Advantage Solutions Inc. — Q3 2023 Form 10-Q
Period: Three and nine months ended September 30, 2023; unaudited. Advantage provides outsourced sales and marketing services to consumer-goods companies and retailers through its Sales and Marketing segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,096.1 million | $1,051.1 million | $3,145.1 million | $2,947.0 million |
| Operating income | $16.0 million | $46.8 million | $30.0 million | $98.1 million |
| Net income (loss) | $(22.6) million | $23.2 million | $(78.1) million | $44.4 million |
| Adjusted EBITDA (non-GAAP) | $113.1 million | $118.3 million | $309.4 million | $323.3 million |
| Adjusted net income (non-GAAP) | $37.9 million | $62.7 million | $88.2 million | $152.5 million |
- Revenue grew 4.3% in Q3 and 6.7% year to date. Management reported growth excluding acquisition/divestiture and foreign-exchange effects of 5.8% and 8.0%, respectively.
- Q3 operating margin was 1.5% versus 4.5%; nine-month operating margin was 1.0% versus 3.3%. Cost of revenue was 86.5% of revenue in Q3 (86.4% prior year) and 87.1% year to date (86.1%). Adjusted EBITDA margin was 10.3% and 9.8%, respectively, compared with 11.3% and 11.0% in the comparable periods.
- Net interest expense increased to $42.3 million in Q3 from $23.6 million and to $120.0 million year to date from $63.6 million. The filing attributes the increase mainly to higher interest rates; Q3 and year-to-date results also reflect derivative fair-value changes and debt-repurchase gains.
- Q3 Sales segment revenue declined 2.7% to $628.5 million, while Marketing revenue rose 15.5% to $467.5 million. Marketing growth was led by in-store sampling and demonstrations; digital services declined. Year-to-date Sales revenue was essentially flat at $1,841.7 million, while Marketing revenue grew 18.0% to $1,303.4 million.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $180.7 million, versus $82.0 million. Investing used $15.5 million, versus $103.1 million; financing used $114.8 million, versus $32.9 million. Capital expenditures were $29.7 million. Operating cash flow less capital expenditures was approximately $151.1 million, a simple derived measure rather than a company-reported metric.
- At September 30, cash and cash equivalents were $171.4 million and restricted cash was $16.3 million. Current assets were $1,118.6 million and current liabilities $633.9 million.
- Reported debt carrying value was $1,958.4 million before current-portion and debt-issuance-cost presentation; it included a $1,177.4 million Term Loan Facility and $775.0 million of 6.50% notes. The term loan bears floating-rate interest of Term SOFR plus 4.50% and matures in October 2027; the notes mature in November 2028. The company repurchased $111.2 million principal amount of term-loan debt during the nine months and recorded a $5.2 million gain.
- No revolving-credit borrowings were outstanding. The $500 million revolving facility was available subject to borrowing-base limits; approximately $44.1 million of letters of credit were outstanding. Management said the company was in compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- SG&A rose to $76.1 million in Q3 from $37.9 million and to $204.4 million year to date from $138.6 million. Management cited increased internal reorganization costs, including professional fees and severance, along with incentive compensation and technology expenses. Year-to-date SG&A also included increased litigation costs and a $20.2 million loss on sale/disposal of businesses and assets.
- The company recorded a $2.7 million Q3 impairment on an equity-method investment. Intangible assets fell to $1,740.7 million from $1,897.5 million at year-end 2022. The filing reports substantial accumulated goodwill impairment losses of $2,019.5 million.
- During the nine months, the company received $12.8 million from divestitures. In October 2023, it agreed to sell another Sales business unit for $10.0 million cash, subject to working-capital and performance adjustments.
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management expects domestic cash and operating cash flows to be sufficient for domestic operations and cash commitments for at least the next 12 months and the foreseeable future. Results are seasonal, with the fourth quarter typically stronger; sampling and demonstration services continued to recover from pandemic-related reductions.
- Risks include inflation and wage pressure, higher floating-rate borrowing costs, foreign-exchange exposure, client spending and service mix, and ordinary-course litigation. The Take 5 matter includes prior misconduct, possible further litigation or government investigations, and potential liability that the company says it cannot estimate; it received $1.7 million of insurance proceeds in June 2023. The filing states no material changes to previously disclosed risk factors.
- Management concluded disclosure controls were effective as of September 30, 2023 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the marketing segment’s sampling-led revenue growth can continue and offset weaker Sales and digital-services trends.
- How much of the unusually high reorganization, litigation and disposal-related costs will recur, and the effect on GAAP profitability.
- Debt interest-rate exposure, covenant headroom, and the extent to which interest-rate caps and collars offset floating-rate costs.
- The outcome and possible financial exposure from the Take 5 matter and other legal proceedings.
- The terms and final proceeds of the October 2023 business sale, and the company’s cash-generation and debt-repayment progress.