Advantage Solutions Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company provides outsourced sales and marketing services to consumer goods manufacturers and retailers. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Advantage reports Sales and Marketing segments. For the quarter, Marketing growth—particularly in-store sampling and demonstrations—more than offset slightly lower Sales revenue. Management said sampling activity continued to improve, while digital services remained a source of pressure.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,037.1 | $981.1 | $2,049.0 | $1,895.9 |
| Operating income | $22.3 | $28.3 | $14.0 | $51.3 |
| Operating margin | 2.1% | 2.9% | 0.7% | 2.7% |
| Net income (loss) | $(7.8) | $3.7 | $(55.5) | $21.2 |
| Adjusted EBITDA (non-GAAP) | $104.2 | $108.3 | $196.3 | $205.1 |
| Adjusted Net Income (non-GAAP) | $36.5 | $40.7 | $50.3 | $89.9 |
| Interest expense, net | $30.5 | $28.2 | $77.7 | $40.1 |
Financial position and cash flow
- At June 30, cash and cash equivalents were $164.7 million, restricted cash was $17.5 million, and current assets were $1,120.1 million versus current liabilities of $595.5 million.
- Debt carrying value was $2,019.9 million before unamortized debt issuance costs; the balance sheet reports $1,981.7 million including current debt and net of those costs. The Term Loan Facility had $1,237.5 million outstanding and the Notes $775.0 million. No Revolving Credit Facility borrowings were outstanding; reported unused capacity was $500 million subject to borrowing-base limitations and letters of credit.
- For the first six months, operating cash flow was $105.0 million, investing cash outflow was $5.8 million, and financing cash outflow was $57.1 million. Cash, cash equivalents and restricted cash increased by $43.6 million to $182.2 million.
- Capital expenditures were $18.6 million for the six months. The company repurchased $54.4 million principal amount of Term Loan debt and made $6.6 million of scheduled principal payments.
Changes versus prior comparable periods
- Q2 revenue rose 5.7%; excluding divestitures net of acquisitions and unfavorable foreign exchange, management reported growth of 7.7%. Marketing revenue increased 16.0%, while Sales revenue declined 0.7%.
- Q2 operating income fell 21.2% and Adjusted EBITDA fell 3.8%. Cost of revenue increased to 87.2% of revenue from 85.8%, which management attributed primarily to inflation and service mix.
- For the first half, revenue grew 8.1% (9.3% excluding the specified acquisition, divestiture and currency effects), but operating income declined 72.7% and Adjusted EBITDA declined 4.3%. Management cited higher costs, internal reorganization expenses, asset-disposal losses and higher interest expense.
- First-half interest expense nearly doubled year over year, primarily due to higher interest rates. The company reported a $5.0 million gain on Term Loan repurchases for the six-month period.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EBITDA guidance. Management said existing domestic cash and operating cash flows are expected to cover domestic operations and cash commitments, including debt repayment and capital expenditures, for at least the next 12 months and the foreseeable future.
- Debt carries material rate exposure: the Term Loan Facility bears floating-rate interest at Term SOFR plus a 4.50% margin; the Notes carry a 6.50% fixed coupon and mature in November 2028. The company reported compliance with debt covenants at June 30, 2023. Interest-rate caps and collars are in place, but do not eliminate rate risk.
- The company recorded a $17.7 million first-half loss on sales of businesses and assets held for sale, including a $1.1 million loss in Q2. It received $12.8 million of proceeds from a Q2 divestiture. It also reported $17.0 million of first-half reorganization and restructuring expenses as a non-GAAP adjustment.
- Take 5-related matters remain uncertain. The company received $1.7 million in insurance proceeds in June after an arbitration award in its favor, but said collection of other amounts is uncertain and potential additional litigation or government investigations could create liability that it cannot currently estimate.
- Other legal matters include employment-related claims, including a California wage-and-hour case returned for further proceedings after an appellate reversal. The filing says there were no material changes to previously disclosed risk factors.
- Management identified inflation, client spending, seasonality, foreign exchange, and the mix of service lines as factors affecting results. The filing cautions that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether revenue growth converts into improved operating margins, particularly as inflation and service mix affect costs.
- How floating-rate debt costs evolve and whether cash generation can support debt reduction and scheduled obligations.
- The basis and persistence of non-GAAP adjustments, and the reconciliation between Adjusted EBITDA or Adjusted Net Income and GAAP results.
- Progress and costs associated with the internal reorganization, divestitures, and any further asset-disposal charges.
- Developments in Take 5-related investigations or claims, employment litigation, and the collectability of arbitration-related amounts.
- Capacity available under the revolving facility after borrowing-base limits and outstanding letters of credit.