. ACCRUED EXPENSES Accrued expenses consisted of the following at December 31 (in thousands): 2020 2019 Employee compensation and benefits $ 40,208 $ 34,119 Project related reimbursable expenses 87,092 68,696 Other 7,067 6,437 Total accrued expenses $ 134,367 $ 109,252 7. DEBT On September 30, 2019 (the “Closing Date”), the Company obtained an unsecured credit facility in an aggregate principal amount up to $ 50.0 million (the “Credit Facility”) through its wholly owned subsidiaries, Medpace, Inc., as borrower (the “Borrower”), and Medpace IntermediateCo, Inc., as guarantor (the “Guarantor”). On the Closing Date, the Borrower and lender entered into a Loan Agreement (the “Loan Agreement”) providing for the Credit Facility, and the Guarantor executed a Guaranty Agreement providing for its guarantee of the payment and performance of the obligations under the Loan Agreement. The Loan Agreement provides that outstanding balances under the Credit Facility will bear interest at a rate of LIBOR plus 100 basis points (1.00%). The Loan Agreement also provides that the Credit Facility will expire in 364 days from the Closing Date. On March 30, 2020, the Company amended the credit facility to extend its expiration date to March 31, 2021 and add provisions for alternative interest rates when certain interbank market offered rates are not available. - 73 - The Loan Agreement contains other customary loan terms, representations and warranties, and affirmative and negative covenants, in each case, subject to customary limitations, exceptions and exclusions. The Loan Agreement contains certain events of default, including, among others, non-payment of principal or interest and breach of the covenants. As of December 31, 2020 and 2019, respectively, there were no outstanding borrowings under the Credit Facility and $ 0.2 million in letters of credit outstanding related to certain operating lease obligations, which are secured by the Credit Facility. 8 . 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 one 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 one year or per other contractual terms. The components of lease expense were as follows (in thousands): Year Ended December 31, 2020 2019 Operating lease cost $ 19,842 $ 13,151 Variable lease cost 5,335 2,813 Supplemental cash flow information related to the leases was as follows (in thousands): Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 13,956 $ 9,773 Right-of-use assets obtained in exchange for lease obligations: Operating leases 73,905 10,294 Supplemental balance sheet information related to the leases was as follows (in thousands): As of December 31, December 31, 2020 2019 Operating lease right-of-use assets $ 113,809 $ 52,152 Other current liabilities $ 15,890 $ 10,977 Operating lease liabilities 115,143 45,212 Total operating lease liabilities $ 131,033 $ 56,189 Weighted Average Remaining Lease Term (years) Operating leases 12.9 6.3 Weighted Average Discount Rate Operating leases 5.9 % 6.0 % - 74 - Lease payments due related to lease liabilities as of December 31, 2020 were as follows (in thousands): Related Party Non-Related Parties Total Operating Leases Operating Leases Operating Leases 2021 $ 10,510 $ 11,905 $ 22,415 2022 10,301 8,960 19,261 2023 8,771 7,477 16,248 2024 8,900 5,206 14,106 2025 9,032 3,746 12,778 Later years 103,006 8,657 111,663 Total lease payments 150,520 45,951 196,471 Less: imputed interest ( 59,799 ) ( 5,639 ) ( 65,438 ) Total $ 90,721 $ 40,312 $ 131,033 Comparative period disclosures under ASC 840: Rental expense under operating leases totaled $ 9.2 million for the year ended December 31, 2018 and is allocated between Total direct costs, and Selling, general and administrative in the consolidated statements of operations. 9. SHAREHOLDERS’ EQUITY Stock-Based Compensation 2016 Incentive Award Plan On August 11, 2016 in connection with the Company's IPO, the Board approved the formation of the 2016 Incentive Award Plan (the “2016 Plan”), which replaced our 2014 Equity Incentive Plan (the “2014 Plan”). The 2016 Plan provides for long-term equity incentive compensation for key employees, officers and non-employee directors. A variety of discretionary awards (collectively, the “Awards”) for employees and non-employee directors are authorized under the 2016 Plan, including vested shares, stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), or other cash based or stock dividend equivalent awards, which are all equity-classified instruments under the 2016 Plan. The number of shares registered and available for grant under the 2016 Plan is 6,000,000 . The vesting of such awards may be conditioned upon either a specified period of time or the attainment of specific performance goals as determined by the administrator of the 2016 Plan. The option price and term are also subject to determination by the administrator with respect to each grant. Option prices are generally expected to be set at the market price of the Company’s common stock at the date of grant and option terms are not expected to exceed ten years . The Company granted 405,237 awards to employees under the 2016 Incentive Award Plan during the year ended December 31, 2020, consisting of 20,724 restricted stock awards (“RSA”) and 177,808 restricted stock units (“RSU”) vesting after four years , 4,800 stock option awards and 2,500 RSU vesting after three years and 199,405 fully-vested stock option awards. The Company granted an additional 23,148 stock option awards to non-employee directors under the 2016 Incentive Award Plan, during the year ended December 31, 2020. These awards will vest on the earlier of (a) the day immediately preceding the date of the first annual meeting following the date of grant and (b) the first anniversary of the date of grant, subject to the non-employee director continuing in service through the applicable vesting date. T he Company granted 816,286 awards to employees under the 2016 Incentive Award Plan during the year ended December 31, 2019, consisting of 10,000 stock option awards and 227,610 RSU vesting after four years , 5,000 stock option awards vesting after one year , 551,676 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 an additional 41,853 stock option awards to non-employee directors under the 2016 Incentive Award Plan, during the year ended December 31, 2019. These awards will vest on the earlier of (a) the day immediately preceding the date of the first annual meeting following the date of grant and (b) the first anniversary of the date of grant, subject to the non-employee director continuing in service through the applicable vesting date. - 75 - The Company granted 850,700 awards to employees under the 2016 Plan during the year ended December 31, 201 8 , consisting of 550,500 stock option awards and 300,200 RSU , all vesting after four years . The Company granted an additional 33,801 stock option awards to non-employee directors under the 2016 Incentive Award Plan, during the year ended December 31, 2018. These awards will vest on the earlier of (a) the day immediately preceding the date of the first annual meeting following the date of grant and (b) the first anniversary of the date of grant, subject to the non-employee director continuing in service through the applicable vesting date. The 2016 Plan expires in 2026, except for awards then outstanding, and is administered by the Board. All Awards granted at the IPO or thereafter were or will be issued under the 2016 Plan. The company satisfies stock option exercises and vested stock awards with treasury shares or newly issued shares. Shares available for future stock compensation grants under the 2016 Plan totaled 2.9 million and 3.2 million at December 31, 2020 and 2019. 2014 Equity Incentive Plan The 2014 Plan for employees and directors provided the issuance of vested shares, stock options, RSAs and RSUs in Medpace Holdings, Inc.’s common stock. The awards were granted to key employees as additional compensation for services rendered and as a means of retention over the vesting period, typically three to four years . RSAs awarded under the 2014 Plan were subject to automatic forfeiture upon departure until vested and entitle the shareholder to all rights of common stock ownership except that they may not be sold, transferred, pledged or otherwise disposed of during the restriction period, except as noted in the following paragraph. The 2014 Plan allowed for the issuance of non-qualified stock options to employees, officers, and directors under this plan (collectively, “the Participants”). Under the 2014 Plan, options could be granted with an exercise price equal to or greater than the fair value of common stock at the grant date as determined by the Board of Directors. The stock options, if unexercised, expired seven years from the date of grant. The awards under the 2014 Plan were equity classified instruments for all periods presented. In the third quarter of 2019, Medpace Investors, LLC (“MPI”), a related party to the Company, filed a Tender Offer Statement (“Tender Offer”) offering to purchase, for cash, vested stock options of employee holders of options outstanding from the 2014 Incentive Award Plan. The Tender Offer resulted in the tender and purchase of 229,431 vested options from employee holders of options by MPI. Under generally accepted accounting guidance governing such transactions, because the Tender Offer was made by an economic interest holder in the Company, this transaction is accounted for as a settlement of vested options and a reissuance of options at fair value as of the transaction date. Expense related to the reissuance of options to MPI is included as stock-based compensation expense of $ 5.1 million within Selling, general and administrative expenses during the year ended December 31, 2019. Equity Awards Valuation Assumptions The Company determines the fair value of stock options using the Black-Scholes-Merton option pricing model (the “BSM Model”). The BSM Model is primarily affected by the fair value of the Company’s common stock (see restricted share valuation discussion below), the expected holding period for the option, expected stock price volatility over the term of the awards, the risk-free interest rate, and expected dividends. - 76 - The following table sets forth the key weighted-average assumptions used in the BSM Model to calculate the fair value of options: Year Ended December 31, 2020 2019 2018 Expected holding period – years 3.1 2.6 5.4 Expected volatility 31.0 % 26.3 % 27.0 % Risk-free interest rate 1.0 % 2.0 % 2.8 % Expected dividend yield 0.0 % 0.0 % 0.0 % The assumptions used in the table above reflect grant date inputs to arrive at the grant date fair values for stock options subject to equity-classified stock compensation accounting. The expected holding period represents the period of time the grants are expected to be outstanding. The Company uses the simplified method, as prescribed by accounting guidance governing such awards, to calculate the expected holding period for options granted to employees as we do not have sufficient historical evidence data to provide a reasonable basis upon which to estimate the expected holding period. For options valued by the Company for the years ended December 31, 2020, 2019 and 2018, respectively, the expected holding period is based on an average between the midpoint of the vesting date and the expiration date of the options. The Company estimates expected volatility primarily by using the historical volatility of a publicly traded peer group that operates in the clinical research and development industry. The Company does not have adequate history to calculate its own historical or implied volatility and believes the Company’s expected volatility will approximate the historical experience of the peer group. The risk-free interest rate is based on the yield on U.S. Treasury obligations with remaining durations equal to the expected holding period of the options. The expected dividend yield is assumed to be zero based on recent and anticipated dividend activity. Subsequent to the Company’s Initial Public Offering (IPO) in August 2016, the fair value of common stock is based upon the market price of the Company’s common stock on the date of grant as listed on the NASDAQ. Due to the absence of an active market for the Company’s common stock prior to the IPO, the Company determined the fair value of restricted shares by obtaining an independent valuation of the fair value of the Company’s equity, applying a discount for lack of marketability, and then calculating the implied share price. The fair value of the Company was estimated primarily using an income approach which is based on assumptions and estimates made by management and, secondarily, using other market-related factors in current industry trends as well as observed transaction values. In determining the estimated future cash flows used in the income approach, the Company developed and applied certain estimates and judgments, including current and projected future levels of income based on management’s plans, business trends, prospects and market and economic conditions, including market-participant considerations. Significant assumptions utilized in the income approach were based on company specific information and projections, which were not observable in the market and are thus considered Level 3 measurements by authoritative guidance. The discount for lack of marketability (the “Marketability Discount”) was applied to reflect what a market participant would consider in relation to the post-vesting restrictions imposed regarding the inability to sell, transfer, or pledge the shares during the restriction period. The Marketability Discount was estimated by using the BSM Model to calculate the cost of a theoretical put option to hedge the fluctuation in value of the investment between the valuation date and an anticipated liquidity date. - 77 - The following table summarizes the grant date fair values of stock options and restricted shares issued during the period as well as the allocation of stock-based compensation expense to Total direct costs, and Selling, general and administrative reported in the consolidated statements of operations: Year Ended December 31, 2020 2019 2018 Weighted average, grant date fair value Stock options $ 15.19 $ 14.06 $ 11.51 Restricted shares (RSAs and RSUs) $ 98.61 $ 60.53 $ 49.38 Stock-based compensation expense allocated to: Total direct costs $ 7,781 $ 6,999 $ 4,132 Selling, general, and administrative 6,003 13,742 2,367 Total stock-based compensation expense $ 13,784 $ 20,741 $ 6,499 Award Activity The following table sets forth the Company’s stock option activity: Year Ended December 31, 2020 2019 2018 Weighted Average Weighted Average Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price Outstanding - beginning of Period 3,030,071 $ 34.50 2,945,040 $ 24.18 2,782,868 $ 20.73 Granted 227,353 $ 105.77 859,960 $ 54.97 584,301 $ 37.72 Exercised ( 637,806 ) $ 25.07 ( 399,368 ) $ 16.19 ( 169,771 ) $ 14.98 Forfeited/Expired ( 118,891 ) $ 37.16 ( 375,561 ) $ 19.91 ( 252,358 ) $ 23.69 Outstanding - end of period 2,500,727 $ 43.26 3,030,071 $ 34.50 2,945,040 $ 24.18 Exercisable - end of period 1,498,829 $ 48.99 1,435,088 $ 38.62 1,096,116 $ 16.01 The following table sets forth the Company’s Restricted Share activity: Year Ended December 31, 2020 2019 2018 Shares/Units Shares/Units Shares/Units Outstanding and unvested - beginning of period 569,770 421,200 183,629 Granted 201,032 227,610 300,200 Vested - - ( 29,629 ) Forfeited ( 75,240 ) ( 79,040 ) ( 33,000 ) Outstanding and unvested - end of period 695,562 569,770 421,200 Cumulative vested shares - end of period 1,913,916 1,913,916 1,913,916 - 78 - The following table summarizes information about stock options expected to vest, stock options exercisable, and unvested restricted share awards expected to vest at December 31, 2020: Weighted Average Weighted Average Exercise Stock Restricted Remaining Price Options Shares Life (Years) December 31, 2020 Number of stock options expected to vest $ 43.26 2,500,727 - 3.4 Number of Restricted Shares expected to vest - 695,562 Total expected to vest - December 31, 2020 2,500,727 695,562 Total stock options exercisable - December 31, 2020 $ 48.99 1,498,829 3.1 Unrecognized compensation cost - December 31, 2020 (in thousands) $ 2,487 $ 26,760 Weighted average years over which unrecognized compensation cost will be recognized 1.3 2.9 The following table sets forth the aggregate intrinsic value of stock options exercised, the fair values of awards vested, and share based liabilities settled during the respective periods (in thousands): Year Ended December 31, 2020 2019 2018 Total intrinsic value of stock options exercised $ 57,927 $ 19,807 $ 5,326 Total grant-date fair value of stock options vested $ 6,833 $ 12,117 $ 1,417 Total grant-date fair value of restricted shares vested $ - $ - $ 447 Total settlement date fair value of restricted shares vested $ - $ - $ 1,568 The actual tax benefits recognized related to stock-based compensation totaled $ 11.7 million, $ 5.5 million and $ 1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. 10. EMPLOYEE BENEFIT PLANS The Company provides a 401(k) plan that covers substantially all U.S. employees. Participants can elect to contribute up to 50 % of their eligible earnings on a pre-tax basis, subject to Internal Revenue Service annual limitations. The U.S.-based plan offers a year-end employer matching contribution, requiring the participant to be an employee at year-end to qualify for the match. Participants with one year or more of service are eligible for the matching contribution. Participants fully vest in the employer contributions after three years of service. The employer contribution represents a percentage of a participant’s eligible compensation. The Company’s 401(k) Plan costs were $ 3.7 million, $ 3.1 million and $ 2.7 million during the years ended December 31, 2020, 2019 and 2018, respectively, and were allocated between Total direct costs, and Selling, general and administrative in the consolidated statements of operations. - 79 - The Company has various defined contribution arrangements for eligible employees of non-U.S. entities. These defined contribution arrangements provide employees with retirement savings and life insurance benefits. The Company incurred expenses related to these arrangements of $ 1.5 million, $ 1.2 million and $ 1.0 million in the years ended December 31, 2020 , 2019 and 2018 , respectively, and were allocated between Total d irect costs, and Selling, general and administrative in the consolidated statements of operations. The Company is also required to pay certain minimum statutory post-employment benefits. The Company recognizes a liability and the associated expense for these benefits when it is probable that employees are entitled to the benefit. 11. INCOME TAXES The Company files income tax returns for U.S. federal and various U.S. states, as well as various foreign jurisdictions. The liabilities for unrecognized tax benefits are carried in Other long-term liabilities on the consolidated balance sheets because the payment of cash is not anticipated within one year of the balance sheet date. The components of income before income taxes consisted of the following (in thousands): Year Ended December 31, 2020 2019 2018 Domestic $ 158,432 $ 117,326 $ 88,014 Foreign jurisdictions 10,100 7,506 5,937 Income before income taxes $ 168,532 $ 124,832 $ 93,951 Income tax provision consisted of the following (in thousands): Current Deferred Total Year ended December 31, 2020 U.S. Federal $ 16,405 $ 436 $ 16,841 U.S. state and local 4,588 95 4,683 Foreign jurisdictions 1,586 38 1,624 $ 22,579 $ 569 $ 23,148 Year ended December 31, 2019 U.S. Federal $ 10,577 $ 8,922 $ 19,499 U.S. state and local 1,761 987 2,748 Foreign jurisdictions 2,023 119 2,142 $ 14,361 $ 10,028 $ 24,389 Year ended December 31, 2018 U.S. Federal $ 13,372 $ 4,172 $ 17,544 U.S. state and local 1,912 ( 116 ) 1,796 Foreign jurisdictions 1,408 18 1,426 $ 16,692 $ 4,074 $ 20,766 - 80 - The difference between the statutory rate for federal income tax and the effective income tax rate was as follows (in thousands): Year Ended December 31, 2020 2019 2018 Income tax expense calculated at the federal statutory rate $ 35,392 21.0 % $ 26,215 21.0 % $ 19,730 21.0 % Effect of: State and local taxes, net of federal benefit 2,639 1.6 2,021 1.6 1,978 2.1 Tax on foreign earnings, net of tax credits and deductions ( 1,773 ) ( 1.1 ) 593 0.4 172 0.2 Tax reform adjustment - - - - ( 195 ) ( 0.2 ) Write off of Deferred Tax Assets - - - - 509 0.6 Deferred credit ( 700 ) ( 0.4 ) ( 802 ) ( 0.6 ) ( 802 ) ( 0.9 ) Permanent items: Stock-based awards ( 10,019 ) ( 5.9 ) ( 3,011 ) ( 2.4 ) ( 651 ) ( 0.7 ) Tax reform - - - - 126 0.1 Deduction for FDII ( 2,593 ) ( 1.5 ) ( 2,283 ) ( 1.8 ) - - Other 144 0.1 964 0.8 687 0.7 State/Local tax credits ( 780 ) ( 0.5 ) ( 793 ) ( 0.6 ) ( 1,253 ) ( 1.3 ) Foreign tax credits - - - - ( 727 ) ( 0.8 ) Change in liability for uncertain tax positions 1,120 0.7 1,325 1.0 1,102 1.2 Other ( 282 ) ( 0.3 ) 160 0.1 90 0.1 $ 23,148 13.7 % $ 24,389 19.5 % $ 20,766 22.1 % Prior to the passage of the “Tax Cuts and Jobs Act” (TCJA), the Company asserted that all of the undistributed foreign earnings of its foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Beginning in 2018, the TCJA provides a 100 % deduction for dividends received from 10 -percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, companies must still apply the guidance of ASC 740-30-25-18 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. As of December 31, 2020, the Company’s accounting position is that unremitted foreign earnings are indefinitely reinvested. Therefore, the Company has not recorded deferred foreign withholding taxes on the unremitted foreign earnings and it is not practicable to determine the amount of the additional taxes that would result if these earnings were repatriated. The undistributed earnings of foreign subsidiaries was approximately $ 27.8 million. - 81 - Components of the Company’s net deferred tax asset (liability) included in the consolidated balance sheets consisted of the following at December 31 (in thousands): 2020 2019 Deferred tax assets: Accrued liabilities $ 16,634 $ 12,229 Depreciation and amortization 881 1,121 Foreign operating loss carryforward 311 447 U.S. state and local tax credits and carryforward - 184 Other 246 96 Valuation allowance ( 578 ) ( 755 ) Total deferred tax assets 17,494 13,322 Deferred tax liabilities: Depreciation and amortization ( 26,119 ) ( 21,787 ) Prepaid expenses ( 829 ) ( 808 ) Advanced billings ( 3,513 ) ( 3,147 ) Other ( 48 ) ( 53 ) Total deferred tax liabilities ( 30,509 ) ( 25,795 ) Net deferred tax liability $ ( 13,015 ) $ ( 12,473 ) The Company has foreign operating loss carryforwards for which a deferred tax asset of $ 0.3 million has been established. The Company has a valuation allowance of $ 0.3 million against this deferred tax asset based upon its assessment that it is more likely than not that this amount will not be realized. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the respective tax jurisdictions. Approximately 12 % of the foreign net operating loss carryforwards can be utilized over an indefinite period whereas the remainder will expire at various times from 2023 to 2029 if not utilized. Annual activity related to the Company’s valuation allowance is as follows (in thousands): Year Ended December 31, 2020 2019 2018 Beginning Balance $ 755 $ 169 $ 2,394 Additions charged to expense - 375 - Additions due to asset acquisition - 265 - Reductions from utilization, reassessments and expirations ( 177 ) ( 54 ) ( 2,225 ) Ending Balance $ 578 $ 755 $ 169 - 82 - A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2020 2019 2018 Beginning Balance $ 9,718 $ 8,525 $ 6,890 Increases in tax positions for prior years - - - Decreases in tax positions for prior years ( 181 ) ( 888 ) ( 579 ) Increases in tax positions for current year 2,881 2,081 2,214 Lapse in statute of limitations ( 1,727 ) - - Ending Balance $ 10,691 $ 9,718 $ 8,525 Interest and penalties associated with uncertain tax positions are recognized as components of Income tax provision in the consolidated statements of operations. There was no material change to tax-related interest and penalties during the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020 and 2019, respectively, the Company has a liability for interest and penalties of $ 2.1 million and $ 1.4 million that is associated with related tax liabilities of $ 8.6 million and $ 8.2 million for uncertain tax positions. The Company operates in various foreign, state and local jurisdictions. The number of tax years for which the statute of limitations remains open for foreign, state and local jurisdictions varies by jurisdiction and is approximately four years ( 2016 through 2020 ). For federal tax purposes, the Company’s open tax years are 2017 through 2020 . 12. COMMITMENTS, CONTINGENCIES, AND GUARANTEES Legal Proceedings Medpace periodically becomes involved in various claims and lawsuits that are incidental to its business. Management believes, after consultation with counsel, that no matters currently pending would, in the event of an adverse outcome, have a material impact on the Company’s consolidated balance sheets, statements of operations, or cash flows for the years ended December 31, 2020, 2019 and 2018. Purchase Commitments The Company has several minimum purchase commitments for project related supplies totaling $ 12.5 million as of December 31, 2020. In return for the commitment, Medpace receives preferential pricing. The commitments expire at various times through 2027. 13. MISCELLANEOUS INCOME (EXPENSE), NET Miscellaneous income (expense), net consisted of the following (in thousands): Year Ended December 31, 2020 2019 2018 Net gain (loss) on foreign-currency transactions $ 514 $ ( 581 ) $ 386 Other income (expense) 669 ( 282 ) 674 Miscellaneous income (expense), net $ 1,183 $ ( 863 ) $ 1,060 14. 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 December 31, 2020 - 83 - and 2019 , respectively, and are included in the Prepaid expenses and other current assets and Other assets line items of the consolidated balance sheets, respectively, depending on the contractual repayment date. Director Fees The Company paid fees for director services provided by Cinven employees that were members of the Company’s Board of Directors and any related committees. The director fees were paid directly to Cinven in accordance with the Company’s non-employee director compensation policy. During the third quarter of 2018, Cinven sold its remaining shares of the Company’s common stock and all three members of the Company’s Board affiliated with Cinven subsequently resigned. During the year ended December 31, 2018, the Company incurred director fees of $ 0.1 million and related travel expenses of less than $ 0.1 million. 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. A Medpace employee was a member Cymabay’s board of directors from the first quarter of 2016 until his resignation in the first quarter of 2020. The Company and Cymabay entered into a Master Service Agreement (“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. The Company recognized total revenue from Cymabay of $ 13.2 million and $ 10.8 million during the years ended December 31, 2019 and 2018, respectively, in the Company’s consolidated statements of operations. As of December 31, 2019, the Company had Advanced billings from Cymabay of $ 1.6 million recorded in the consolidated balance sheets. In addition, as of December 31, 2019, the Company had Accounts receivable and unbilled, net from Cymabay of $ 1.4 million recorded in the consolidated balance sheets. As of the first quarter of 2020, Cymabay is no longer considered a related party. 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 and/or have equity investments in LIB. 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. The Company recognized total revenue from LIB of $ 2.6 million, $ 2.0 million and $ 3.7 million during the years ended December 31, 2020, 2019 and 2018 in the Company’s consolidated statement of operations. As of December 31, 2020 and 2019, the Company had, from LIB, Advanced billings of $ 0.7 million and $ 0.5 million in the consolidated balance sheets, respectively. In addition, the Company had Accounts receivable and unbilled, net from LIB of $ 0.3 million in the consolidated balance sheets at December 31, 2020 and 2019, respectively. 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 years ended December 31, 2020, 2019 and 2018, the Company recognized total revenue from CinRx of $ 13.2 million, $ 3.7 million and $ 0.5 million in the Company’s consolidated statements of operations. As of December 31, 2020 and 2019, the Company had Advanced billings from CinRx of $ 5.8 million and $ 0.9 million in the consolidated balance sheets, respectively. As of December 31, 2020 and 2019 the Company had Accounts receivable and unbilled, net from CinRx of $ 2.2 million and $ 0.2 million in the consolidated balance sheets. - 84 - The Summit 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. During the years ended December 31, 2020, 2019 and 2018, Medpace incurred expenses of $ 0.4 million, $ 0.6 million and $ 0.4 million at The Summit. Medpace Investors, LLC (“MPI”) MPI is a noncontrolling shareholder and related party of Medpace Holdings, Inc. MPI is owned and managed by employees of the Company. The chief executive officer of Medpace is also the manager and majority unit holder of MPI. The Company acted as a paying agent for MPI with taxing authorities principally in instances when employee tax payments or remittance of withholdings related to equity compensation are required. Refer to Note 9 of the Notes to Consolidated Financial Statements for details of the Tender Offer transaction. Leased Real Estate Headquarters Lease The Company has entered into operating leases for its corporate headquarters and a storage space facility with an entity that is wholly owned by the Company’s chief executive officer. 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 leases. 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 properties. Annual base rent for the corporate headquarters allows for adjustments to the rental rate annually for increases in the consumer price index. O perating lease cost recognized for the years ended December 31, 2020 and 2019 was $ 2.0 million, respectively, and was allocated between Direct service costs, excluding depreciation and amortization, and Selling, general and administrative in the consolidated statements of operations. The Operating lease right-of-use assets at December 31, 2020 and 2019 were $ 3.5 million and $ 5.3 million in the consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 2020 were $ 1.9 million and $ 1.6 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 2019 were $ 1.8 million and $ 3.5 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the consolidated balance sheets. Under ASC 840, lease expense recognized for the years ended December 31, 2018 was $ 2.2 million and was allocated between Direct service costs, excluding depreciation and amortization, and Selling, general and administrative in the 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 with an entity that is wholly owned by the Company’s chief executive officer and certain members of his immediate family. The Company began to occupy the premises in the second quarter of fiscal year 2020 . The lease expires in 2040 and the Company has two 10 -year options to extend the term of the lease. 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. The Company has determined that the lease is an operating lease. Operating lease cost recognized for the year ended December 31, 2020 was $ 3.6 million. The operating lease cost was allocated between Total direct costs and Selling, general and administrative in the consolidated statements of operations. The Operating lease right-of-use assets at December 31, 2020 were $ 56.6 million in the consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 2020 were $ 0.7 million and $ 66.8 million, respectively and were recognized in Other current liabilities and Operating lease liabilities in the consolidated balance sheets. 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. The Company has determined that the leases are operating leases. Operating lease cost recognized for the years ended December 31, 2020 and 2019 was $ 3.6 million, respectively. The lease cost was allocated between Total direct costs and Selling, general and - 85 - administrative in the consolidated statements of operations. The Operating lease right-of-use assets at December 31, 2020 and 2019 were $ 19.7 million and $ 21.9 million, respectively, in the consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 20 20 were $ 2.4 million and $ 17.2 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 2019 were $ 2.3 million and $ 19.7 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the consolidated balance sheets. ASC 840 - Deemed Assets and Deemed Landlord Liabilities The Company paid $ 3.8 million during the year ended December 31, 2018 related to leases recognized as deemed assets and deemed landlord liabilities under ASC 840. 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 $ 0.7 million, $ 1.2 million and $ 1.3 million during the years ended December 31, 2020, 2019 and 2018, respectively. These travel expenses are recorded in Selling, general and administrative in the Company’s consolidated statements of operations. 15. ENTITY WIDE DISCLOSURES Operations By Geographic Location The Company conducts operations in North America, Europe, Africa, Asia-Pacific and Latin America through wholly-owned subsidiaries and representative sales offices. The Company attributes revenue to geographical locations based upon the location of the contracting entity. For the years ended December 31, 2020, 2019 and 2018, total revenue attributable to the U.S. represented approximately 96 %, 95 % and 97 %, respectively, of total consolidated total revenue. The following table summarizes property and equipment, net by geographic region and is further broken down to show countries which account for 10% or more of total as of December 31, if any (in thousands): 2020 2019 Property and equipment, net: United States $ 58,124 $ 25,603 Europe Belgium 12,024 10,045 Other 7,961 5,728 Total Europe 19,985 15,773 Asia-Pacific 6,566 5,671 Other 342 245 Total property and equipment, net $ 85,017 $ 47,292 - 86 - Revenue by Category The following table disaggregates the Company’s revenue by major source (in thousands): Years Ended December 31, 2020 2019 2018 Therapeutic Area Oncology $ 297,675 $ 256,766 $ 189,056 Other 215,370 196,159 163,983 Metabolic 126,075 138,650 124,837 AVAI 103,259 86,390 77,271 Cardiology 95,153 91,258 95,213 Central Nervous System 88,393 91,746 54,229 Total revenue $ 925,925 $ 860,969 $ 704,589 In the current year and for all periods presented, the revenue associated with medical device projects, previously a separate therapeutic area, has been included in the respective therapeutic area that best aligns with the therapeutic focus of the medical device project and represents how management evaluates disaggregated revenue in its internal reporting. - 87 - Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.