Advantage Solutions Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with the three months ended March 31, 2020. Amounts are in U.S. dollars. Advantage provides outsourced sales, merchandising and marketing services to consumer goods companies and retailers. The comparison reflects the legacy operating business; the 2020 business combination was accounted for as a reverse recapitalization.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $791.0 million | $879.4 million; down 10.0% |
| Operating income / margin | $37.6 million / 4.8% | $31.4 million / 3.6% |
| Net loss | $0.5 million | $21.7 million |
| Adjusted EBITDA (non-GAAP) / margin | $111.4 million / 14.1% | $106.4 million / 12.1% |
| Adjusted net income (non-GAAP) | $46.3 million | $26.8 million |
| Operating cash flow | $29.9 million | $51.0 million |
| Cash and cash equivalents at quarter-end | $156.4 million | $204.3 million at December 31, 2020 |
| Cash, cash equivalents and restricted cash at quarter-end | $173.8 million | $220.0 million at beginning of quarter |
Cost of revenue was $653.3 million, or 82.6% of revenue, versus 84.9% a year earlier; implied gross margin increased to 17.4% from 15.1%. SG&A was $40.5 million (5.1% of revenue), including $8.7 million of noncash stock-based compensation. Depreciation and amortization was $59.6 million. Interest expense, net, fell to $30.9 million from $51.8 million. A $5.5 million noncash warrant-liability remeasurement expense partly offset operating improvement. Net loss attributable to Advantage shareholders was $0.1 million, or approximately break-even per share.
Operating cash flow declined by $21.1 million year over year, which management primarily attributed to working-capital timing, including payroll funding and higher digital-commerce inventory. Investing used $19.3 million, including $14.0 million for acquisitions and $5.2 million for capital expenditures. Financing used $54.5 million, including repayment of $50.0 million on the revolving facility. Cash and restricted cash decreased $46.1 million during the quarter.
At March 31, total debt principal was approximately $2.10 billion: $1.322 billion under the term loan, $775 million of 6.50% senior secured notes and $3.0 million of other obligations. The revolving facility had no balance outstanding. Cash less debt principal was approximately $1.94 billion of net debt. The company reported covenant compliance. Current assets were $887.2 million and current liabilities $522.1 million. The $400 million asset-based revolver is subject to borrowing-base capacity; availability is not stated in the provided filing text.
Changes versus the prior comparable period
- Sales segment revenue rose 5.2% to $534.3 million, and operating income increased 45.3% to $35.1 million. Growth in headquarters sales, retail services and e-commerce was partly offset by weakness in foodservice and Europe.
- Marketing segment revenue fell 30.9% to $256.7 million, and operating income declined 66.3% to $2.4 million, mainly due to COVID-related suspensions or reductions in in-store sampling. Digital marketing continued to grow.
- Consolidated revenue fell despite higher sales-segment revenue, as the marketing decline outweighed sales growth. Lower cost of revenue as a share of sales and lower interest expense helped improve operating income and reduce the GAAP net loss.
- Adjusted EBITDA increased 4.8% to $111.4 million; sales-segment Adjusted EBITDA rose 7.0%, while marketing-segment Adjusted EBITDA decreased 1.6% to $27.4 million.
Outlook, risks and unusual items
- Management expected COVID-19 to continue affecting the business through at least the first half of 2021, with the impact expected to lessen in the second half as in-person activity increases. This is commentary, not quantified financial guidance; no specific revenue or earnings guidance is provided in the filing text.
- COVID-related restrictions continued to weigh on in-store sampling, foodservice and European operations. Higher at-home consumption supported headquarters sales and private-label services, while increased online shopping benefited e-commerce services. The ultimate effects remained uncertain.
- The company acquired two sales agencies for aggregate consideration of approximately $18.2 million; the businesses contributed $4.7 million of Q1 revenue. Purchase-price allocations were preliminary.
- Take 5-related matters remain a significant contingency: the company disclosed prior revenue misstatements and business closure, a government investigation to which it voluntarily disclosed information, seller arbitration, and possible additional client claims or investigations. The company could not estimate the potential impact or assure insurance coverage would be sufficient. The arbitration hearing was scheduled for Q4 2021.
- Management reported that material weaknesses in internal control over financial reporting remained, including weaknesses involving acquisition due diligence and revenue-system data, whistleblower processes, and warrant classification. Disclosure controls and procedures were ineffective as of March 31, 2021. Remediation was in progress; the company stated its financial statements fairly presented results after additional analyses and procedures.
- Other exposures include ordinary-course employment litigation, contingent consideration with maximum potential payments of $289.9 million, and interest-rate, foreign-currency and warrant fair-value volatility. The company reported a 145.6% effective tax rate, including a $1.3 million valuation allowance for Mexico; excluding that allowance, it said the rate would have been 31.5%.
Most important facts for investors to verify
- Whether marketing revenue and margins recover as in-store sampling resumes, and whether the anticipated second-half easing of pandemic impacts materializes.
- Current borrowing-base availability under the revolver, cash conversion and working-capital trends, alongside the substantial debt balance and future interest-rate exposure.
- Progress in remediating the disclosed material weaknesses and whether controls operate effectively over a sufficient period.
- Developments and potential financial exposure from the Take 5 investigation, arbitration and any related claims.
- Acquisition integration and final purchase accounting, including contingent consideration obligations; also distinguish non-GAAP Adjusted EBITDA and Adjusted Net Income from GAAP results.