Advantage Solutions Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Advantage provides outsourced sales and marketing services to consumer-goods manufacturers and retailers through its Sales and Marketing segments. Amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $850.0 | $641.5 | $1,641.0 | $1,520.9 |
| Operating income | $42.4 | $0.003 | $80.0 | $31.4 |
| Operating margin | 5.0% | Approximately 0% | 4.9% | 2.1% |
| Net income (loss) | $5.8 | $(37.8) | $5.2 | $(59.5) |
| Net margin | 0.7% | (5.9)% | 0.3% | (3.9)% |
| Adjusted EBITDA (non-GAAP) | $122.0 | $112.0 | $233.4 | $218.4 |
| Adjusted EBITDA margin | 14.4% | 17.5% | 14.2% | 14.4% |
| Interest expense, net | $37.2 | $51.5 | $68.1 | $103.3 |
- Q2 revenue increased 32.5% year over year. Sales revenue rose 22.0% and Marketing revenue rose 59.0%. For the first half, Sales revenue increased 13.2%, while Marketing revenue decreased 1.4%.
- Q2 cost of revenues increased to 82.1% of revenue from 79.5%, reflecting service mix and costs to restart dormant services. First-half cost of revenues was broadly stable at 82.4% versus 82.6%.
- Cash from operations was $55.9, versus $234.4 in the first half of 2020. The filing attributes the decline chiefly to lower working-capital benefit than in the prior-year period and the prior-year deferral of the company’s share of Social Security taxes. Investing used $33.4; financing used $64.5. Cash, cash equivalents and restricted cash ended at $177.2, including $159.8 of unrestricted cash.
- At June 30, gross debt carrying value was $2,096.3: $1,318.4 under the term loan, $775.0 of senior secured notes and $3.0 of other obligations. No revolver borrowings were outstanding, compared with $50.0 at year-end 2020. The term loan matures in 2027 and the 6.50% notes in 2028. The company reported compliance with debt covenants.
- Current assets were $928.7 and current liabilities $521.9. Accounts receivable was $641.1. Goodwill was $2,181.2 and net intangible assets were $2,365.3.
Changes, outlook and key commentary
- Profitability improved versus the pandemic-affected prior-year comparison, with lower interest expense following the October 2020 refinancing and lower restructuring costs. Q2 also included a $7.1 non-cash gain from revaluing warrant liabilities. Adjusted EBITDA rose 8.9% in Q2, but its margin declined from 17.5% to 14.4%.
- Management cited recovery in in-store sampling, international and foodservice activity, alongside growth in digital marketing, retail merchandising and e-commerce. First-half Marketing revenue remained below the prior year; in-store sampling and other pandemic-affected services were recovering gradually.
- Management expected the pandemic’s impact to decrease in the second half of 2021 as in-person activity increased, while cautioning that duration, severity and future restrictions were uncertain. The filing provides no numerical earnings or revenue guidance. Management stated domestic cash and operating cash flows were expected to fund domestic operating needs and commitments for at least the next 12 months.
- COVID-19 remained a material uncertainty. The company said it had reduced discretionary spending, modified or terminated some leases, and furloughed, reduced pay for, or terminated employees in affected operations.
- The company acquired three Sales businesses during the first half for total consideration of approximately $27.0, including $20.4 cash, $5.1 contingent consideration and $1.4 holdbacks. Maximum potential payments on these acquisitions were $13.5.
- Material weaknesses in internal control over financial reporting remained unresolved at June 30, including controls related to acquired-business revenue systems, acquisition due diligence, whistleblower investigations and warrant classification. Management concluded disclosure controls were not effective, although it stated the presented financial statements fairly stated results in all material respects.
- Take 5-related matters include a voluntary U.S. Attorney’s Office and FBI disclosure/investigation, seller arbitration, and possible additional client claims or investigations. The company could not estimate potential impact; the arbitration hearing was scheduled for Q4 2021. Employment-related litigation and other ordinary-course legal matters also remain.
Important facts for investors to verify
- Whether revenue and margin trends persist as pandemic-related comparisons normalize, particularly the recovery in Marketing and sampling services.
- Cash conversion: why operating cash flow fell sharply year over year, and whether working-capital movements reverse or recur.
- Debt service and refinancing exposure, including floating-rate term-loan exposure, revolver availability and covenant headroom.
- Progress and independent testing of remediation plans for the disclosed material weaknesses; controls were still not effective at quarter-end.
- Developments and potential financial exposure from Take 5 investigations, arbitration and related claims, as well as employment litigation.
- How much reported adjusted performance depends on exclusions and other non-GAAP adjustments; compare these measures with GAAP income and cash flow.