Advantage Solutions Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same 2021 periods. Amounts are in millions of dollars unless stated otherwise. The company provides outsourced sales, merchandising, marketing and related services to consumer-goods manufacturers and retailers through its Sales and Marketing segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,051.1 | $928.8 | $2,947.0 | $2,569.7 |
| Operating income | $46.8 | $65.6 | $98.1 | $145.6 |
| Operating margin | 4.5% | 7.1% | 3.3% | 5.7% |
| Net income | $23.2 | $24.3 | $44.4 | $29.5 |
| Net income attributable to Advantage Solutions shareholders | $21.1 | $23.3 | $43.4 | $29.3 |
| Diluted earnings per share | $0.07 | $0.07 | $0.14 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $118.3 | $133.8 | $323.3 | $367.2 |
| Adjusted EBITDA margin (non-GAAP) | 11.3% | 14.4% | 11.0% | 14.3% |
Revenue grew 13.2% in Q3 and 14.7% year to date, while operating income fell 28.6% and 32.6%, respectively. Cost of revenues rose to 86.4% of revenue in Q3 from 82.5%, and to 86.1% year to date from 82.4%; management cited service and acquisition mix, recruiting investment, wage increases and employee-benefit inflation. Adjusted EBITDA, a company-defined non-GAAP measure, declined 11.6% in Q3 and 11.9% year to date.
For the first nine months, cash provided by operations was $82.0, down from $101.1. Investing used $103.1, including $74.1 for business acquisitions and $30.0 for property and equipment; financing used $32.9. Cash, cash equivalents and restricted cash decreased $66.3 to $114.3, comprising $96.2 of cash and equivalents and $18.1 of restricted cash at period-end.
At September 30, 2022, gross debt was $2,082.4, compared with $2,093.1 at year-end 2021. Long-term debt, net of current portion and issuance costs, was $2,024.6. The company had no revolving-credit borrowings and reported $400.0 of unused facility capacity, subject to borrowing-base limits; $54.5 of letters of credit was outstanding. It reported compliance with debt covenants. Current assets were $1,103.2 and current liabilities $601.0.
Business and period-over-period changes
- Q3 Sales revenue rose 8.2% to $646.2; Marketing revenue rose 22.1% to $404.8. Year-to-date growth was 8.8% in Sales and 26.0% in Marketing.
- Management attributed Marketing growth largely to continued recovery in in-store product demonstrations and sampling after COVID-related suspensions. Sales growth reflected merchandising and international activity, partly offset by weakness in certain third-party selling and retailing services. Foreign-exchange movements reduced reported segment revenue growth.
- Sales operating income fell to $31.8 in Q3 from $51.9 and to $65.9 for nine months from $131.7. Marketing operating income increased to $15.1 in Q3 from $13.7 and to $32.2 year to date from $13.9.
- Net income increased 50.5% year to date despite lower operating income, partly because interest expense and income taxes were lower and the company recorded a noncash gain from the change in fair value of warrant liabilities. The Q3 net-income comparison was down 4.5%.
- The company acquired four businesses during the first nine months for aggregate consideration of $75.5, including $74.1 paid in cash. Acquired businesses contributed $21.3 of revenue in the period.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or Adjusted EBITDA guidance. Management stated that existing domestic cash and operating cash flows were expected to fund domestic operations and investing and financing commitments for at least the next 12 months and the foreseeable future.
- Management identified inflation and labor costs, hiring and retention, client spending and procurement pressure, retailer and client consolidation, seasonality, and continued adaptation to digital and omnichannel services as important business factors. Q4 typically generates a higher share of revenue because of seasonal consumer spending.
- The company has substantial indebtedness and variable-rate exposure. It had $650.0 of interest-rate caps outstanding, with a reported fair value of $49.1; changes in derivative fair value contributed materially to lower reported net interest expense. The filing also discusses the transition from LIBOR to replacement rates.
- The company recorded $2.8 of pretax charges in Q1 related primarily to its proportionate investment in Russian operations following the Ukraine conflict and sanctions; it intends to use its influence to cause disposal of the local agencies. Recovery of the investment and influence over those operations remain uncertain.
- In October 2022, an arbitrator issued a final award in the company’s favor in the Take 5 seller dispute. The company could not estimate whether or when it would collect amounts. Separate potential client claims or government investigations related to Take 5 remain uncertain, and potential liability beyond offered refunds could not be estimated. Employment-related litigation and other ordinary-course legal matters also remain.
- The company cited ongoing COVID-19 recovery, but warned that further pandemic-related disruptions could affect services and client spending. Other risks include currency movements, impairment of goodwill or intangibles, cybersecurity and privacy matters, and the ability to sustain operating cash flow and service debt. Management reported disclosure controls were effective at quarter-end and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether revenue growth can translate into improved operating margins as wage, benefit and recruiting costs rise, particularly in the Sales segment.
- Cash conversion and working-capital trends, including the decline in operating cash flow and the cash consumed by acquisitions and capital spending.
- Debt service capacity, floating-rate exposure, available revolver capacity after borrowing-base restrictions, and the impact of reference-rate transition.
- Underlying segment performance and the sustainability of COVID-recovery-related Marketing growth, distinguishing organic growth from acquisitions and currency effects.
- Potential costs and outcomes of Take 5-related investigations or claims, and whether the favorable arbitration award results in recoveries.
- Material assumptions behind non-GAAP Adjusted EBITDA and Adjusted Net Income, including the recurring nature of excluded expenses.