Advantage Solutions Inc. quarterly report, Q1 FY2023

Advantage Solutions Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023. The company provides outsourced sales and marketing services to consumer goods manufacturers and retailers through its Sales and Marketing segments. Figures below are in U.S. dollars; financial statement amounts are generally in millions.

Financial performance and liquidity

Metric	Q1 2023	Q1 2022
Revenue	$1,012.0 million	$914.8 million
Operating income (loss)	$(8.3) million; (0.8)% margin	$23.0 million; 2.5% margin
Net income (loss)	$(47.7) million	$17.5 million
Adjusted EBITDA (non-GAAP)	$92.1 million; 9.1% margin	$96.7 million; 10.6% margin
Operating cash flow	$43.1 million	$(24.0) million

• Revenue grew 10.6%. Sales segment revenue rose 3.6% to $613.3 million; Marketing rose 23.5% to $398.6 million. Management attributed growth mainly to retail merchandising and European joint venture activity in Sales, and in-store demonstrations and sampling in Marketing.
• Cost of revenue was 87.8% of revenue, versus 85.9% a year earlier, reflecting service mix and inflation in recruiting and wages. Implied gross margin declined to approximately 12.2% from 14.1%.
• SG&A increased to $75.1 million from $48.1 million, including $16.5 million of noncash asset-disposal and held-for-sale losses and $11.1 million of reorganization and restructuring expense. Depreciation and amortization was $57.1 million, broadly stable year over year.
• Net interest expense increased to $47.2 million from $11.9 million. Management cited higher interest rates and the prior-year benefit from derivative fair-value changes. The effective tax rate was 13.9%, versus 34.0%; the company recorded a $7.7 million tax benefit in Q1 2023.
• Adjusted EBITDA declined 4.8%. Sales segment Adjusted EBITDA was $65.8 million, down 3.5%; Marketing was $26.2 million, down 8.0%, with digital-services headwinds partly offset by sampling growth. Adjusted Net Income, also non-GAAP, fell to $13.8 million from $49.1 million.
• Operating cash flow improved from the prior-year use of cash, which management attributed primarily to working-capital needs to launch services in Q1 2022. Q1 2023 cash flows included a $72.9 million benefit from accounts receivable and outflows from accounts payable and accrued compensation.
• Cash and cash equivalents were $149.1 million at March 31, 2023; restricted cash was $19.7 million. Gross debt was $2.074 billion, including $1.293 billion under the Term Loan Facility and $775 million of 6.50% notes. The company reported no revolver borrowings and $500 million of unused revolver capacity, subject to borrowing-base limits; approximately $44.5 million of letters of credit were outstanding. It reported compliance with debt covenants.

Material changes, outlook and risks

• Compared with Q1 2022, higher revenue did not translate into higher profitability: operating results moved from income to loss, net results moved from profit to loss, and Adjusted EBITDA and margins declined. The filing attributes the operating loss primarily to one-time SG&A charges; higher interest expense was a major contributor to the net loss.
• In April 2023, the company agreed to sell a portion of its Sales reporting unit. At March 31, assets of $20.2 million and liabilities of $4.8 million were classified as held for sale; the company recorded a $11.7 million remeasurement loss in Q1. The disposal was not classified as discontinued operations.
• No specific financial guidance was provided. Management stated that domestic cash and operating cash flows were expected to fund domestic operating activities and cash commitments for at least the next 12 months and thereafter for the foreseeable future. The company cautioned that Q1 results are not necessarily indicative of full-year results; its business is seasonal, with Q4 typically generating a higher share of revenue.
• Management noted ongoing inflation, wage and recruiting costs, interest-rate exposure, foreign-exchange exposure, and continued recovery in COVID-affected in-store sampling services. It reported $650 million notional of interest-rate caps; in April 2023, it entered additional interest-rate collars with $300 million aggregate notional.
• Legal contingencies include ordinary-course disputes and employment-related claims. In the Take 5 Matter, the company disclosed misconduct at an acquired business, terminated its operations in 2019, and is cooperating with government investigations. It received a favorable arbitration award against the sellers but cannot estimate when or whether it will collect; further litigation or investigations could create liability that the company cannot currently quantify.
• The filing reported no material changes to the risk factors in the 2022 Form 10-K and stated that disclosure controls were effective as of March 31, 2023.

Key facts for investors to verify

• Whether revenue growth, particularly in Marketing, can improve segment profitability and offset wage inflation and weaker digital-services performance.
• How much of the Q1 operating loss reflects nonrecurring disposal and restructuring charges, and whether further charges or restructuring costs arise.
• Interest expense, floating-rate exposure, hedge coverage and covenant headroom, given the company’s substantial debt and higher interest rates.
• Final proceeds, timing and any additional impacts from the Sales reporting-unit divestiture.
• Cash conversion and working-capital trends, as well as the availability of revolver capacity under borrowing-base limits.
• Potential financial exposure and recoveries related to Take 5 and other litigation; the filing does not provide a clear estimate of possible Take 5 liability or arbitration collections.