Advantage Solutions Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021. Advantage provides outsourced sales, merchandising and marketing services to consumer goods companies and retailers, through its Sales and Marketing segments.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $914.8 million | $791.0 million |
| Operating income | $23.0 million | $37.6 million |
| Net income (loss) | $17.5 million | ($0.5 million) |
| Net income (loss) attributable to Advantage stockholders | $19.0 million | ($0.1 million) |
| Adjusted Net Income (non-GAAP) | $49.1 million | $46.3 million |
| Adjusted EBITDA (non-GAAP) | $96.7 million | $111.4 million |
Revenue grew 15.6%. Sales segment revenue increased 10.8% to $592.0 million, including $47.9 million from acquired businesses; Marketing revenue increased 25.8% to $322.8 million, primarily from recovery in in-store demonstrations and sampling. Marketing organic revenue rose $64.0 million; Sales organic revenue rose $14.7 million excluding acquisitions and foreign exchange.
Profitability weakened despite revenue growth. Cost of revenue rose to 85.9% of revenue from 82.6%, and operating margin fell to 2.5% from 4.8%. Management attributed pressure primarily to service mix and acquisitions, recruiting and wage investment, and higher self-insured medical claims. Sales operating income declined 46.0% to $19.0 million; Marketing operating income increased 66.0% to $4.1 million.
GAAP net income benefited from noncash fair-value movements: the warrant liability adjustment was a $15.4 million gain, versus a $5.5 million expense in Q1 2021. Net interest expense was $11.9 million, down from $30.9 million; the company also reported a $21.0 million gain on interest-rate-cap fair-value changes within interest expense. Adjusted EBITDA decreased 13.2%, reflecting higher costs. These non-GAAP measures exclude specified items and should not be treated as substitutes for GAAP results.
Cash flow, debt and liquidity
- Operating cash flow was negative $24.0 million, compared with positive $29.9 million in Q1 2021. Management cited increased working-capital needs to launch services.
- Investing cash outflow was $12.2 million, including $10.4 million of capital expenditures; financing cash outflow was $2.0 million. Cash, cash equivalents and restricted cash ended the quarter at $140.9 million, down from $180.6 million at year-end 2021. Unrestricted cash was $123.6 million.
- Total debt carrying value was $2.09 billion, excluding debt issuance costs; balance-sheet debt was $2.04 billion net of current portion and issuance costs. Debt included a $1.31 billion term loan and $775 million of 6.50% notes due 2028. The term loan matures in 2027. The company reported compliance with debt covenants at quarter-end.
- The revolving facility has commitments of up to $400 million, subject to borrowing-base limits. The filing reports $54.8 million of letters of credit; availability is therefore subject to those letters of credit and borrowing-base constraints. The company stated it expected domestic cash and operating cash flow to fund domestic operations and commitments for at least the next 12 months.
Material changes, outlook and risks
- COVID-19-related service disruption had begun to ease: management said the recovery in most services continued through Q1 2022, particularly for experiential and sampling services. The filing provides no specific revenue, earnings or cash-flow guidance; quarterly results are not necessarily indicative of the full year, and the business is seasonal, generally generating a larger share of revenue in Q4.
- The company recorded $2.8 million of pretax charges related primarily to its Russian investment amid the war in Ukraine, sanctions and currency restrictions. It intends to use its influence to cause the European investee to dispose of its Russian agency interests; recovery of the investment and influence over those operations remain uncertain.
- Two marketing-agency acquisitions closed after quarter-end for aggregate cash consideration of $66.6 million. Purchase-price allocations were preliminary and not available in the filing.
- Risks highlighted include labor availability, wage and inflation pressure, client spending and pricing decisions, retailer concentration and access, COVID-19 uncertainty, acquisition integration, foreign-exchange and interest-rate exposure, and substantial indebtedness.
- Legal matters include wage-and-hour cases and ongoing Take 5-related arbitration and government investigation. The Take 5 arbitration hearing resumed in Q2 2022; the company could not estimate the outcome or potential liability. Additional client litigation or government investigations are possible.
- Management reported disclosure controls were effective as of March 31, 2022, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth translates into improved margins, particularly as labor, wage and medical-claim costs remain elevated.
- Whether working-capital investment reverses and operating cash flow supports debt service, acquisitions and other commitments.
- Actual revolving-credit availability under borrowing-base limits and compliance with debt covenants as business conditions change.
- Performance and integration costs of the post-quarter acquisitions, and their effect on leverage and cash balances.
- Developments and potential financial exposure from the Take 5 matters and the Russian investment, including any recovery or disposal proceeds.
- The comparability of GAAP earnings with adjusted measures, including the impact of warrant and derivative fair-value changes.