Advantage Solutions(ADV) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's discussion, and market risk disclosures Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, equity, cash flows, and detailed accounting notes Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2022 | December 31, 2021 | | :--------------- | :------------------- | :------------------ | | ASSETS | | | | Cash and cash equivalents | $96,215 | $164,622 | | Total current assets | $1,103,155 | $1,104,314 | | Goodwill | $2,246,053 | $2,206,004 | | Other intangible assets, net | $2,150,075 | $2,287,514 | | Total assets | $5,813,826 | $5,854,268 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $601,010 | $645,520 | | Long-term debt, net of current portion | $2,024,591 | $2,028,882 | | Total liabilities | $3,192,510 | $3,271,974 | | Total stockholders' equity | $2,617,963 | $2,580,401 | | Total liabilities, redeemable noncontrolling interest, and stockholders' equity | $5,813,826 | $5,854,268 | Condensed Consolidated Statements of Operations and Comprehensive Income This section details the company's revenues, expenses, and net income over specific reporting periods Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands, except share and per share data) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenues | $1,051,095 | $928,760 | $2,946,979 | $2,569,735 | | Total operating expenses | $1,004,253 | $863,158 | $2,848,847 | $2,424,098 | | Operating income | $46,842 | $65,602 | $98,132 | $145,637 | | Income before income taxes | $24,385 | $32,603 | $55,960 | $46,117 | | Net income | $23,227 | $24,327 | $44,437 | $29,535 | | Net income attributable to stockholders of Advantage Solutions Inc. | $21,059 | $23,311 | $43,395 | $29,316 | | Basic Net income per common share | $0.07 | $0.07 | $0.14 | $0.09 | | Diluted Net income per common share | $0.07 | $0.07 | $0.14 | $0.09 | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including net income, stock-based compensation, and other adjustments - Total stockholders' equity increased from $2,580,401 thousand at January 1, 2022, to $2,617,963 thousand at September 30, 2022, primarily driven by net income of $44,313 thousand and stock-based compensation of $29,021 thousand, partially offset by foreign currency translation adjustments of $(38,124) thousand and equity-based compensation of Karman Topco L.P. of $(7,142) thousand[17] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | | :--------------- | :----------------------------------- | :----------------------------------- | | Net cash provided by operating activities | $81,950 | $101,068 | | Net cash used in investing activities | $(103,062) | $(66,152) | | Net cash used in financing activities | $(32,920) | $(68,999) | | Net effect of foreign currency changes on cash | $(12,311) | $(1,476) | | Net change in cash, cash equivalents and restricted cash | $(66,343) | $(35,559) | | Cash, cash equivalents and restricted cash, end of period | $114,294 | $184,407 | Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations of the accounting policies, significant transactions, and other financial disclosures 1. Organization and Significant Accounting Policies This note describes the company's business, the impact of external events, and recently adopted accounting standards - Advantage Solutions Inc. provides outsourced solutions to consumer goods companies and retailers, with its Class A common stock and warrants listed on the Nasdaq Global Select Market[27] - The company's services were severely impacted by client spending reductions due to the COVID-19 pandemic from March 2020 through Q1 2021, with recovery continuing through Q3 2022[29] - The war in Ukraine led to sanctions and currency restrictions, creating uncertainty for the company's investment in Russian operations, with pretax charges of $2.8 million recorded in Q1 2022 as the company intends to dispose of its ownership interests in local agencies in Russia[29] - The company adopted several new accounting standards (ASU 2020-04, 2020-06, 2021-04, 2021-10) on January 1, 2022, none of which had a material impact on its condensed consolidated financial statements[31][32][33][34] 2. Revenue Recognition This note details the company's revenue recognition policies and disaggregated revenue by service type and segment - Revenue is recognized when control of promised goods or services is transferred to the client, typically over time as the client simultaneously receives and consumes the benefits[37] - Sales segment revenues are primarily from commissions, fee-for-service, or cost-plus for services like headquarter relationship management, retail merchandising, and digital solutions[38] - Marketing segment revenues are primarily fee-for-service (including retainer, hourly, project-based, or event fees), commissions, or cost-plus for experiential marketing, shopper/consumer marketing, private label development, and digital/social/media services[38] Disaggregated Revenues by Service Type (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales brand-centric services | $343,478 | $330,740 | $1,005,707 | $946,147 | | Sales retail-centric services | $302,768 | $266,399 | $836,640 | $746,960 | | Total sales revenues | $646,246 | $597,139 | $1,842,347 | $1,693,107 | | Marketing brand-centric services | $143,241 | $142,554 | $393,155 | $381,358 | | Marketing retail-centric services | $261,608 | $189,067 | $711,477 | $495,270 | | Total marketing revenues | $404,849 | $331,621 | $1,104,632 | $876,628 | | Total revenues | $1,051,095 | $928,760 | $2,946,979 | $2,569,735 | 3. Acquisitions This note provides details on business acquisitions, including purchase prices, goodwill, and pro-forma financial impacts - During the nine months ended September 30, 2022, the Company acquired four businesses (two sales, two marketing) for an aggregate purchase price of $75.5 million, including $74.1 million in cash, resulting in Goodwill of $56.1 million[41][43][44] - The 2022 acquisitions contributed $12.8 million in revenues for the three months ended September 30, 2022, and $21.3 million for the nine months ended September 30, 2022[47] - During the nine months ended September 30, 2021, the Company acquired six businesses for an aggregate purchase price of $73.5 million, including $40.0 million in cash[48] Pro-Forma Revenues and Net Income (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Pro-Forma Revenues | $1,052,274 | $963,576 | $2,962,479 | $2,719,111 | | Pro-Forma Net income | $21,467 | $23,896 | $46,461 | $32,590 | 4. Goodwill and Intangible Assets This note details the company's goodwill and other intangible assets, including their carrying values and amortization Goodwill by Segment (in thousands) | | Sales | Marketing | Total | | :--------------- | :------ | :-------- | :------ | | Balance at January 1, 2021 | $1,462,378 | $700,961 | $2,163,339 | | Acquisitions | $32,087 | $13,315 | $45,402 | | Balance at December 31, 2021 | $1,492,771 | $713,233 | $2,206,004 | | Acquisitions | $5,672 | $50,461 | $56,133 | | Balance at September 30, 2022 | $1,482,359 | $763,694 | $2,246,053 | - Accumulated impairment losses related to goodwill remained at $652.0 million as of September 30, 2022 and 2021[57] Other Intangible Assets, Net Carrying Value (in thousands) | | September 30, 2022 Net Carrying Value | December 31, 2021 Net Carrying Value | | :--------------------- | :------------------------------------ | :----------------------------------- | | Client relationships | $1,195,222 | $1,321,435 | | Trade names (finite-lived) | $51,204 | $59,851 | | Developed technology | $3,390 | $5,054 | | Covenant not to compete | $259 | $1,174 | | Total finite-lived intangible assets | $1,250,075 | $1,387,514 | | Indefinite-lived trade names | $900,000 | $900,000 | | Total other intangible assets | $2,150,075 | $2,287,514 | - Amortization of intangible assets was $50.0 million for the three months ended September 30, 2022 (vs. $49.8 million in 2021) and $150.9 million for the nine months ended September 30, 2022 (vs. $148.4 million in 2021)[61] Estimated Future Amortization Expense (in thousands) | | Estimated Future Amortization Expense | | :--------------- | :------------------------------------ | | Remainder of 2022 | $49,782 | | 2023 | $197,530 | | 2024 | $196,181 | | 2025 | $190,153 | | 2026 | $186,203 | | Thereafter | $430,226 | | Total amortization expense | $1,250,075 | 5. Debt This note provides details on the company's long-term debt, including loan facilities, notes, and covenant compliance Long-Term Debt, Net of Current Portion (in thousands) | | September 30, 2022 | December 31, 2021 | | :--------------- | :------------------- | :------------------ | | Term Loan Facility | $1,301,813 | $1,311,750 | | Notes | $775,000 | $775,000 | | Government loans for COVID-19 relief | $4,113 | $5,212 | | Other | $1,492 | $1,113 | | Total long-term debt | $2,082,418 | $2,093,075 | | Less: current portion | $14,704 | $14,397 | | Less: debt issuance costs | $43,123 | $49,796 | | Long-term debt, net of current portion | $2,024,591 | $2,028,882 | - As of September 30, 2022, the Company had $1.3 billion outstanding under the Term Loan Facility (maturity Oct 2027) and $775.0 million under the Notes (maturity Nov 2028)[63] - The Company was in compliance with all covenants under the Term Loan Facility and Notes as of September 30, 2022, with no payments under the excess cash flow calculation required in the reported periods[63][65] - No borrowings were outstanding under the Revolving Credit Facility as of September 30, 2022[65] 6. Fair Value of Financial Instruments This note details the fair value measurements of financial instruments, including derivatives, warrants, and contingent liabilities Assets and Liabilities Measured at Fair Value (in thousands) | | September 30, 2022 Fair Value | December 31, 2021 Fair Value | | :--------------- | :---------------------------- | :--------------------------- | | Assets measured at fair value | | | | Derivative financial instruments | $49,149 | $10,164 | | Total assets measured at fair value | $49,149 | $10,164 | | Liabilities measured at fair value | | | | Warrant liability | $733 | $22,189 | | Contingent consideration liabilities | $40,431 | $58,366 | | Total liabilities measured at fair value | $41,164 | $80,555 | | Derivative financial instruments (liability) | N/A | $385 | - The Company uses interest rate cap agreements to manage exposure to variable interest rates, with an aggregate notional value of $650.0 million as of September 30, 2022, and recorded a gain of $14.5 million in Q3 2022 from changes in fair value of derivative instruments[68][70] - The warrant liability decreased significantly from $22.2 million (Dec 31, 2021) to $0.7 million (Sep 30, 2022), resulting in a non-cash gain of $21.5 million for the nine months ended September 30, 2022, with the valuation method for private placement warrants shifting from Level 3 (Black-Scholes) to Level 2 (public warrant share price) in Q1 2022[72][73] - Contingent consideration liabilities decreased from $58.4 million (beginning of period) to $40.4 million (end of period) for the nine months ended September 30, 2022, primarily due to payments of $23.2 million[77] Fair Value of Long-Term Debt (in thousands) | | September 30, 2022 Carrying Value | September 30, 2022 Fair Value (Level 2) | | :--------------- | :-------------------------------- | :-------------------------------------- | | Term Loan Facility | $1,301,813 | $1,329,741 | | Notes | $775,000 | $723,486 | | Government loans for COVID-19 relief | $4,113 | $4,306 | | Other | $1,492 | $1,492 | | Total long-term debt | $2,082,418 | $2,059,025 | 7. Related Party Transactions This note discloses transactions with related parties, including board members' affiliations and revenues from client companies - Nine members of the Company's board of directors also serve on the boards of eight client companies[80] Revenues and Accounts Receivable from Related Party Clients (in thousands) | | Three Months Ended Sep 30, 2022 Revenues | Three Months Ended Sep 30, 2021 Revenues | Nine Months Ended Sep 30, 2022 Revenues | Nine Months Ended Sep 30, 2021 Revenues | As of Sep 30, 2022 Accounts Receivable | As of Dec 31, 2021 Accounts Receivable | | :--------------- | :--------------------------------------- | :--------------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------ | :----------------------------------- | | Client 1 | $450 | $0 | $1,275 | $0 | $301 | $176 | | Client 2 | $136 | $42 | $668 | $75 | $289 | $160 | | Client 3 | $147 | $124 | $455 | $457 | $129 | $190 | | All other clients | $30 | $1,452 | $152 | $6,694 | $16 | $10 | | Total | $763 | $1,618 | $2,550 | $7,226 | $735 | $536 | - Revenues from a parent company of an unconsolidated affiliate were $4.4 million for both the three months ended September 30, 2022 and 2021, and for the nine months, revenues were $11.1 million in 2022 and $13.7 million in 2021[84] 8. Income Taxes This note explains the company's effective tax rates and the impact of tax law changes on its financial statements Effective Tax Rates | Period | Effective Tax Rate 2022 | Effective Tax Rate 2021 | | :----- | :---------------------- | :---------------------- | | Three Months Ended Sep 30 | 4.7% | 25.4% | | Nine Months Ended Sep 30 | 20.6% | 36.0% | - The fluctuation in effective tax rates was primarily due to differences in pretax book income and a $5.0 million discrete impact from remeasuring deferred tax liability due to a Pennsylvania statutory tax rate change in 2022[85] - The Inflation Reduction Act (IRA) is not expected to have a material impact on the Company's consolidated financial statements[85] 9. Segments This note provides financial information for the company's sales and marketing reportable segments - The Company operates in two reportable segments: sales and marketing, with performance evaluated based on revenues and operating income[86][88] Segment Revenues and Operating Income (Three Months Ended September 30, in thousands) | | Sales 3M Sep 30, 2022 | Marketing 3M Sep 30, 2022 | Total 3M Sep 30, 2022 | Sales 3M Sep 30, 2021 | Marketing 3M Sep 30, 2021 | Total 3M Sep 30, 2021 | | :--------------- | :-------------------- | :------------------------ | :-------------------- | :-------------------- | :------------------------ | :-------------------- | | Revenues | $646,246 | $404,849 | $1,051,095 | $597,139 | $331,621 | $928,760 | | Operating income | $31,765 | $15,077 | $46,842 | $51,906 | $13,696 | $65,602 | Segment Revenues and Operating Income (Nine Months Ended September 30, in thousands) | | Sales 9M Sep 30, 2022 | Marketing 9M Sep 30, 2022 | Total 9M Sep 30, 2022 | Sales 9M Sep 30, 2021 | Marketing 9M Sep 30, 2021 | Total 9M Sep 30, 2021 | | :--------------- | :-------------------- | :------------------------ | :-------------------- | :-------------------- | :------------------------ | :-------------------- | | Revenues | $1,842,347 | $1,104,632 | $2,946,979 | $1,693,107 | $876,628 | $2,569,735 | | Operating income | $65,915 | $32,217 | $98,132 | $131,727 | $13,910 | $145,637 | 10. Commitments and Contingencies This note details the company's legal matters, including employment class actions and the 'Take 5 Matter' investigations - The Company is involved in various legal matters, including employment-related class actions concerning wage and hour violations under the U.S. Fair Labor Standards Act and California Labor Code and Private Attorneys General Act[91][92] - The 'Take 5 Matter' involved the termination of Take 5 Media Group's operations in July 2019 due to revenue recognition inconsistencies and inaccurate client reports, with the Company voluntarily disclosed misconduct to the USAO and FBI[93][95] - In October 2022, an arbitrator made a final award in the Company's favor in arbitration proceedings against the Take 5 Sellers, who had alleged breach of contract and defamation[96] - The Take 5 Matter may lead to additional litigation or governmental investigations, with potential liabilities exceeding current refund offers, which may not be fully covered by insurance[97] 11. Stock-Based Compensation This note describes the company's stock-based compensation plans, including PSUs, RSUs, and stock options - Total stock-based compensation expense and equity-based compensation expense for Karman Topco L.P. was $6.7 million for the three months ended September 30, 2022 (vs. $8.3 million in 2021) and $27.0 million for the nine months ended September 30, 2022 (vs. $28.5 million in 2021)[98] - Performance Restricted Stock Units (PSUs) vest over three years based on revenue and Adjusted EBITDA targets, with 2021 PSU EBITDA achievement at 64.6% of target and Revenue achievement at 126.2% of target in Q1 2022[99][102] - A modification to 2021 PSUs in March 2022 resulted in a $1.1 million gain upon cancellation of the original award and a $1.2 million intrinsic value for the new award[103] Performance Share Unit Activity (Nine Months Ended September 30, 2022) | | Performance Share Units | Weighted Average Grant Date Fair Value | | :----------------------------------- | :---------------------- | :------------------------------------- | | Outstanding at January 1, 2022 | 2,609,079 | $13.07 | | Granted | 5,393,085 | $5.66 | | Distributed | 660,880 | $13.09 | | Forfeited | 684,261 | $8.19 | | PSU performance adjustment | (377,572) | $11.19 | | Outstanding at September 30, 2022 | 6,279,451 | $7.22 | - Restricted Stock Units (RSUs) are subject to continued service and generally vest over three years, with total unrecognized compensation cost for RSUs at $30.4 million as of September 30, 2022, amortized over 2.2 years[107][110] - 945,664 non-qualified stock options were granted during the nine months ended September 30, 2022, with a weighted average exercise price of $5.99 per share, and unrecognized compensation expense for stock options was $1.4 million[111][112] 12. Redeemable Noncontrolling Interest This note explains the redeemable noncontrolling interest arising from a put and call option agreement - The Company has a redeemable noncontrolling interest of $3.4 million as of September 30, 2022, arising from a put and call option agreement related to a majority-owned subsidiary[113] - The fair value of the redeemable noncontrolling interest and put option at acquisition date was valued using a mix of income and market approaches, employing a Monte Carlo simulation method with Level 3 inputs[115] 13. Earnings Per Share This note details the calculation of basic and diluted earnings per share, including dilutive share adjustments - Basic EPS is calculated by dividing net income attributable to stockholders by weighted-average common shares outstanding, while Diluted EPS adjusts for potential dilutive shares (PSUs, RSUs, warrants, stock options) using the treasury stock method[116] Earnings Per Share Calculation (in thousands, except share and earnings per share data) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income attributable to stockholders of Advantage Solutions Inc. | $21,059 | $23,311 | $43,395 | $29,316 | | Weighted average common shares - basic | 318,821,895 | 318,563,497 | 318,345,565 | 318,213,337 | | Basic earnings per common share | $0.07 | $0.07 | $0.14 | $0.09 | | Weighted average common shares - diluted | 319,725,065 | 320,120,634 | 319,190,804 | 319,654,817 | | Diluted earnings per common share | $0.07 | $0.07 | $0.14 | $0.09 | - 18,578,321 warrants were excluded from diluted EPS calculation as of September 30, 2022, because the market price of common stock did not exceed the exercise price[118] 14. Subsequent Events This note discloses significant events that occurred after the reporting period, including new equity grants - In October 2022, the Company granted 2,153,900 RSUs and 1,170,000 stock options, with an estimated aggregate grant date fair value of $4.8 million and $1.2 million, respectively[120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an executive overview, financial performance summary, factors affecting the business, assessment methods, segment results, and liquidity analysis Executive Overview This section provides a high-level summary of the company's business model and service offerings - Advantage Solutions Inc. is a leading business solutions provider to consumer goods manufacturers and retailers, offering essential sales and marketing services like headquarter sales, retail merchandising, in-store sampling, digital commerce, and shopper marketing[124] - The company operates through two reportable segments: sales (62.5% of 9M 2022 revenues) and marketing (37.5% of 9M 2022 revenues)[125][126] - The COVID-19 pandemic significantly impacted services, particularly experiential services, from March 2020 through Q1 2021, with recovery continuing through Q3 2022[129] Summary This section provides a concise summary of the company's key financial performance metrics for the periods presented Financial Performance Summary (Three Months Ended September 30, in millions) | Financial Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change ($) | Change (%) | | :--------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Revenues | $1,051.1 million | $928.8 million | $122.3 million | 13.2% | | Operating income | $46.8 million | $65.6 million | $(18.8) million | (28.6)% | | Net income | $23.2 million | $24.3 million | $(1.1) million | (4.5)% | | Adjusted Net Income | $62.7 million | $59.1 million | $3.6 million | 6.1% | | Adjusted EBITDA | $118.3 million | $133.8 million | $(15.5) million | (11.6)% | Financial Performance Summary (Nine Months Ended September 30, in millions) | Financial Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change ($) | Change (%) | | :--------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Revenues | $2,947.0 million | $2,569.7 million | $377.2 million | 14.7% | | Operating income | $98.1 million | $145.6 million | $(47.5) million | (32.6)% | | Net income | $44.4 million | $29.5 million | $14.9 million | 50.5% | | Adjusted Net Income | $152.5 million | $146.8 million | $5.8 million | 3.9% | | Adjusted EBITDA | $323.3 million | $367.2 million | $(43.8) million | (11.9)% | - During the nine months ended September 30, 2022, the company acquired four businesses for an aggregate purchase price of $75.5 million[131] Factors Affecting Our Business and Financial Reporting This section discusses key internal and external factors influencing the company's business and financial outcomes - Key factors affecting performance include organic growth strategies, acquisitions (73 completed since Jan 2014, excluding Daymon), contingent consideration arrangements, depreciation and amortization of acquired intangibles, foreign exchange fluctuations, and seasonality (Q4 typically highest revenue)[132][134] How We Assess the Performance of Our Business This section explains the methodologies used to evaluate business performance, including revenue disaggregation and non-GAAP measures - Revenue is disaggregated into organic and acquired revenues to improve comparability, with acquired revenues generally referring to revenues from a newly acquired business for the first 12 months post-acquisition[137][138][139][140][141] - Cost of revenues includes fixed and variable expenses for associate compensation, benefits, and project-related costs, subject to external factors like inflation and wage increases[143] - Selling, general and administrative expenses include corporate personnel costs, IT, professional services, and fair value adjustments for contingent consideration and acquisition-related costs[144] - Non-cash items like change in fair value of warrant liability and amortization of acquired intangible assets significantly impact operating and net income but are not considered material economic costs to the business[145][147][149] - Adjusted Net Income and Adjusted EBITDA are non-GAAP measures used to evaluate performance by excluding certain non-cash, unusual, or infrequent items, and are also used for debt covenant compliance[153][155][157] Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 This section analyzes the company's financial results, including revenues, operating income, and net income, for the specified periods Results of Operations (Three Months Ended September 30, in thousands) | | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | Change ($) | Change (%) | | :--------------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Sales Revenues | $646,246 | $597,139 | $49,107 | 8.2% | | Marketing Revenues | $404,849 | $331,621 | $73,228 | 22.1% | | Total Revenues | $1,051,095 | $928,760 | $122,335 | 13.2% | | Sales Operating Income | $31,765 | $51,906 | $(20,141) | (38.8)% | | Marketing Operating Income | $15,077 | $13,696 | $1,381 | 10.1% | | Total Operating Income | $46,842 | $65,602 | $(18,760) | (28.6)% | | Interest Expense, net | $23,557 | $36,490 | $(12,933) | (35.4)% | | Provision for Income Taxes | $1,158 | $8,276 | $(7,118) | (86.0)% | | Net Income | $23,227 | $24,327 | $(1,100) | (4.5)% | | Adjusted EBITDA | $118,268 | $133,756 | $(15,488) | (11.6)% | Results of Operations (Nine Months Ended September 30, in thousands) | | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | Change ($) | Change (%) | | :--------------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Sales Revenues | $1,842,347 | $1,693,107 | $149,240 | 8.8% | | Marketing Revenues | $1,104,632 | $876,628 | $228,004 | 26.0% | | Total Revenues | $2,946,979 | $2,569,735 | $377,244 | 14.7% | | Sales Operating Income | $65,915 | $131,727 | $(65,812) | (50.0)% | | Marketing Operating Income | $32,217 | $13,910 | $18,307 | 131.6% | | Total Operating Income | $98,132 | $145,637 | $(47,505) | (32.6)% | | Interest Expense, net | $63,628 | $104,544 | $(40,916) | (39.1)% | | Provision for Income Taxes | $11,523 | $16,582 | $(5,059) | (30.5)% | | Net Income | $44,437 | $29,535 | $14,902 | 50.5% | | Adjusted EBITDA | $323,329 | $367,155 | $(43,826) | (11.9)% | - Sales segment organic revenues increased by $42.5 million (3M) and $68.9 million (9M) due to growth in retail merchandising and international businesses, despite unfavorable foreign exchange rates[163][179] - Marketing segment organic revenues increased by $67.9 million (3M) and $216.5 million (9M), primarily driven by the recovery of in-store product demonstration and sampling services[164][180] - Cost of revenues as a percentage of revenues increased for both periods due to changes in revenue mix, COVID-19 recoveries, and inflationary impacts on recruiting, wages, and employee benefits[165][181] - The decrease in sales segment operating income was due to revenue mix shift, ongoing investment, and inflationary impact on expenses, while the increase in marketing segment operating income was due to revenue growth[168][169][184][186] Non-GAAP Financial Measures This section reconciles non-GAAP financial measures like Adjusted Net Income and Adjusted EBITDA to GAAP equivalents - Adjusted Net Income and Adjusted EBITDA are non-GAAP measures used to assess financial performance by excluding items not indicative of ongoing operations, such as impairment, amortization of intangibles, equity-based compensation, changes in warrant liability fair value, acquisition-related expenses, and COVID-19 costs[195][197][198] Reconciliation of Net Income to Adjusted Net Income and Adjusted EBITDA (in thousands) | | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :--------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net income | $23,227 | $24,327 | $44,437 | $29,535 | | Adjusted Net Income | $62,682 | $59,101 | $152,541 | $146,762 | | Adjusted EBITDA | $118,268 | $133,756 | $323,329 | $367,155 | Segment Adjusted EBITDA (in thousands) | Sales Segment | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :--------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Operating income | $31,765 | $51,906 | $65,915 | $131,727 | | Sales Segment Adjusted EBITDA | $76,172 | $95,199 | $216,158 | $268,798 | | Marketing Segment | | | | | | Operating income | $15,077 | $13,696 | $32,217 | $13,910 | | Marketing Segment Adjusted EBITDA | $42,096 | $38,557 | $107,171 | $98,357 | Liquidity and Capital Resources This section analyzes the company's cash flows, debt facilities, and capital structure to assess its financial flexibility - Principal liquidity sources are cash flows from operations, Revolving Credit Facility, and other debt, while principal uses are operating expenses, working capital, acquisitions, interest, and debt repayment[207] Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $81,950 | $101,068 | | Net cash used in investing activities | $(103,062) | $(66,152) | | Net cash used in financing activities | $(32,920) | $(68,999) | | Net effect of foreign currency fluctuations on cash | $(12,311) | $(1,476) | | Net change in cash, cash equivalents and restricted cash | $(66,343) | $(35,559) | - Operating cash flow decreased in 9M 2022 primarily due to ongoing investment and inflationary impact on recruiting, wage, and employee benefit expenses[210] - Investing activities in 9M 2022 primarily included $74.4 million for business purchases and $30.0 million for property and equipment[211] - Financing activities in 9M 2022 were mainly payments of contingent consideration and holdbacks ($31.7 million) and debt principal repayment ($9.9 million), partially offset by stock issuance proceeds and noncontrolling interest contributions[212] - The Senior Secured Credit Facilities include a $400.0 million Revolving Credit Facility (maturing Oct 2025) and a $1.325 billion Term Loan Facility (maturing Oct 2027), with $400.0 million unused capacity available under the Revolving Credit Facility as of Sep 30, 2022[214][215][223] - The Company also has $775.0 million in 6.50% Senior Secured Notes due 2028, which are redeemable under certain conditions and subject to restrictive covenants[230][236][237] - As of September 30, 2022, $71.6 million of cash and cash equivalents were held by foreign subsidiaries and $21.6 million by foreign branches, with the Company asserting indefinite reinvestment for most foreign earnings, except for Canada, where a $2.5 million deferred tax liability for withholding tax was recorded[241][242] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to foreign currency and interest rate risks, their management, and estimated financial impacts - The Company's foreign currency risk primarily stems from operations in Europe and Canada, with functional currencies including Canadian dollars, British pounds, and euros, and financial derivative instruments are used to hedge these risks[248][249] - A hypothetical 10% unfavorable change in exchange rates relative to the U.S. dollar would have decreased consolidated income before taxes by approximately $2.5 million for the nine months ended September 30, 2022[249] - Interest rate risk is managed through interest rate cap agreements on variable rate debt (Term Loan Facility, Revolving Credit Facility), with the Company having interest rate cap contracts on an additional $650.0 million notional value as of September 30, 2022[250][251] - A one-eighth percentage point increase in the weighted average interest rate above the floor would have increased interest expense by approximately $0.7 million for the nine months ended September 30, 2022[251] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022. No material changes in internal control over financial reporting occurred during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022, ensuring timely and accurate reporting of information[254] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[255] PART II—OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, and other disclosures Item 1. Legal Proceedings This section outlines the company's legal matters, including employment class actions and the 'Take 5 Matter,' and potential liabilities - The Company is involved in various legal matters, including employment-related class actions concerning wage and hour violations under the U.S. Fair Labor Standards Act and California's Labor Code[257][258] - The 'Take 5 Matter' involves voluntary disclosure of misconduct to the United States Attorney's Office and FBI, with ongoing cooperation in investigations[259][260] - In October 2022, an arbitrator ruled in the Company's favor in arbitration proceedings against the Take 5 Sellers, who had alleged breach of contract and defamation[261][263] - Additional litigation or governmental investigations related to the Take 5 Matter may expose the Company to potential liability beyond current refund offers, which may not be fully covered by insurance[264] Item 1A. Risk Factors This section details significant risks to the company's business, including pandemic impacts, market dynamics, retailer relations, technology, international operations, legal, and financial risks - The COVID-19 pandemic continues to pose significant risks, including adverse effects on business operations, client spending, consumer behavior, and the company's ability to adapt and retain talent[269][271] - Market-driven wage increases, changes in labor laws, and inflation could adversely affect operating results by increasing labor costs and impacting margins[272][276] - Reliance on a limited number of national retailers and their evolving strategies (e.g., private labels, exclusive service providers) could reduce demand for services and negatively impact revenues[277] - The company faces risks from consolidation in the consumer goods and retail industries, which could lead to reduced demand for services and pricing pressure[279] - Inability to adapt to significant technological changes, develop relevant omni-channel services, or protect intellectual property could adversely affect business and competitive position[285][288][333] - International operations expose the company to risks such as foreign currency fluctuations, compliance with diverse foreign laws, political instability (e.g., Russia-Ukraine conflict), and difficulties in enforcing contracts[306][309][341] - The 'Take 5 Matter' continues to present risks of additional litigation, governmental investigations, reputational harm, and substantial costs[322][324] - Substantial indebtedness ($2.1 billion as of Sep 30, 2022) could adversely affect financial health, restrict activities, and increase debt service obligations, especially with variable interest rates and the upcoming LIBOR transition[364][370][371] - The company is controlled by Topco, Advantage Sponsors, and CP Sponsor, whose interests may conflict with other stockholders, and as a controlled company, it may rely on exemptions from Nasdaq corporate governance requirements[347][348] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds were reported[382] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[382] Item 4. Mine Safety Disclosures This section confirms that there are no mine safety disclosures to report - No mine safety disclosures were reported[382] Item 5. Other Information This section states that there is no other information to report - No other information was reported[384] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report, including certifications from the CEO and CFO, and Inline XBRL documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and various Inline XBRL taxonomy extension documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[385] Signatures This section provides the official signatures of the Chief Executive Officer and Chief Financial Officer - The report is signed by Jill Griffin, Chief Executive Officer, and Brian Stevens, Chief Financial Officer and Chief Operating Officer, on November 9, 2022[387][388]