Medpace Holdings, Inc. 10-Q

Item 1. Financial Statements MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Amounts in thousands, except share amounts) As of September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 95,207 $ 28,265 Accounts receivable and unbilled, net (includes $ 2.2 million and $ 7.7 million with related parties at September 30, 2023 and December 31, 2022, respectively) 292,773 253,404 Prepaid expenses and other current assets 60,901 52,293 Total current assets 448,881 333,962 Property and equipment, net 114,764 109,849 Operating lease right-of-use assets 144,147 139,068 Goodwill 662,396 662,396 Intangible assets, net 36,359 38,008 Deferred income taxes 59,343 48,083 Other assets 20,831 21,129 Total assets $ 1,486,721 $ 1,352,495 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable (includes $ 3.1 million and $ 0.3 million with related parties at September 30, 2023 and December 31, 2022, respectively) $ 29,023 $ 33,069 Accrued expenses 264,785 210,125 Advanced billings (includes $ 13.4 million and $ 8.8 million with related parties at September 30, 2023 and December 31, 2022, respectively) 518,755 462,729 Short-term debt — 50,000 Other current liabilities (includes $ 12.5 million with related parties at December 31, 2022) 35,955 47,547 Total current liabilities 848,518 803,470 Operating lease liabilities 143,039 138,867 Deferred income tax liability 1,128 1,070 Other long-term liabilities 23,124 22,701 Total liabilities 1,015,809 966,108 Commitments and contingencies (see Note 11) Shareholders’ equity: Preferred stock - $ 0.01 par-value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively — — Common stock - $ 0.01 par-value; 250,000,000 shares authorized at September 30, 2023 and December 31, 2022, respectively; 30,682,157 and 31,091,694 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively 307 309 Treasury stock - 70,573 and 71,573 shares at September 30, 2023 and December 31, 2022, respectively ( 12,322 ) ( 12,497 ) Additional paid-in capital 795,994 770,794 Accumulated deficit ( 300,197 ) ( 359,827 ) Accumulated other comprehensive loss ( 12,870 ) ( 12,392 ) Total shareholders’ equity 470,912 386,387 Total liabilities and shareholders’ equity $ 1,486,721 $ 1,352,495 See notes to condensed consolidated financial statements. -3- Table of Contents MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue, net (includes $ 15.5 million and $ 9.8 million with related parties for the three months ended September 30, 2023 and 2022, respectively, and $ 44.6 million and $ 40.3 million with related parties for the nine months ended September 30, 2023 and 2022, respectively) $ 492,499 $ 383,744 $ 1,387,441 $ 1,065,898 Operating expenses: Direct service costs, excluding depreciation and amortization 164,364 136,648 473,958 394,200 Reimbursed out-of-pocket expenses 194,942 128,062 525,784 354,991 Total direct costs 359,306 264,710 999,742 749,191 Selling, general and administrative 41,407 35,418 118,838 97,999 Depreciation 6,329 4,951 17,707 13,928 Amortization 549 838 1,649 2,514 Total operating expenses 407,591 305,917 1,137,936 863,632 Income from operations 84,908 77,827 249,505 202,266 Other (expense) income, net: Miscellaneous (expense) income, net ( 1,602 ) 5,649 ( 2,198 ) 9,027 Interest expense, net ( 105 ) ( 1,584 ) ( 2,332 ) ( 2,078 ) Total other (expense) income, net ( 1,707 ) 4,065 ( 4,530 ) 6,949 Income before income taxes 83,201 81,892 244,975 209,215 Income tax provision 12,651 15,865 40,463 32,517 Net income $ 70,550 $ 66,027 $ 204,512 $ 176,698 Net income per share attributable to common shareholders: Basic $ 2.30 $ 2.13 $ 6.65 $ 5.39 Diluted $ 2.22 $ 2.05 $ 6.42 $ 5.18 Weighted average common shares outstanding: Basic 30,629 31,009 30,723 32,791 Diluted 31,762 32,253 31,839 34,098 See notes to condensed consolidated financial statements. -4- Table of Contents MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Amounts in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income $ 70,550 $ 66,027 $ 204,512 $ 176,698 Other comprehensive income Foreign currency translation adjustments, net of taxes ( 1,676 ) ( 6,080 ) ( 478 ) ( 11,206 ) Comprehensive income $ 68,874 $ 59,947 $ 204,034 $ 165,492 See notes to condensed consolidated financial statements. -5- Table of Contents MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (Amounts in thousands) Common Stock Treasury Stock Additional Paid-In Capital (Accumulated Deficit) Retained Earnings Accumulated Other Comprehensive Loss Total BALANCE — December 31, 2021 $ 360 $ ( 5,427 ) $ 727,857 $ 234,984 $ ( 4,846 ) $ 952,928 Net income 61,311 61,311 Foreign currency translation ( 1,542 ) ( 1,542 ) Stock-based compensation expense 4,372 4,372 Stock options exercised 3 13,894 13,897 Repurchases of common stock ( 27 ) ( 14,243 ) ( 411,680 ) ( 425,950 ) Retirement of treasury stock 5,427 ( 5,427 ) — BALANCE — March 31, 2022 $ 336 $ ( 14,243 ) $ 746,123 $ ( 120,812 ) $ ( 6,388 ) $ 605,016 Net income 49,360 49,360 Foreign currency translation ( 3,584 ) ( 3,584 ) Stock-based compensation expense 5,653 5,653 Stock options exercised 1,524 1,524 Repurchases of common stock ( 27 ) ( 374,690 ) ( 374,717 ) BALANCE — June 30, 2022 $ 309 $ ( 14,243 ) $ 753,300 $ ( 446,142 ) $ ( 9,972 ) $ 283,252 Net income 66,027 66,027 Foreign currency translation ( 6,080 ) ( 6,080 ) Stock-based compensation expense 5,794 5,794 Stock options exercised 892 892 BALANCE — September 30, 2022 $ 309 $ ( 14,243 ) $ 759,986 $ ( 380,115 ) $ ( 16,052 ) $ 349,885 Common Stock Treasury Stock Additional Paid-In Capital (Accumulated Deficit) Retained Earnings Accumulated Other Comprehensive Loss Total BALANCE — December 31, 2022 $ 309 $ ( 12,497 ) $ 770,794 $ ( 359,827 ) $ ( 12,392 ) $ 386,387 Net income 72,894 72,894 Foreign currency translation 1,078 1,078 Stock-based compensation expense 5,438 5,438 Stock options exercised 4 2,459 2,463 Repurchases of common stock ( 7 ) ( 120,991 ) ( 120,998 ) Re-issuance of treasury stock 175 ( 175 ) — BALANCE — March 31, 2023 $ 306 $ ( 12,322 ) $ 778,691 $ ( 408,099 ) $ ( 11,314 ) $ 347,262 Net income 61,068 61,068 Foreign currency translation 120 120 Stock-based compensation expense 4,906 4,906 Stock options exercised 1 1,695 1,696 Repurchases of common stock ( 1 ) ( 23,991 ) ( 23,992 ) BALANCE — June 30, 2023 $ 306 $ ( 12,322 ) $ 785,292 $ ( 371,022 ) $ ( 11,194 ) $ 391,060 Net income 70,550 70,550 Foreign currency translation ( 1,676 ) ( 1,676 ) Stock-based compensation expense 5,007 5,007 Stock options exercised 1 5,695 5,696 Repurchases of common stock 275 275 BALANCE — September 30, 2023 $ 307 $ ( 12,322 ) $ 795,994 $ ( 300,197 ) $ ( 12,870 ) $ 470,912 See notes to condensed consolidated financial statements. -6- Table of Contents MEDPACE HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands) Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 204,512 $ 176,698 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 17,707 13,928 Amortization 1,649 2,514 Stock-based compensation expense 15,351 15,819 Noncash lease expense 14,579 13,460 Deferred income tax benefit ( 11,308 ) ( 2,126 ) Other 821 ( 350 ) Changes in assets and liabilities: Accounts receivable and unbilled, net ( 39,314 ) ( 62,438 ) Prepaid expenses and other current assets ( 8,954 ) ( 17,397 ) Accounts payable ( 921 ) 770 Accrued expenses 54,923 47,848 Advanced billings 56,026 73,286 Lease liabilities ( 14,433 ) ( 11,134 ) Other assets and liabilities, net ( 13,659 ) 488 Net cash provided by operating activities 276,979 251,366 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment expenditures ( 26,662 ) ( 27,636 ) Other 30 ( 1,886 ) Net cash used in investing activities ( 26,632 ) ( 29,522 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock option exercises 9,855 16,313 Repurchases of common stock ( 144,020 ) ( 800,667 ) Proceeds from revolving loan 105,000 299,200 Payments on revolving loan ( 155,000 ) ( 159,500 ) Net cash used in financing activities ( 184,165 ) ( 644,654 ) EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 760 ( 7,487 ) INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 66,942 ( 430,297 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 28,265 461,304 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period $ 95,207 $ 31,007 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Acquisition of property and equipment—non-cash $ 4,704 $ 9,094 See notes to condensed consolidated financial statements. -7- Table of Contents MEDPACE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 2023 (1) Basis of Presentation Description of Business Medpace Holdings, Inc. (together with its subsidiaries, “Medpace” or the “Company”), a Delaware corporation, is a global provider of clinical research-based drug and medical device development services. The Company partners with pharmaceutical, biotechnology, and medical device companies in the development and execution of clinical trials. The Company’s drug development services focus on full service Phase I-IV clinical development services and include development plan design, project management, regulatory affairs, clinical monitoring, data management and analysis, pharmacovigilance new drug application submissions, post-marketing clinical support, laboratory services, clinical human pharmacology, imaging services, and electrocardiography reading support for clinical trials. The Company’s operations are principally based in North America, Europe, and Asia. Unaudited Interim Financial Information The interim condensed consolidated financial statements include the accounts of the Company, are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), and are unaudited. In the opinion of the Company’s management, all adjustments of a normal recurring nature necessary for a fair presentation have been reflected. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. The preparation of the interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results and outcomes could differ from management’s estimates and assumptions. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Share Repurchases In 2018, the Board of Directors approved a stock repurchase program which has been amended several times to increase the aggregate amount of the stock repurchase authorization. During the nine months ended September 30, 2022, the Company repurchased 5,463,244 shares for $ 800.5 million. In the fourth quarter of 2022, the Board approved a new stock repurchase program of up to $ 500.0 million. The Company did no t execute any share repurchases during the three months ended September 30, 2023. During the nine months ended September 30, 2023, the Company repurchased 781,068 shares for $ 144.0 million. As of September 30, 2023, we have remaining authorization of $ 308.8 million under the new repurchase program. Repurchases under the share repurchase program are executed in the open market or negotiated transactions under trading plans put in place pursuant to Rule 10b5-1. The Company constructively retired the repurchased shares associated with these approved share repurchases, except for a small portion which were retained as Treasury Shares on the condensed consolidated statements of shareholders' equity. Retired share repurchase amounts paid in excess of par value are reflected within Accumulated deficit/Retained earnings in the Company’s condensed consolidated balance sheets. (2) 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 Restricted Stock Awards (“RSA”) 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. -8- Table of Contents The computation of diluted EPS includes additional common shares, such as unvested Restricted Stock Units (“RSU”) 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 three and nine months ended September 30, 2023 and 2022 (in thousands, except for earnings per share): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Weighted-average shares: Common shares outstanding 30,629 31,009 30,723 32,791 RSAs 21 21 21 21 Total weighted-average shares 30,650 31,030 30,744 32,812 Earnings per common share—Basic Net income $ 70,550 $ 66,027 $ 204,512 $ 176,698 Less: Undistributed earnings allocated to RSAs ( 48 ) ( 44 ) ( 138 ) ( 112 ) Net income available to common shareholders—Basic $ 70,502 $ 65,983 $ 204,374 $ 176,586 Net income per common share—Basic $ 2.30 $ 2.13 $ 6.65 $ 5.39 Basic weighted-average common shares outstanding 30,629 31,009 30,723 32,791 Effect of diluted shares 1,133 1,244 1,116 1,307 Diluted weighted-average shares outstanding 31,762 32,253 31,839 34,098 Net income per common share—Diluted $ 2.22 $ 2.05 $ 6.42 $ 5.18 During the nine months ended September 30, 2023, the Company had (in thousands) 0.6 stock options that were excluded due to the exercise price exceeding the average fair value of the Company’s common stock during the period. During the three and nine months ended September 30, 2022, the Company had (in thousands) 274.4 stock options, respectively, that were excluded due to the exercise price exceeding the average fair value of the Company’s common stock during the period. (3) 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. -9- Table of Contents The Company does not have material recurring fair value measurements as of September 30, 2023. There were no material transfers between Level 1, Level 2 or Level 3 during the three and nine months ended September 30, 2023 or September 30, 2022. (4) Contract Assets and Contract Liabilities Contract assets and liabilities are reflected in the Company’s condensed consolidated balance sheets within the accounts reflected below. Contract Assets Accounts receivable represent amounts due from the Company’s customers who are concentrated primarily in the pharmaceutical, biotechnology, and medical device industries. Unbilled represents revenue recognized to date that has not been billed or is not yet contractually billable to the customer. In general, amounts become billable upon the achievement of negotiated contractual events, in accordance with predetermined payment schedules or when a reimbursable expense has been incurred. Amounts classified to unbilled are those billable to customers within one year from the respective balance sheet date. Accounts receivable and unbilled, net consisted of the following (in thousands): As of September 30, 2023 December 31, 2022 Accounts receivable $ 257,294 $ 213,169 Unbilled receivables 35,486 40,405 Less: allowance for doubtful accounts ( 7 ) ( 170 ) Total accounts receivable and unbilled, net $ 292,773 $ 253,404 Contract Liabilities Advanced billings represent cash received from customers, or billed amounts per an agreed upon payment schedule, in advance of services being performed or revenue being recognized. Advanced billings consisted of the following (in thousands): As of September 30, 2023 December 31, 2022 Advanced billings $ 518,755 $ 462,729 As of September 30, 2023, we had approximately $ 2.8 billion of performance obligations remaining to be performed for active projects. -10- Table of Contents (5) Intangible Assets, Net Intangible assets, net consisted of the following (in thousands): As of September 30, 2023 December 31, 2022 Intangible assets: Finite-lived intangible assets: Carrying amount: Customer relationships 145,051 145,051 Accumulated amortization: Customer relationships ( 140,338 ) ( 138,689 ) Total finite-lived intangible assets, net 4,713 6,362 Trade name (indefinite-lived) 31,646 31,646 Total intangible assets, net $ 36,359 $ 38,008 As of September 30, 2023, estimated amortization expense of the Company’s intangible assets for each of the next five years and thereafter is as follows (in thousands): Amortization Remainder of 2023 $ 550 2024 1,443 2025 946 2026 620 2027 577 2028 577 $ 4,713 (6) Accrued Expenses Accrued expenses consisted of the following (in thousands): As of September 30, 2023 December 31, 2022 Employee compensation and benefits $ 69,509 $ 71,197 Project related reimbursable expenses 183,998 128,416 Other 11,278 10,512 Total accrued expenses $ 264,785 $ 210,125 (7) Short-term Debt Short-term debt consisted of the following (in thousands): As of September 30, 2023 December 31, 2022 Credit facility $ — $ 50,000 Short-term debt $ — $ 50,000 -11- Table of Contents The estimated fair value of the Company’s debt based on Level 2 inputs using the market approach, which is primarily based on rates at which the debt is traded among financial institutions, approximates the carrying value as of December 31, 2022. On September 30, 2019 (the “Closing Date”), the Company obtained an unsecured credit facility in an aggregate principal amount up to $ 50.0 million (as amended from time to time, 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 (as it may be amended from time to time, 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. On March 15, 2022, the Company entered into Amendment No. 4 to the Loan Agreement, which increased the aggregate principal amount that may be borrowed under the facility’s line of credit to up to $ 250.0 million. On March 31, 2023, the Company entered into Amendment No. 5 to the Loan Agreement, which changed the aggregate principal amount that may be borrowed under the facility’s line of credit to up to $ 150.0 million, adjusted the interest rate and fee charged on the credit facility and extended the expiration date of revolving credit note to March 29, 2024. The Credit Facility bears interest at a rate of the sum of The Secured Overnight Financing Rate (SOFR) plus 125 basis points ( 1.25 %) or the highest of the Prime Rate, the sum of the Overnight Bank Funding Rate plus 50 basis points ( 0.50 %) and the sum of Daily Simple SOFR plus 100 basis points ( 1.00 %). 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 September 30, 2023, there were less than $ 0.1 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 1 year to 17 years. Many of the Company’s leases include options to extend the leases on a month to month basis or for set periods for up to 20 years. Many leases also include options to terminate the leases within 1 year or per other contractual terms. The components of lease expense were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Operating lease cost $ 7,002 $ 6,482 $ 20,637 $ 19,357 Variable lease cost 2,372 2,240 6,544 6,353 Supplemental cash flow information related to the leases was as follows (in thousands): Nine Months Ended September 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 14,883 $ 12,045 Right-of-use assets obtained in exchange for lease obligations: Operating leases 20,412 29,915 -12- Table of Contents Supplemental balance sheet information related to the leases was as follows (in thousands): As of September 30, 2023 December 31, 2022 Operating lease right-of-use assets - related parties $ 84,592 $ 86,356 Operating lease right-of-use assets - non-related parties 59,555 52,712 Operating lease right-of-use assets $ 144,147 $ 139,068 Other current liabilities - related parties 5,592 5,409 Other current liabilities - non-related parties 14,686 13,863 Other current liabilities $ 20,278 $ 19,272 Operating lease liabilities - related parties 92,049 93,393 Operating lease liabilities - non-related parties 50,990 45,474 Operating lease liabilities 143,039 138,867 Total operating lease liabilities $ 163,317 $ 158,139 Weighted Average Remaining Lease Term (years) Operating leases 10.3 11.1 Weighted Average Discount Rate Operating leases 5.4 % 5.2 % Lease payments due related to lease liabilities as of September 30, 2023 were as follows (in thousands): Related Party Operating Leases Non-Related Parties Operating Leases Total Operating Leases Remainder of 2023 $ 2,827 $ 4,157 $ 6,984 2024 11,412 16,333 27,745 2025 11,607 15,110 26,717 2026 11,807 12,878 24,685 2027 10,839 9,843 20,682 Later years 100,278 14,449 114,727 Total lease payments 148,770 72,770 221,540 Less: imputed interest ( 51,129 ) ( 7,094 ) ( 58,223 ) Total $ 97,641 $ 65,676 $ 163,317 As of September 30, 2023, we have several additional leases with contractual obligations, which have not yet commenced, with future payments of $ 4.6 million. (9) Shareholder’s Equity and Stock-Based Compensation The Company granted 38,188 awards to employees under the 2016 Incentive Award Plan during the nine months ended September 30, 2023, consisting of 36,938 RSU and 1,250 stock option awards having four year vesting schedules. The Company granted an additional 11,187 stock option awards to non-employee directors under the 2016 Incentive Award Plan, during the nine months ended September 30, 2023. These awards are scheduled to 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. -13- Table of Contents Award Activity The following table sets forth the Company’s stock option activity: Nine Months Ended September 30, 2023 Stock Options Weighted Average Exercise Price Outstanding - beginning of period 1,629,148 $ 89.71 Granted 12,437 $ 211.25 Exercised ( 238,492 ) $ 41.32 Cancelled/Forfeited/Expired ( 9,750 ) $ 186.77 Outstanding - end of period 1,393,343 $ 98.39 Exercisable - end of period 950,421 $ 72.58 The following table sets forth the Company’s RSA/RSU activity: Nine Months Ended September 30, 2023 Shares/Units Outstanding and unvested - beginning of period 523,377 Granted 36,938 Vested ( 133,039 ) Forfeited ( 20,809 ) Outstanding and unvested - end of period 406,467 Cumulative vested shares - end of period 2,362,955 Stock-based compensation expense recognized in the condensed consolidated statements of operations related to all outstanding stock based compensation awards is summarized below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Total direct costs $ 2,745 $ 3,179 $ 8,243 $ 8,744 Selling, general and administrative 2,262 2,615 7,108 7,075 Total stock-based compensation expense $ 5,007 $ 5,794 $ 15,351 $ 15,819 (10) Income Taxes The Company’s effective income tax rate was 15.2 % and 19.4 % for the three months ended September 30, 2023 and 2022, respectively. The Company's effective income tax rate was 16.5 % and 15.5 % for the nine months ended September 30, 2023 and 2022, respectively. The Company’s effective income tax rate for the three months ended September 30, 2023 and the nine months ended September 30, 2023 varied from the U.S. statutory rate of 21 % primarily due to the impact of the state taxes, which was favorably offset by excess tax benefits recognized from share-based compensation and tax benefits related to Foreign Derived Intangible Income (FDII). -14- Table of Contents (11) Commitments and Contingencies Legal Proceedings The Company is involved in legal proceedings from time to time in the ordinary course of its business, including employment claims and claims related to other business transactions. The Company cannot predict with certainty the outcome of such proceedings, but it believes that adequate reserves have been recorded and losses already recognized with respect to such proceedings, which were immaterial as of September 30, 2023 and December 31, 2022. There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these actions; however, the Company believes that such potential losses were immaterial as of September 30, 2023. Purchase Commitments The Company has several minimum purchase commitments for project related supplies totaling $ 16.9 million as of September 30, 2023. In return for the commitment, Medpace receives preferential pricing. The commitments expire at various times through 2029. (12) 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 $ 0.3 million existed at September 30, 2023 and December 31, 2022, respectively, and are included in the Prepaid expenses and other current assets and Other assets line items of the condensed consolidated balance sheets, respectively, depending on the contractual repayment date. Service Agreement LIB Therapeutics LLC and subsidiaries (“LIB”) Certain executives and employees of the Company, including the chief executive officer, are members of LIB’s board of managers. The Company entered into a MSA dated November 24, 2015 with LIB, a company that engages in research, development, marketing and commercialization of pharmaceutical drugs. Subsequently, the Company and LIB have entered into several task orders for the Company to perform clinical trial related services. The Company recognized total revenue from LIB of $ 10.1 million and $ 9.5 million during the three months ended September 30, 2023 and 2022, respectively, and $ 33.1 million and $ 26.6 million during the nine months ended September 30, 2023 and 2022, respectively, in the Company’s condensed consolidated statements of operations. As of September 30, 2023 and December 31, 2022, respectively, the Company had Advanced billings from LIB of $ 10.6 million and $ 7.4 million in the condensed consolidated balance sheets. In addition, as of September 30, 2023 and December 31, 2022, respectively, the Company had Accounts receivable and unbilled, net from LIB of $ 0.7 million and $ 5.5 million in the condensed consolidated balance sheets. The Company had Other current liabilities with LIB of $ 12.5 million in the condensed consolidated balance sheets at December 31, 2022. CinRX Pharma, subsidiaries and affiliates (“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. The Company recognized total revenue from CinRx of $ 5.3 million and $ 0.5 million during the three months ended September 30, 2023 and 2022, respectively, and $ 11.4 million and $ 13.8 million during the nine months ended September 30, 2023 and 2022, respectively, in the Company’s condensed consolidated statements of operations. As of September 30, 2023 and December 31, 2022, respectively, the Company had Advanced billings from CinRx of $ 2.8 million and $ 1.4 million in the condensed consolidated balance sheets. As of September 30, 2023 and December 31, 2022 the Company had Accounts receivable and unbilled, net from CinRx of $ 1.5 million and $ 2.2 million, respectively, in the condensed consolidated balance sheets. Certain affiliates of CinRx included in previous reported quarters are no longer disclosed due to changes in the affiliate relationships. 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. Medpace incurred expenses of $ 0.1 million during the three months ended September 30, 2023 and 2022, respectively, and $ 0.3 million and $ 0.2 million during the nine months ended September 30, 2023 and 2022 at The Summit, respectively. -15- Table of Contents Leased Real Estate Campus Headquarters Leases The Company entered into an operating lease for the occupancy of office space in a building in Cincinnati, Ohio with an entity that is wholly owned by the chief executive officer of the Company. The Company has evaluated its relationship with the related party and concluded that the related party is not a variable interest entity because the Company has no direct ownership interest or relationship other than the lease. The lease was renewed in the first quarter of fiscal year 2023 for a term of ten years through December 2032 with a renewal option for one 10-year term at prevailing market rates. The Company pays rent, taxes, insurance, and maintenance expenses that arise from the use of the property. Annual base rent for its corporate headquarters allows for adjustments to the rental rate annually for increases in the consumer price index. The Company has determined that the lease is an operating lease. Operating lease cost recognized for the three months ended September 30, 2023 and 2022 was $ 0.7 million and $ 0.6 million and $ 2.0 million and $ 1.7 million for the nine months ended September 30, 2023 and 2022, respectively. The operating lease cost was allocated between Total direct costs and Selling, general and administrative in the condensed consolidated statements of operations. The Operating lease right-of-use assets at September 30, 2023 and December 31, 2022 were $ 19.8 million and $ 18.2 million, respectively, in the condensed consolidated balance sheets. The current and long-term portions of the lease liabilities at September 30, 2023 were $ 1.4 million and $ 18.5 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the condensed consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 2022 were $ 1.5 million and $ 16.7 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the condensed consolidated balance sheets. 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 three months ended September 30, 2023 and 2022 was $ 1.5 million and $ 4.3 million for the nine months ended September 30, 2023 and 2022. The operating lease cost was allocated between Total direct costs and Selling, general and administrative in the condensed consolidated statements of operations. The Operating lease right-of-use assets at September 30, 2023 and December 31, 2022 were $ 52.3 million and $ 53.5 million, respectively, in the condensed consolidated balance sheets. The current and long-term portions of the lease liabilities at September 30, 2023 were $ 1.2 million and $ 63.9 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the condensed consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 2022 were $ 1.1 million and $ 64.8 million, respectively and were recognized in Other current liabilities and Operating lease liabilities in the condensed 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 three months ended September 30, 2023 and 2022 was $ 0.9 million and $ 2.7 million for the nine months ended September 30, 2023 and 2022. The operating lease cost was allocated between Total direct costs and Selling, general and administrative in the condensed consolidated statements of operations. The Operating lease right-of-use assets at September 30, 2023 and December 31, 2022 were $ 12.6 million and $ 14.6 million, respectively, in the condensed consolidated balance sheets. The current and long-term portions of the lease liabilities at September 30, 2023 were $ 2.9 million and $ 9.7 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the condensed consolidated balance sheets. The current and long-term portions of the lease liabilities at December 31, 2022 were $ 2.8 million and $ 11.9 million, respectively, and were recognized in Other current liabilities and Operating lease liabilities in the condensed consolidated balance sheets. Travel Services The Company incurs expenses for travel services for company executives provided by private aviation charter companies which is a company controlled by the chief executive officer of the Company (each a “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 -16- Table of Contents 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 and $ 0.6 million during the three months ended September 30, 2023 and 2022, respectively, and $ 1.5 million and $ 1.6 million during the nine months ended September 30, 2023 and 2022, respectively, related to these travel services. These travel expenses are recorded in Selling, general and administrative in the Company’s condensed consolidated statements of operations. As of September 30, 2023 and December 31, 2022, the Company had Accounts payable to the Aircraft Management Company of $ 0.3 million, respectively, in the condensed consolidated balance sheets. (13) Entity Wide Disclosures Revenue by Category The following table disaggregates our revenue by major source (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Therapeutic Area Oncology $ 149,326 $ 122,834 $ 438,366 $ 343,589 Other 106,160 72,767 294,319 216,739 Metabolic 103,118 63,478 277,818 167,194 Cardiology 44,360 49,802 142,107 129,225 Central Nervous System 43,989 43,418 120,412 120,811 AVAI 45,546 31,445 114,419 88,340 Total revenue $ 492,499 $ 383,744 $ 1,387,441 $ 1,065,898 -17- Table of Contents