Advantage Solutions Inc. annual report, FY2021

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Advantage Solutions Inc. — 2021 Form 10-K

Business context and reporting period

Advantage Solutions provides outsourced sales and marketing services to consumer goods manufacturers and retailers, including retail merchandising, in-store sampling, e-commerce, shopper marketing and private-label services. This filing reports the fiscal year ended December 31, 2021, with comparisons to 2020; it is an annual report, not a standalone fourth-quarter report. Sales represented 64.5% of 2021 revenue and marketing 35.5%.

Financial and operating performance

  • Revenue: $3.602 billion, up $446.6 million (14.2%) from 2020. Sales revenue was $2.324 billion, up 12.8%; marketing revenue was $1.278 billion, up 16.7%.
  • Profitability: Operating income was $230.0 million, versus $67.0 million; operating margin was 6.4%, versus 2.1%. GAAP net income was $57.5 million, compared with a $175.1 million net loss. Net income attributable to Advantage Solutions stockholders was $54.5 million; diluted EPS was $0.17, versus a $0.79 loss.
  • Adjusted results: Adjusted EBITDA, a non-GAAP measure, was $521.2 million, up 7.0%, with a 14.5% margin versus 15.4%. Adjusted net income, also non-GAAP, was $223.8 million, up 22.3%. These measures exclude items and should be considered alongside GAAP results.
  • Cash flow: Operating cash flow was $126.0 million, down from $345.7 million. Investing cash outflow was $75.8 million, including $42.7 million for acquisitions and $31.2 million for capital expenditures. Financing cash outflow was $86.3 million. Cash, cash equivalents and restricted cash ended the year at $180.6 million, including $164.6 million unrestricted cash.
  • Debt and liquidity: Total debt principal was $2.093 billion, excluding debt issuance costs, and the company had $54.8 million in letters of credit outstanding. Debt comprised a $1.312 billion term loan, $775 million of 6.50% notes due 2028 and other borrowings; the $400 million asset-based revolver had no drawn balance at year-end. The term loan is floating-rate and was repriced to 5.25% in October 2021; management estimated annual interest savings of $9.9 million. Net interest expense fell to $137.9 million from $234.0 million.
  • Balance sheet: Total assets were $5.854 billion, including $2.206 billion of goodwill and $2.288 billion of net intangible assets. Stockholders’ equity was $2.580 billion. Accounts receivable increased to $797.7 million from $574.1 million.

Material changes versus 2020

  • Revenue and operating income improved as both segments recovered and grew. Sales organic growth reflected retail services, new clients and e-commerce; marketing growth reflected recovering in-store sampling and digital marketing. Acquisitions contributed to reported growth in both segments.
  • Marketing Adjusted EBITDA rose 24.2% to $158.0 million; sales Adjusted EBITDA was nearly flat at $363.2 million, up 0.9%.
  • Cost of revenue rose to 82.3% of revenue from 80.9%, reflecting service mix and the cost of rebuilding staffing as paused services resumed. Lower SG&A—partly due to lower prior-year transaction-related and legacy equity compensation costs—supported the increase in operating income.
  • Operating cash flow declined substantially, chiefly due to greater working-capital needs as revenue recovered and payment of deferred Social Security taxes. The company also completed six acquisitions for aggregate consideration of approximately $76.0 million.

Outlook, risks and unusual items

  • No numerical revenue, earnings or cash-flow guidance is provided. Management expects domestic cash and operating cash flows, together with borrowing capacity, to support operations and commitments for at least the next 12 months. Recovery remains dependent on the course of COVID-19, restrictions and client demand.
  • COVID-19 continued to affect in-store sampling, foodservice and international operations. Sampling had resumed in some locations on a phased basis; management reported growth in online sampling and virtual demonstrations. Labor availability, wage inflation and service restart costs are additional risks.
  • Other significant risks include substantial indebtedness and variable-rate exposure; client and retailer concentration and spending changes; competitive pricing and outsourcing trends; technology, privacy and cybersecurity risks; and acquisition integration. The three largest clients generated approximately 11% of 2021 revenue.
  • The Take 5 matter remains unresolved: the company closed the acquired business, offered client refunds and voluntarily disclosed misconduct to federal authorities. The company reported $9.4 million in client refund liabilities at year-end; related arbitration and potential investigations or claims could create additional costs, which management could not estimate.
  • Management reported that previously identified material weaknesses in internal control were remediated and concluded controls were effective at year-end; the auditor also issued an unqualified opinion on the financial statements and internal control. The auditor excluded four 2021 acquisitions, representing approximately 1% of assets and 2% of revenue, from its internal-control audit.
  • The company repurchased $12.6 million of shares in 2021 under a $100 million authorization, leaving $87.4 million available. It reported no current plan to pay cash dividends.

Important facts for investors to verify

  • Whether revenue recovery—especially in sampling and other pandemic-affected services—continues, and whether operating margins improve as services restart.
  • Whether cash conversion rebounds from the 2021 working-capital outflow, including the rise in accounts receivable.
  • Debt repayment capacity, floating-rate exposure, revolver availability and compliance with credit-agreement covenants.
  • Potential financial and reputational consequences of the Take 5 investigation, arbitration and client claims, beyond recorded refund liabilities.
  • The assumptions supporting goodwill and intangible-asset valuations; these assets total approximately $4.5 billion, though no impairment was recorded in 2021.
  • How non-GAAP Adjusted EBITDA and Adjusted net income reconcile to GAAP results and the effect of recurring adjustments on reported performance.