Advantage Solutions Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company provides outsourced sales and marketing services to consumer goods manufacturers and retailers through its Sales and Marketing segments.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $928.8 | $784.3 | $2,569.7 | $2,305.3 |
| Operating income | $65.6 | $88.6 | $145.6 | $120.0 |
| Operating margin | 7.1% | 11.3% | 5.7% | 5.2% |
| Net income (loss) | $24.3 | $36.7 | $29.5 | $(22.8) |
| Net income (loss) attributable to Advantage stockholders | $23.3 | $35.9 | $29.3 | $(23.2) |
| Basic and diluted EPS | $0.07 | $0.18 | $0.09 | $(0.11) |
| Adjusted EBITDA (non-GAAP) | $133.8 | $136.3 | $367.2 | $354.6 |
| Adjusted Net Income (non-GAAP) | $59.1 | $65.6 | $146.8 | $131.3 |
Balance sheet, debt and liquidity
- At September 30, 2021, cash and cash equivalents were $168.0 million, restricted cash was $16.4 million, and total current assets were $1,056.1 million versus current liabilities of $628.1 million.
- Debt carrying amount was $2,093.0 million: $1,315.1 million under the Term Loan Facility and $775.0 million of notes, plus $3.0 million of other obligations. The revolving facility had no balance. Cash less debt was approximately $1,925 million, excluding restricted cash.
- The company reported $400 million of unused revolving capacity, subject to borrowing-base limits; approximately $60.3 million of letters of credit were outstanding. It was in compliance with debt covenants at quarter-end.
- For the nine months, operating cash flow was $101.1 million, investing cash outflow was $66.2 million, and financing cash outflow was $69.0 million. Cash, cash equivalents and restricted cash declined $35.6 million to $184.4 million.
- Operating cash flow was down from $290.1 million in the prior-year period, which management attributed primarily to working-capital timing and the prior-year deferral of the company’s Social Security tax payments. Investing included $40.0 million for acquisitions and $24.1 million for property and equipment.
Material changes versus the prior comparable periods
- Q3: Revenue increased 18.4%, but operating income fell 25.9%, net income fell 33.7%, and Adjusted EBITDA decreased 1.8%. Cost of revenue rose to 82.5% of revenue from 79.7%, and operating margin declined to 7.1% from 11.3%.
- Nine months: Revenue increased 11.5%, operating income rose 21.4%, and net income improved from a loss to a profit. Adjusted EBITDA increased 3.5%; reported EPS improved to $0.09 from a loss of $0.11.
- Q3 Sales revenue grew 10.2% and Marketing revenue grew 36.9%. Sales operating income declined 13.8%, while Marketing operating income declined 51.7%.
- For the nine months, Sales revenue grew 12.1% and operating income 38.0%; Marketing revenue grew 10.2%, but operating income fell 43.4%. Management cited contingent-consideration fair-value changes and prior-year Take 5 recovery items among factors affecting segment comparisons.
- Interest expense declined to $36.5 million in Q3 and $104.5 million for the nine months, from $48.2 million and $151.6 million, respectively, primarily reflecting lower debt following the October 2020 business combination and refinancing.
Outlook, management commentary, risks and unusual items
- The filing gives no quantified revenue, earnings or cash-flow guidance. Management expected the pandemic’s impact to continue decreasing during the remainder of 2021 as in-person activity increased, while cautioning that effects depend on the pandemic’s duration and any future restrictions.
- COVID-19 had disrupted in-store sampling, foodservice and international operations. Sampling activity was being restored in phases; online grocery sampling and virtual demonstrations, digital marketing, e-commerce and some retail services showed growth. Management also cited workforce rebuilding and costs to restart dormant client services.
- On October 28, 2021, the company amended its term loan to reduce the applicable interest rate to 5.25% per year. Management estimated annual interest savings of approximately $9.9 million, or $7.3 million after tax. The revolving-credit amendment also reduced certain interest-rate floors and updated benchmark-replacement provisions.
- On November 9, 2021, the board authorized a share repurchase program of up to $100 million, with no expiration date and no obligation to repurchase shares.
- The company acquired six businesses in the first nine months for aggregate consideration of $73.5 million: $40.0 million cash, $19.9 million contingent consideration and $13.6 million holdbacks. Maximum potential payments tied to these acquisitions were $71.3 million; total contingent-consideration liabilities across acquisitions were $65.1 million, with maximum potential outcomes of $291.2 million.
- Take 5-related matters remain unresolved: the company disclosed misconduct involving services and client reporting, voluntarily informed the U.S. Attorney’s Office and FBI, and faces arbitration and possible further claims or investigations. It could not estimate the potential impact; insurance may not cover all exposure. The arbitration hearing was scheduled for Q1 2022.
- The company reported continuing material weaknesses in internal control over financial reporting, including acquisition-related revenue controls, system-generated reporting, whistleblower processes and warrant accounting. Management concluded disclosure controls were ineffective at September 30, 2021; remediation and effectiveness testing were ongoing.
- Other risks include employment litigation, the effects of COVID-19, foreign-exchange and interest-rate exposure, acquisition integration and substantial intangible assets. The company said the reported risk factors had no material changes during the quarter.
- Adjusted EBITDA and Adjusted Net Income are non-GAAP measures and exclude various expenses and other items; they should not be viewed as substitutes for GAAP results.
Most important facts for investors to verify
- Whether revenue recovery and growth convert into improved operating profitability, particularly given Q3 margin compression and lower segment operating income.
- Whether working-capital movements normalize and operating cash flow improves from the nine-month level.
- Actual revolver availability after borrowing-base limits and letters of credit, and the company’s debt, interest costs and covenant headroom following the October repricing.
- Progress and independent evidence of remediation of the disclosed material weaknesses and restoration of effective disclosure controls.
- Developments, potential liability and insurance coverage relating to Take 5 investigations, arbitration and possible additional claims.
- Final purchase-price allocations and realized performance or payment obligations from acquisitions and contingent consideration.
- The filing contains differing warrant fair-value references: the fair-value note reports $16.2 million at September 30, while the market-risk discussion refers to $19.7 million. Verify the correct amount against the company’s filed financial statements and disclosures.