ADVANTAGE SOLUTIONS INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report"), including the section titled "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management's assumptions. Such words as "expect," "anticipate," "outlook," "could," "target," "project," "intend," "plan," "believe," "seek," "estimate," "should," "may," "assume" and "continue" as well as variations of such words and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain such terms. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. We have based our forward-looking statements on our management's beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecasted by our forward-looking statements. More information regarding these risks and uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements is set forth in Part II, Item 1A "Risk Factors" of this report. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Except as required under the federal securities laws and the rules and regulations of theSecurities and Exchange Commission , we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. Executive Overview We are a leading business solutions provider to consumer goods manufacturers and retailers. We have a strong platform of competitively advantaged sales and marketing services built over multiple decades - essential, business critical services like headquarter sales, retail merchandising, in-store sampling, digital commerce and shopper marketing. For brands and retailers of all sizes, we help get the right products on the shelf (whether physical or digital) and into the hands of consumers (however they shop). We use a scaled platform to innovate as a trusted partner with our clients, solving problems to increase their efficiency and effectiveness across a broad range of channels.
We have two reportable segments: sales and marketing.
Through our sales segment, which generated approximately 62.5% and 65.9% of our total revenues in the nine months endedSeptember 30, 2022 and 2021, respectively, we offer headquarter sales representation services to consumer goods manufacturers, for whom we prepare and present to retailers a business case to increase distribution of manufacturers' products and optimize how they are displayed, priced and promoted. We also make in-store merchandising visits for both manufacturer and retailer clients to ensure the products we represent are adequately stocked and properly displayed. Through our marketing segment, which generated approximately 37.5% and 34.1% of our total revenues in the nine months endedSeptember 30, 2022 and 2021, respectively, we help brands and retailers reach consumers through two main categories within the marketing segment. The first and largest category is our retail experiential business, also known as in-store sampling or demonstrations, where we manage highly customized large-scale sampling programs (both in-store and online) for leading retailers. The second category is our collection of specialized agency services, in which we provide private label services to retailers and develop granular marketing programs for brands and retailers through our shopper, consumer and digital marketing agencies. 26 --------------------------------------------------------------------------------
Business Combination with
OnOctober 28, 2020 ,Conyers Park II Acquisition Corp. ("Conyers Park"), aDelaware corporation, consummated a merger withASI Intermediate Corp. ("ASI"), formerly known asAdvantage Solutions Inc. , with ASI surviving the merger as a wholly owned subsidiary of Conyers Park (the "Merger" and, together with the other transactions contemplated by the merger agreement, the "Transactions"). OnOctober 28, 2020 , and in connection with the closing of the Transactions, Conyers Park changed its name toAdvantage Solutions Inc.
Impacts of the COVID-19 Pandemic
Beginning inMarch 2020 and continuing through the first quarter of 2021, our services experienced the effects from reductions in client spending due to the economic impact related to the COVID-19 pandemic. While mixed by services and geography, the spending reductions impacted all of our services and markets. Globally, the most impacted services were our experiential services. Most services began to improve inApril 2021 , and the improvement has continued through the third quarter of 2022. Summary
Our financial performance for the three months ended
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Revenues increased by
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Operating income decreased by
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Net income decreased by
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Adjusted Net Income increased by
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Adjusted EBITDA decreased by
Our financial performance for the nine months ended
•
Revenues increased by
•
Operating income decreased by
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Net income increased by
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Adjusted Net Income increased by
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Adjusted EBITDA decreased by
During the nine months endedSeptember 30, 2022 , we acquired four businesses. The aggregate purchase price was$75.5 million , of which$74.1 million was paid in cash,$0.5 million in contingent consideration and$0.8 million in holdback. Factors Affecting Our Business and Financial Reporting
There are a number of factors, in addition to the impact of the COVID-19 pandemic and inflation, that affect the performance of our business and the comparability of our results from period to period including:
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Organic Growth. Part of our strategy is to generate organic growth by expanding
our existing client relationships, continuing to win new clients, pursuing
channel expansion and new industry opportunities, enhancing our digital
technology solutions, developing our international platform, delivering
operational efficiencies and expanding into logical adjacencies. We believe that
by pursuing
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--------------------------------------------------------------------------------these organic growth opportunities we will be able to continue to enhance our value proposition to our clients and thereby grow our business.
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Acquisitions. We have grown and expect to continue to grow our business in part by acquiring quality businesses, both domestic and international. Excluding the 2017 acquisition ofDaymon Worldwide Inc. , we have completed 73 acquisitions fromJanuary 2014 toNovember 9, 2022 , ranging in purchase prices from approximately$0.3 million to$98.5 million . Many of our acquisition agreements include contingent consideration arrangements, which are described below. We have completed acquisitions at what we believe are attractive purchase prices and have regularly structured our agreements to result in the generation of long-lived tax assets, which have in turn reduced our effective purchase prices when incorporating the value of those tax assets. We continue to look for strategic acquisitions that can be completed at attractive purchase prices.
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Contingent Consideration. Many of our acquisition agreements include contingent consideration arrangements, which are generally based on the achievement of financial performance thresholds by the operations attributable to the acquired businesses. The contingent consideration arrangements are based upon our valuations of the acquired businesses and are intended to share the investment risk with the sellers of such businesses if projected financial results are not achieved. The fair values of these contingent consideration arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent consideration payments as part of the initial purchase price. We review and assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from our initial estimates. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in "Selling, general and administrative expenses" in our Condensed Consolidated Statements of Operations and Comprehensive Income.
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Depreciation and Amortization. As a result of the acquisition of our business byKarman Topco L.P. ("Topco") onJuly 25, 2014 (the "2014 Topco Acquisition"), we acquired significant intangible assets, the value of which is amortized, on a straight-line basis, over 15 years from the date of the 2014 Topco Acquisition, unless determined to be indefinite-lived. The amortization of such intangible assets recorded in our consolidated financial statements has a significant impact on our operating income (loss) and net income (loss). Our historical acquisitions have increased, and future acquisitions likely will increase, our intangible assets. We do not believe the amortization expense associated with the intangibles created from our purchase accounting adjustments reflect a material economic cost to our business. Unlike depreciation expense which has an economic cost reflected by the fact that we must re-invest in property and equipment to maintain the asset base delivering our results of operations, we do not have any capital re-investment requirements associated with the acquired intangibles, such as client relationships and trade names, that comprise the majority of the finite-lived intangibles that create our amortization expense.
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Foreign Exchange Fluctuations. Our financial results are affected by fluctuations in the exchange rate between theU.S. dollar and other currencies, primarily Canadian dollars, British pounds and euros, due to our operations in such foreign jurisdictions. See also " -Quantitative and Qualitative Disclosure of Market Risk-Foreign Currency Risk."
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Seasonality. Our quarterly results are seasonal in nature, with the fourth
fiscal quarter typically generating a higher proportion of our revenues than
other fiscal quarters, as a result of higher consumer spending. We generally
record slightly lower revenues in the first fiscal quarter of each year, as our
clients begin to roll out new programs for the year, and consumer spending
generally is less in the first fiscal quarter than other quarters. Timing of our
clients' marketing expenses, associated with marketing campaigns and new product
launches, can also result in fluctuations from one quarter to another.
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How We Assess the Performance of Our Business
Revenues
Revenues related to our sales segment are primarily comprised of commissions,
fee-for-service and cost-plus fees for providing retail merchandising services,
category and space management, headquarter relationship management, technology
solutions and administrative services. A small portion of our arrangements
include performance incentive provisions, which allow us to earn additional
revenues on our performance relative to specified quantitative or qualitative
goals. We recognize the incentive portion of revenues under these arrangements
when the related services are transferred to the customer.
Marketing segment revenues are primarily recognized in the form of a
fee-for-service (including retainer fees, fees charged to clients based on hours
incurred, project-based fees or fees for executing in-person consumer
engagements or experiences, which engagements or experiences we refer to as
events), commissions or on a cost-plus basis, in each case, related to services
including experiential marketing, shopper and consumer marketing services,
private label development or our digital, social and media services.
Given our acquisition strategy, we analyze our financial performance, in part,
by measuring revenue growth in two ways-revenue growth attributable to organic
activities and revenue growth attributable to acquisitions, which we refer to as
organic revenues and acquired revenues, respectively.
We define organic revenues as any revenues that are not acquired revenues. Our organic revenues exclude the impacts of acquisitions and divestitures, when applicable, which improves comparability of our results from period to period.
In general, when we acquire a business, the acquisition includes a contingent consideration arrangement (e.g., an earn-out provision) and, accordingly, we separately track the relevant metrics associated with the earnout agreement of the acquired business. In such cases, we consider revenues generated by such a business during the 12 months following its acquisition to be acquired revenues. For example, if we completed an acquisition onJuly 1, 2021 for a business that included a contingent consideration arrangement, we would consider revenues from the acquired business fromJuly 1, 2021 toJune 30, 2022 to be acquired revenues. We generally consider growth attributable to the financial performance of an acquired business after the 12-month anniversary of the date of acquisition to be organic. In limited cases, when the acquisition of an acquired business does not include a contingent consideration arrangement, or we otherwise do not separately track the financial performance of the acquired business due to operational integration, we consider the revenues that the business generated in the 12 months prior to its acquisition to be our acquired revenues for the 12 months following its acquisition, and any differences in revenues actually generated during the 12 months after its acquisition to be organic. For example, if we completed an acquisition onJuly 1, 2021 for a business that did not include a contingent consideration arrangement, we would consider the amount of revenues from the acquired business fromJuly 1, 2020 toJune 30, 2021 to be acquired revenues during the period fromJuly 1, 2021 toJune 30, 2022 , with any differences from that amount actually generated during the latter period to be organic revenues.
All revenues generated by our acquired businesses are considered to be organic revenues after the 12-month anniversary of the date of acquisition.
When we divest a business, we consider the revenues that the divested business generated in the 12 months prior to its divestiture to be subtracted from acquired revenues for the 12 months following its divestiture. For example, if we completed a divestiture onJuly 1, 2021 for a business, we would consider the amount of revenues from the divested business fromJuly 1, 2020 toJune 30, 2021 to be subtracted from acquired revenues during the period fromJuly 1, 2021 toJune 30, 2022 . We measure organic revenue growth and acquired revenue growth by comparing the organic revenues or acquired revenues, respectively, period over period, net of any divestitures. 29 --------------------------------------------------------------------------------
Cost of Revenues
Our cost of revenues consists of both fixed and variable expenses primarily attributable to the hiring, training, compensation and benefits provided to both full-time and part-time associates, as well as other project-related expenses. A number of costs associated with our associates are subject to external factors, including inflation, increases in market specific wages and minimum wage rates at federal, state and municipal levels and minimum pay levels for exempt roles. Additionally, when we enter into certain new client relationships, we may experience an initial increase in expenses associated with hiring, training and other items needed to launch the new relationship.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, payroll taxes and benefits for corporate personnel. Other overhead costs include information technology, occupancy costs for corporate personnel, professional services fees, including accounting and legal services, and other general corporate expenses. Additionally, included in selling, general and administrative expenses are costs associated with the changes in fair value of the contingent consideration of acquisitions and other acquisition-related costs. Acquisition-related costs are comprised of fees related to change of equity ownership, transaction costs, professional fees, due diligence and integration activities.
Other (Income) Expenses
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability represents a non-cash (income) expense resulting from a fair value adjustment to warrant liability with respect to the private placement warrants. Based on the period of time the public warrants have now been trading, we determined the fair value of the liability classified private placement warrants by approximating the value with the share price of the public warrants at the respective period end, which is inherently less subjective and judgmental given it is based on observable inputs. Previously, the fair value of the warrant liability was based on the input assumptions used in the Black-Scholes option pricing model, including our stock price at the end of the reporting period, the implied volatility or other inputs to the model and the number of private placement warrants outstanding, which may vary from period to period. We believe these amounts are not correlated to future business operations.
Interest Expense
Interest expense relates primarily to borrowings under the Senior Secured Credit Facilities as described below. See " -Liquidity and Capital Resources."
Depreciation and Amortization
Amortization Expense
Included in our depreciation and amortization expense is amortization of
acquired intangible assets. We have ascribed value to identifiable intangible
assets other than goodwill in our purchase price allocations for companies we
have acquired. These assets include, but are not limited to, client
relationships and trade names. To the extent we ascribe value to identifiable
intangible assets that have finite lives, we amortize those values over the
estimated useful lives of the assets. Such amortization expense, although
non-cash in the period expensed, directly impacts our results of operations. It
is difficult to predict with any precision the amount of expense we may record
relating to future acquired intangible assets.
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As a result of the 2014 Topco Acquisition, we acquired significant intangible
assets, the value of which is amortized, on a straight-line basis, over 15 years
from the date of the 2014 Topco Acquisition, unless determined to be
indefinite-lived.
Depreciation Expense
Depreciation expense relates to the property and equipment that we own, which represented less than 1% of our total assets atSeptember 30, 2022 and 2021, respectively. Income Taxes Income tax expense and our effective tax rates can be affected by many factors, including state apportionment factors, our acquisition strategy, tax incentives and credits available to us, changes in judgment regarding our ability to realize our deferred tax assets, changes in our worldwide mix of pre-tax losses or earnings, changes in existing tax laws and our assessment of uncertain tax positions. Cash Flows
We have positive cash flow characteristics, as described below, due to the limited required capital investment in the fixed assets and working capital needs to operate our business in the normal course. See " -Liquidity and Capital Resources."
Our principal sources of liquidity are cash flows from operations, borrowings under the Revolving Credit Facility, and other debt. Our principal uses of cash are operating expenses, working capital requirements, acquisitions and repayment of debt. Adjusted Net Income Adjusted Net Income is a non-GAAP financial measure. Adjusted Net Income means Net income before (i) impairment of goodwill and indefinite-lived assets, (ii) amortization of intangible assets, (iii) equity-based compensation of Topco, (iv) changes in fair value of warrant liability, (v) fair value adjustments of contingent consideration related to acquisitions, (vi) acquisition-related expenses, (vii) costs associated with COVID-19, net of benefits received, (viii) EBITDA for economic interests in investments, (ix) restructuring expenses, (x) litigation expenses (recovery), (xi) costs associated with the Take 5 Matter, (xii) related tax adjustments and (xiii) other adjustments that management believes are helpful in evaluating our operating performance. We present Adjusted Net Income because we use it as a supplemental measure to evaluate the performance of our business in a way that also considers our ability to generate profit without the impact of items that we do not believe are indicative of our operating performance or are unusual or infrequent in nature and aid in the comparability of our performance from period to period. Adjusted Net Income should not be considered as an alternative for Net income, our most directly comparable measure presented on a GAAP basis.
Adjusted EBITDA and Adjusted EBITDA by Segment
Adjusted EBITDA and Adjusted EBITDA by segment are supplemental non-GAAP
financial measures of our operating performance. Adjusted EBITDA means Net
income before (i) interest expense, net, (ii) provision for income taxes, (iii)
depreciation, (iv) impairment of goodwill and indefinite-lived assets, (v)
amortization of intangible assets, (vi) equity-based compensation of Topco,
(vii) changes in fair value of warrant liability, (viii) stock-based
compensation expense, (ix) fair value adjustments of contingent consideration
related to acquisitions, (x) acquisition-related expenses, (xi) costs associated
with COVID-19, net of benefits received, (xii) EBITDA for economic interests in
investments, (xiii) restructuring expenses, (xiv) litigation expenses
(recovery), (xv) costs associated with the Take 5 Matter and (xvi) other
adjustments that management believes are helpful in evaluating our operating
performance.
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We present Adjusted EBITDA and Adjusted EBITDA by segment because they are key
operating measures used by us to assess our financial performance. These
measures adjust for items that we believe do not reflect the ongoing operating
performance of our business, such as certain noncash items, unusual or
infrequent items or items that change from period to period without any material
relevance to our operating performance. We evaluate these measures in
conjunction with our results according to GAAP because we believe they provide a
more complete understanding of factors and trends affecting our business than
GAAP measures alone. Furthermore, the agreements governing our indebtedness
contain covenants and other tests based on measures substantially similar to
Adjusted EBITDA. Neither Adjusted EBITDA nor Adjusted EBITDA by segment should
be considered as an alternative for Net income, our most directly comparable
measure presented on a GAAP basis.
Results of Operations for the Three and Nine Months Ended
2021
The following table sets forth items derived from the Company's consolidated
statements of operations for the three and nine months ended September 30, 2022
and 2021 in dollars and as a percentage of total revenues.
Three Months Ended September 30, Nine Months Ended September 30,
(amounts in thousands) 2022 2021 2022 2021
Revenues $ 1,051,095 100.0 % $ 928,760 100.0 % $ 2,946,979 100.0 % $ 2,569,735 100.0 %
Cost of revenues 908,523 86.4 % 766,253 82.5 % 2,536,256 86.1 % 2,117,818 82.4 %
Selling, general, and
administrative
expenses 37,945 3.6 % 37,742 4.1 % 138,594 4.7 % 124,830 4.9 %
Depreciation and
amortization 57,785 5.5 % 59,163 6.4 % 173,997 5.9 % 181,450 7.1 %
Total expenses 1,004,253 95.5 % 863,158 92.9 % 2,848,847 96.7 % 2,424,098 94.3 %
Operating income 46,842 4.5 % 65,602 7.1 % 98,132 3.3 % 145,637 5.7 %
Other (income)
expenses:
Change in fair value of
warrant liability (1,100 ) (0.1 )% (3,491 ) (0.4 )% (21,456 ) (0.7 )% (5,024 ) (0.2 )% Interest expense, net 23,557 2.2 % 36,490 3.9 % 63,628 2.2 % 104,544 4.1 % Total other expenses 22,457 2.1 % 32,999 3.6 % 42,172 1.4 % 99,520 3.9 % Income before income taxes
24,385 2.3 % 32,603 3.5 % 55,960 1.9 % 46,117 1.8 % Provision for income taxes
1,158 0.1 % 8,276 0.9 % 11,523 0.4 % 16,582 0.6 % Net income
$ 23,227 2.2 %$ 24,327 2.6
%
(1)
Adjusted Net Income and Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted Net Income and Adjusted EBITDA and reconciliations of Net income to Adjusted Net Income and Adjusted EBITDA, see "-Non-GAAP Financial Measures."
Comparison of the Three Months Ended
Revenues
Three Months Ended September 30, Change
(amounts in thousands) 2022 2021 $ %
Sales $ 646,246 $ 597,139 $ 49,107 8.2 %
Marketing 404,849 331,621 73,228 22.1 %
Total revenues $ 1,051,095 $ 928,760 $ 122,335 13.2 %
Total revenues increased by $122.3 million , or 13.2%, during the three months
ended September 30, 2022 , as compared to the three months ended September 30,
2021 .
The sales segment revenues increased $49.1 million during the three months ended
September 30, 2022 as compared to the three months ended September 30, 2021 , of
which $23.6 million were revenues from acquired
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businesses. Excluding revenues from acquired businesses and unfavorable foreign
exchange rates of $17.0 million , the segment experienced an increase of $42.5
million in organic revenues primarily due to growth in our retail merchandising
services and international businesses, partially offset by a decrease in our
third party selling and retailing services.
The marketing segment revenues increased $73.2 million during the three months
ended September 30, 2022 as compared to the three months ended September 30,
2021 , of which $11.0 million were revenues from acquired businesses. Excluding
revenues from acquired businesses and unfavorable foreign exchange rates of $5.7
million , the segment experienced an increase of $67.9 million in organic
revenues. The increase in revenues was primarily due to an increase in our
in-store product demonstration and sampling services which continue to recover
from the temporary suspensions as a result of the COVID-19 pandemic, partially
offset by a decrease in certain of our client media spend.
Cost of Revenues
Cost of revenues as a percentage of revenues for the three months endedSeptember 30, 2022 was 86.4%, as compared to 82.5% for the three months endedSeptember 30, 2021 . The increase as a percentage of revenues was largely attributable to the change in the revenue mix of our services as a result of recoveries from the COVID-19 pandemic and acquired businesses, and the ongoing investment and inflationary impact in recruiting, wage, and employee benefit expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenues for the three months endedSeptember 30, 2022 was 3.6%, compared to 4.1% for the three months endedSeptember 30, 2021 , primarily due to the change in fair value adjustments related to contingent consideration and a decrease in legal fees associated with the Take 5 Matter.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by$1.4 million , or 2.3%, to$57.8 million for the three months endedSeptember 30, 2022 compared to$59.2 million for the three months endedSeptember 30, 2021 , which stayed relatively consistent year over year. Operating Income Three Months Ended September 30, Change (amounts in thousands) 2022 2021 $ % Sales$ 31,765 $ 51,906 $ (20,141 ) (38.8 )% Marketing 15,077 13,696 1,381 10.1 % Total operating income$ 46,842 $ 65,602 $ (18,760 ) (28.6 )% In the sales segment, the decrease in operating income during the three months endedSeptember 30, 2022 was due to a shift in revenue mix and ongoing investment and inflationary impact in recruiting, wage, and employee benefit expenses.
In the marketing segment, the increase in operating income during the three
months ended
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability represents$1.1 million of non-cash gain resulting from a fair value adjustment to warrant liability with respect to the private placement warrants for the three months endedSeptember 30, 2022 , approximating the fair value with the warrant price of the public warrants. 33 --------------------------------------------------------------------------------
Interest Expense, net
Interest expense, net decreased
Provision for Income Taxes
Provision for income taxes was$1.2 million for the three months endedSeptember 30, 2022 as compared to$8.3 million of provision for income taxes for the three months endedSeptember 30, 2021 . The fluctuation was primarily attributable to the decrease in pre-tax income during the three months endedSeptember 30, 2022 and decrease of$4.3 million of discrete items for the three months endedSeptember 30, 2022 .
Net Income
Net income was$23.2 million for the three months endedSeptember 30, 2022 , compared to net income of$24.3 million for the three months endedSeptember 30, 2021 . The decrease in net income was primarily driven by the decrease in operating income as described above, offset by the decrease in interest expense, net and provision for income taxes.
Adjusted Net Income
The increase in Adjusted Net Income for the three months ended
Adjusted EBITDA and Adjusted EBITDA by Segment
Three Months Ended September 30, Change
(amounts in thousands) 2022 2021 $ %
Sales $ 76,172 $ 95,199 $ (19,027 ) (20.0 )%
Marketing 42,096 38,557 3,539 9.2 %
Total Adjusted EBITDA $ 118,268 $ 133,756 $ (15,488 ) (11.6 )%
Adjusted EBITDA decreased by $15.5 million , or 11.6%, to $118.3 million for the
three months ended September 30, 2022 , from $133.8 million for the three months
ended September 30, 2021 . In the sales segment, the decrease in Adjusted EBITDA
was primarily attributable to the increase in cost of revenues as described
above. In the marketing segment, the increase in the Adjusted EBITDA was
primarily attributable to the growth in revenues as described above. For a
reconciliation of Adjusted EBITDA to Net income, see "-Non-GAAP Financial
Measures."
Comparison of the Nine Months Ended September 30, 2022 and 2021
Revenues
Nine Months Ended September 30, Change
(amounts in thousands) 2022 2021 $ %
Sales $ 1,842,347 $ 1,693,107 $ 149,240 8.8 %
Marketing 1,104,632 876,628 228,004 26.0 %
Total revenues $ 2,946,979 $ 2,569,735 $ 377,244 14.7 %
34-------------------------------------------------------------------------------- Total revenues increased by$377.2 million , or 14.7%, during the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . The sales segment revenues increased$149.2 million during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , of which$114.2 million were revenues from acquired businesses. Excluding revenues from acquired businesses and unfavorable foreign exchange rates of$33.9 million , the segment experienced an increase of$68.9 million in organic revenues primarily due to our European joint venture which experienced continued recoveries from temporary reduction in services as a result of the COVID-19 pandemic and growth in our retail merchandising services partially offset by a decrease in our foodservice and third party selling and retailing services. The marketing segment revenues increased$228.0 million during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , of which$23.1 million were revenues from acquired businesses. Excluding revenues from acquired businesses and unfavorable foreign exchange rates of$11.6 million , the segment experienced an increase of$216.5 million in organic revenues. The increase in revenues was primarily due to an increase in our in-store product demonstration and sampling services which continue to recover from the temporary suspensions as a result of the COVID-19 pandemic, partially offset by a decrease in certain of our client media spend.
Cost of Revenues
Cost of revenues as a percentage of revenues for the nine months endedSeptember 30, 2022 was 86.1%, as compared to 82.4% for the nine months endedSeptember 30, 2021 . The increase as a percentage of revenues was largely attributable to the change in the revenue mix of our services as a result of recoveries from the COVID-19 pandemic and acquired businesses, and the ongoing investment and inflationary impact in recruiting, wage, and employee benefit expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenues for the nine months endedSeptember 30, 2022 was 4.7%, compared to 4.9% for the nine months endedSeptember 30, 2021 .
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by$7.5 million or 4.1% to$174.0 million for the nine months endedSeptember 30, 2022 compared to$181.5 million for the nine months endedSeptember 30, 2021 . The decrease was primarily due to a decrease in depreciation expenses from our internally developed software. Operating Income Nine Months Ended September 30, Change (amounts in thousands) 2022 2021 $ % Sales$ 65,915 $ 131,727 $ (65,812 ) (50.0 %) Marketing 32,217 13,910 18,307 131.6 % Total operating income$ 98,132 $ 145,637 $ (47,505 ) (32.6 %) In the sales segment, the decrease in operating income during the nine months endedSeptember 30, 2022 was primarily attributable to a shift in revenue mix, ongoing investment and inflationary impact in recruiting, wage, and employee benefit expenses, the change in fair value adjustments related to contingent consideration, and an increase in stock-based compensation expense, partially offset by a decrease in depreciation expense. 35 --------------------------------------------------------------------------------
In the marketing segment, the increase in operating income during the nine
months ended
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability represents$21.5 million of non-cash gain resulting from a fair value adjustment to warrant liability with respect to the private placement warrants for the nine months endedSeptember 30, 2022 , approximating the fair value with the warrant price of the public warrants.
Interest Expense, net
Interest expense, net decreased
Provision for Income Taxes
Provision for income taxes was$11.5 million for the nine months endedSeptember 30, 2022 as compared to$16.6 million for the nine months endedSeptember 30, 2021 . The fluctuation was primarily attributable to the increase in pre-tax income during the nine months endedSeptember 30, 2022 , partially offset by a decrease of$7.4 million of discrete items.
Net Income
Net income was$44.4 million for the nine months endedSeptember 30, 2022 , compared to net income of$29.5 million for the nine months endedSeptember 30, 2021 . The increase in net income was primarily driven by the decrease in change in fair value of warrant liability, interest expense, net, and provision for income taxes, partially offset by the decrease in operating income as described above. Adjusted Net Income The increase in Adjusted Net Income for the nine months endedSeptember 30, 2022 was attributable to the decrease in change in fair value of warrant liability, and interest expense, net as described above. For a reconciliation of Adjusted Net Income to Net income, see " -Non-GAAP Financial Measures."
Adjusted EBITDA and Adjusted EBITDA by Segment
Nine Months Ended September 30, Change
(amounts in thousands) 2022 2021 $ %
Sales $ 216,158 $ 268,798 $ (52,640 ) (19.6 )%
Marketing 107,171 98,357 8,814 9.0 %
Total Adjusted EBITDA $ 323,329 $ 367,155 $ (43,826 ) (11.9 )%
Adjusted EBITDA decreased by $43.8 million , or 11.9%, to $323.3 million for the
nine months ended September 30, 2022 , from $367.2 million for the nine months
ended September 30, 2021 . In the sales segment, the decrease in Adjusted EBITDA
was primarily attributable to the increase in cost of revenues as described
above. In the marketing segment, the increase in the Adjusted EBITDA was
primarily attributable to the growth in revenues as described above. For a
reconciliation of Adjusted EBITDA to Net income, see "-Non-GAAP Financial
Measures."
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Non-GAAP Financial Measures
Adjusted Net Income is a non-GAAP financial measure. Adjusted Net Income means
Net income before (i) impairment of goodwill and indefinite-lived assets, (ii)
amortization of intangible assets, (iii) equity-based compensation of Topco,
(iv) change in fair value of warrant liability, (v) fair value adjustments of
contingent consideration related to acquisitions, (vi) acquisition-related
expenses, (vii) costs associated with COVID-19, net of benefits received, (viii)
EBITDA for economic interests in investments, (ix) restructuring expenses, (x)
litigation expenses (recovery), (xi) costs associated with the Take 5 Matter,
(xii) related tax adjustments and (xiii)other adjustments that management
believes are helpful in evaluating our operating performance.
We present Adjusted Net Income because we use it as a supplemental measure to
evaluate the performance of our business in a way that also considers our
ability to generate profit without the impact of items that we do not believe
are indicative of our operating performance or are unusual or infrequent in
nature and aid in the comparability of our performance from period to period.
Adjusted Net Income should not be considered as an alternative for our Net
income, our most directly comparable measure presented on a GAAP basis.
A reconciliation of Adjusted Net Income to Net income is provided in the following table:
Nine Months Ended September
Three Months Ended September 30, 30,
2022 2021 2022 2021
(in thousands)
Net income $ 23,227 $ 24,327 $ 44,437 $ 29,535
Less: Net income attributable to
noncontrolling interest 2,168 1,016 1,042 219
Add:
Equity -based compensation of Karman Topco L.P.(a) (828 ) (5,575 ) (7,142 ) (10,031 ) Change in fair value of warrant liability (1,100 ) (3,491 ) (21,456 ) (5,024 ) Fair value adjustments related to contingent consideration related to acquisitions(c) (340 ) 3,221 5,448 5,776 Acquisition-related expenses(d) 4,260 5,110 19,843 13,053 Restructuring expenses(e) 3,562 (394 ) 4,458 10,636 Litigation(f) - (92 ) (800 ) (910 ) Amortization of intangible assets(g) 49,997 49,786 150,930 148,396 Costs associated with COVID-19, net of benefits received(h) 2,009 1,087 4,945 (948 ) Costs associated with the Take 5 Matter(i) 278 1,400 2,088 3,611 Tax adjustments related to non-GAAP adjustments(j) (16,215 ) (15,262 ) (49,168 ) (47,113 ) Adjusted Net Income $ 62,682 $ 59,101$ 152,541 $ 146,762 Adjusted EBITDA and Adjusted EBITDA by segment are supplemental non-GAAP financial measures of our operating performance. Adjusted EBITDA means Net income before (i) interest expense, net, (ii) provision for income taxes, (iii) depreciation, (iv) impairment of goodwill and indefinite-lived assets, (v) amortization of intangible assets, (vi) equity-based compensation of Topco, (vii) change in fair value of warrant liability, (viii) stock-based compensation expense, (ix) fair value adjustments of contingent consideration related to acquisitions, (x) acquisition-related expenses, (xi) costs associated with COVID-19, net of benefits received, (xii) EBITDA for economic interests in investments, (xiii) restructuring expenses, (xiv) litigation expenses (recovery), (xv) costs associated with the Take 5 Matter and (xvi) other adjustments that management believes are helpful in evaluating our operating performance. We present Adjusted EBITDA and Adjusted EBITDA by segment because they are key operating measures used by us to assess our financial performance. These measures adjust for items that we believe do not reflect the ongoing operating performance of our business, such as certain noncash items, unusual or infrequent items or items that change from period to period without any material relevance to our operating performance. We evaluate these measures in conjunction with our results according to GAAP because we believe they provide a more complete understanding of factors and trends affecting our business than GAAP measures alone. Furthermore, the agreements governing our indebtedness contain covenants and other tests based on measures substantially similar to 37 -------------------------------------------------------------------------------- Adjusted EBITDA. Neither Adjusted EBITDA nor Adjusted EBITDA by segment should be considered as an alternative for our Net income, our most directly comparable measure presented on a GAAP basis.
A reconciliation of Adjusted EBITDA to Net income is provided in the following table:
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