UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
b
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
(Address of principal executive offices)
(
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: |
||||
|
|
|
|
|
Title of each class |
|
Trading Symbol |
|
Name of each exchange on which registered |
|
|
|||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
|
☒ |
|
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
|
|
|
|
|
Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of October 28, 2021, the registrant had
Table of Contents
|
|
Page |
PART I. |
2 |
|
Item 1. |
2 |
|
|
2 |
|
|
3 |
|
|
4 |
|
|
5 |
|
|
6 |
|
|
Notes to the Consolidated Financial Statements (Unaudited) |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
Item 3. |
23 |
|
Item 4. |
23 |
|
PART II. |
24 |
|
Item 1. |
24 |
|
Item 1A. |
24 |
|
Item 2. |
24 |
|
Item 3. |
24 |
|
Item 4. |
24 |
|
Item 5. |
24 |
|
Item 6. |
25 |
|
26 |
||
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
Cars.com Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
|
|
(unaudited) |
|
|
|
|
||
Assets: |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
||
Investments and other assets, net |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Liabilities and stockholders' equity: |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued compensation |
|
|
|
|
|
|
||
Current portion of long-term debt |
|
|
|
|
|
|
||
Other accrued liabilities |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Noncurrent liabilities: |
|
|
|
|
|
|
||
Long-term debt |
|
|
|
|
|
|
||
Deferred tax liability |
|
|
|
|
|
|
||
Other noncurrent liabilities |
|
|
|
|
|
|
||
Total noncurrent liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Stockholders' equity: |
|
|
|
|
|
|
||
Preferred Stock at par, $ |
|
|
|
|
|
|
||
Common Stock at par, $ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
Total stockholders' equity |
|
|
|
|
|
|
||
Total liabilities and stockholders' equity |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
Cars.com Inc.
Consolidated Statements of Income (Loss)
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dealer |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
OEM and National |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue and operations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product and technology |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketing and sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Affiliate revenue share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Goodwill and intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Nonoperating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Total nonoperating expense, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Income tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Diluted |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
Cars.com Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|||||||
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|||
Net income (loss) |
$ |
|
$( |
|
$ |
|
$( |
|||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|||
Interest rate swap |
|
|
|
|
|
( |
||||
Reclassification of amortization of accumulated other comprehensive loss on interest rate swap into Net income (loss) |
|
|
|
|||||||
Total other comprehensive income (loss) |
|
|
|
( |
||||||
Comprehensive income (loss) |
$ |
|
$( |
|
$ |
|
$( |
|||
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
Cars.com Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Stockholders' |
|
||||||||||||||
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
||||||||
Balance at December 31, 2020 |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Shares issued in connection with |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||||||
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Shares issued in connection with |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||||||
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Shares issued in connection with |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at September 30, 2021 |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Stockholders' |
|
||||||||||||||
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
||||||||
Balance at December 31, 2019 |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Other comprehensive loss, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Shares issued in connection with |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||||||
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Shares issued in connection with |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||||||
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Shares issued in connection with |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at September 30, 2020 |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
Cars.com Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Nine Months Ended |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
Adjustments to reconcile Net income (loss) to Net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation |
|
|
|
|
|
|
||
Amortization of intangible assets |
|
|
|
|
|
|
||
Goodwill and intangible asset impairment |
|
|
|
|
|
|
||
Impairment of non-marketable security |
|
|
|
|
|
|
||
Unrealized gain on interest rate swap |
|
|
|
|
|
( |
) |
|
Amortization of accumulated other comprehensive loss on interest rate swap |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
Provision for doubtful accounts |
|
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
|
||
Other, net |
|
|
|
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
|
|
Prepaid expenses |
|
|
( |
) |
|
|
( |
) |
Other current assets |
|
|
|
|
|
( |
) |
|
Other assets |
|
|
|
|
|
|
||
Accounts payable |
|
|
( |
) |
|
|
|
|
Accrued compensation |
|
|
( |
) |
|
|
|
|
Other accrued liabilities |
|
|
|
|
|
|
||
Other noncurrent liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from revolving loan borrowings |
|
|
|
|
|
|
||
Payments of long-term debt |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation plans, net |
|
|
( |
) |
|
|
( |
) |
Payments of debt issuance costs and other fees |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net (decrease) increase in cash and cash equivalents |
|
|
( |
) |
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Cash (received) paid for income taxes |
|
$ |
( |
) |
|
$ |
|
|
Cash paid for interest and interest rate swap |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
Cars.com Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
NOTE 1. Description of Business and Summary of Significant Accounting Policies
Description of Business. Cars.com Inc. (the “Company” or “CARS”) is a leading automotive marketplace platform that provides a robust set of industry specific digital solutions. Through the marketplace, dealer websites and other digital products, the Company showcases dealer inventory, elevates and amplifies dealers’ and automotive manufacturers’ (“OEMs”) brands, connects sellers with the Company’s ready-to-buy audience and empowers shoppers with the resources and information needed to make confident car buying decisions. The Company’s digital solutions strategy builds on the rich data and audience of its digital marketplace to offer media and solutions that drive growth and efficiency for the automotive industry. The Company’s portfolio of brands includes Cars.com, Dealer Inspire, FUEL, DealerRater, Auto.com, PickupTrucks.com and NewCars.com.
Basis of Presentation. These accompanying unaudited interim Consolidated Financial Statements (“Consolidated Financial Statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2020, which are included in the Company's Annual Report on Form 10-K dated February 25, 2021 (the “December 31, 2020 Financial Statements”).
The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in the December 31, 2020 Financial Statements. In the opinion of management, the Consolidated Financial Statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, cash flows and changes in stockholders' equity as of the dates and for the periods indicated. The unaudited results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results that may be expected for the year ending December 31, 2021.
Reclassifications. Certain prior year balances have been reclassified to conform to the current year presentation. In addition, effective January 1, 2021, the Company renamed its revenue categories as follows: "Direct" revenue is now "Dealer" revenue and "National advertising" revenue is now "OEM and National" revenue. This naming convention change has no impact on the components or the historical amounts of the respective revenue categories. Dealer revenue consists of marketplace and digital solutions sold to dealer customers. OEM and National revenue consists of display advertising and other solutions sold to OEMs, advertising agencies, automotive dealer associations and auto adjacent businesses.
NOTE 2. Revenue
Revenue Summary. In the table below (in thousands), revenue is disaggregated by major products and services. The Company only has
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Major products and services |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Subscription advertising and digital solutions |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Display advertising |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pay per lead |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
7
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. Goodwill and Indefinite-lived Intangible Asset
In March 2020, the Company determined there was a triggering event, caused by the economic impacts of the novel coronavirus disease 2019 pandemic and related restrictions (“COVID-19”). The Company performed interim quantitative impairment tests as of March 31, 2020. The results of the goodwill and indefinite-lived intangible asset impairment tests indicated at the time, due to the projected impacts of COVID-19, that the carrying values exceeded the estimated fair values and thus, the Company recorded an impairment of $
NOTE 4. Debt
As of September 30, 2021, the Company was in compliance with the covenants under its debt agreements.
Term Loan. As of September 30, 2021, the outstanding principal amount under the Term Loan was $
Revolving Loan. As of September 30, 2021, $
Senior Unsecured Notes. In October 2020, the Company issued $
Fair Value. The Company's debt is classified as Level 2 in the fair value hierarchy and the fair value is measured based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments. As of September 30, 2021, the fair value of the outstanding indebtedness was approximately $
NOTE 5. Interest Rate Swap
The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on its borrowing under the initial Term Loan, the Company entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, the Company is locked into a fixed rate of interest of
During the second quarter of 2020, the Company entered into the second amendment to the Credit Agreement, which triggered a quantitative hedge effectiveness test that resulted in the loss of hedge accounting. As a result, as of the date of the second amendment, the unrealized loss included within Accumulated other comprehensive loss was frozen and is now being ratably reclassified into Net income (loss) over the remaining life of the Swap through Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Income (Loss). Subsequent to the second amendment, any changes in the fair value of the Swap are recorded within Other income (expense), net on the Consolidated Statements of Income (Loss).
During the fourth quarter of 2020, the Company entered into the third amendment to the Credit Agreement, which triggered a partial debt extinguishment, including a partial extinguishment of the underlying Term Loan. Due to the reduction in the Term Loan as compared to the notional amount of the Swap, the Company wrote-off a proportional amount of the frozen Accumulated other comprehensive loss balance as of the date of the partial extinguishment proportional to the reduction in the underlying notional amount of Term Loan. The Company will continue to amortize the remaining Accumulated other comprehensive loss to Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Income (Loss) through the remainder of the term of the Swap. Any changes in the fair value of the Swap will continue to be recorded within Other income (expense), net on the Consolidated Statements of Income (Loss).
As of September 30, 2021, the fair value of the Swap was an unrealized loss of $
8
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
ended September 30, 2021, the Company made payments of $
NOTE 6. Commitments and Contingencies
The Company and its subsidiaries are parties from time to time in legal and administrative proceedings involving matters incidental to its business. These matters, whether pending, threatened or unasserted, if decided adversely to the Company or settled, may result in liabilities material to its financial position, results of operations or cash flows. The Company records a liability when it believes that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both the probability and the estimated amount.
NOTE 7. Stock-Based Compensation
Restricted Stock Units (“RSUs”) and Restricted Stock. RSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. RSUs are subject to graded vesting, generally ranging between and
|
|
Number |
|
|
Weighted-Average |
|
||
Outstanding as of December 31, 2020 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested and delivered |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Outstanding as of September 30, 2021 (1) |
|
|
|
|
|
|
||
Performance Stock Units (“PSUs”). PSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting. The fair value of the PSUs is equal to the Company’s common stock price on the date of grant. Expense related to PSUs is recognized when the performance conditions are probable of being achieved. The percentage of PSUs that shall vest will range from
|
|
Number |
|
|
Weighted-Average |
|
||
Outstanding as of December 31, 2020 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested and delivered |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
|
|
|
|
||
Outstanding as of September 30, 2021 |
|
|
|
|
|
|
||
Stock Options. Stock options represent the right to purchase shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. Stock options are subject to
9
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
|
|
Number of Options |
|
|
Weighted-Average |
|
|
Weighted-Average Remaining Contractual Term (in years) |
|
|
Aggregate |
|
||||
Outstanding as of December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Exercised |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Forfeited |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Outstanding as of September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercisable as of September 30, 2021 |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
The fair value of the stock options granted during the nine months ended September 30, 2021 are estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions:
|
2021 |
|
|
Risk-free interest rate |
|
% |
|
Weighted-average volatility |
|
% |
|
Dividend yield |
|
% |
|
Expected years until exercise |
|
|
|
NOTE 8. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing Net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted earnings (loss) per share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans, unless the inclusion of such shares would have an anti-dilutive effect.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Basic weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive stock-based compensation awards (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per share, basic |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Earnings (loss) per share, diluted |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
NOTE 9. Other Income (Expense), net
Included in Other income (expense), net in the nine months ended September 30, 2020 was a full impairment of $
NOTE 10. Income Taxes
Deferred Tax Asset and Valuation Allowance. Due to the goodwill and indefinite-lived intangible asset impairments recorded during the year ended December 31, 2020, the Company has concluded a valuation allowance is required against its deferred tax assets as of September 30, 2021. In reaching this conclusion, in accordance with U.S. GAAP, the Company has evaluated all available evidence, both positive and negative and determined that the Company’s history of recent losses was sufficient significant negative evidence to require a valuation allowance. Therefore, the Company has recorded a valuation allowance to reduce its deferred tax assets as of
10
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
September 30, 2021 to the amount that is more likely than not to be realized in future periods. At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.
Tax Refund. During the nine months ended September 30, 2021, the Company received a $
Effective Tax Rate. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income tax, was
(In thousands, except percentages) |
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
||||||||||
Income tax provision at statutory rate |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
State income taxes, net of federal income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Tax credits |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Uncertain tax positions |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Valuation allowance |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income tax expense |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
NOTE 11. Subsequent Event
In November 2021, the Company signed a definitive agreement to acquire CreditIQ, Inc. (the "Acquisition"), a cutting edge automotive fintech platform that provides instant online loan screening and approvals to facilitate online car buying. Through the Acquisition, the Company will provide dealers with access to advanced digital financing technology across the CARS platform. Using cash on hand, the Company will pay $
11
Note About Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts are forward-looking statements. Forward-looking statements include information concerning the impact of the novel coronavirus disease 2019 pandemic and related restrictions (“COVID-19”) on our industry, our dealer customers and our results of operations, our business strategies, strategic alternatives, plans and objectives, market potential, outlook, trends, future financial performance, planned operational and product improvements, potential strategic transactions, liquidity, including draws from our revolving credit facility, expense management and other matters and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements, strategic actions or prospects may differ materially from those expressed or implied by these forward-looking statements. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “outlook,” “intend,” “strategy,” “plan,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” “mission,” “strive,” “more,” “goal” or similar expressions. Forward-looking statements are based on our current expectations, beliefs, strategies, estimates, projections and assumptions, based on our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, current developments regarding the COVID-19 pandemic and other factors we think are appropriate. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us and our management based on our knowledge and understanding of the business and industry, including supply chain, are inherently uncertain. These statements are expressed in good faith and we believe these judgments are reasonable. However, you should understand that these statements are not guarantees of strategic action, performance or results. Our actual results and strategic actions could differ materially from those expressed in the forward-looking statements. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Whether or not any such forward-looking statement is in fact achieved will depend on future events, some of which are beyond our control.
Important factors that could cause actual results or events to differ materially from those anticipated include, among others:
12
13
For a detailed discussion of many of these risks and uncertainties, see “Part I, Item 1A., Risk Factors” and “Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021, our subsequent Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings filed with the SEC and available on our website at investor.cars.com or via EDGAR at www.sec.gov. All forward-looking statements contained in this report are qualified by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. The forward-looking statements contained in this report are based only on information currently available to us and speak only as of the date of this report. We undertake no obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise. The forward-looking statements in this report are intended to be subject to the safe harbor protection provided by the federal securities laws.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our business, financial condition, results of operations and quantitative and qualitative disclosures should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in “Note About Forward-Looking Statements” in this Quarterly Report on Form 10-Q. The financial information discussed below and included elsewhere in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations and cash flows may be in the future.
References in this discussion and analysis to “we,” “us,” “our” and similar terms refer to Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise.
Business Overview
We are a leading automotive marketplace platform that provides a robust set of industry specific digital solutions. Through our marketplace, dealer websites and other digital products, we showcase dealer inventory, elevate and amplify dealers’ and automotive manufacturers’ (“OEMs”) brands, connect sellers with our ready-to-buy audience and empower shoppers with the resources and information needed to make confident car buying decisions. Our digital solutions strategy builds on the rich data and audience of our digital marketplace to offer media and solutions that drive growth and efficiency for the automotive industry. Our portfolio of brands includes Cars.com, Dealer Inspire, FUEL, DealerRater, Auto.com, PickupTrucks.com and NewCars.com.
Overview of Results
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Revenue (1) |
|
$ |
156,553 |
|
|
$ |
144,392 |
|
|
$ |
465,378 |
|
|
$ |
394,495 |
|
Net income (loss) (2) |
|
|
2,431 |
|
|
|
(12,261 |
) |
|
|
13,675 |
|
|
|
(824,339 |
) |
2021 Highlights and Trends
Dealer Customers. In the third quarter of 2021, Dealer Customers increased by 1%, or 184 Dealer Customers, as compared with June 30, 2021, continuing five consecutive quarters of growth in Dealer Customers and surpassing Dealer Customers as of March 31, 2020.
Total Dealer Customers increased by 899, as compared with September 30, 2020. This increase was a result of sustained high retention rates and new sales to dealer customers following the higher cancellations of marketplace customers in the second quarter of 2020, principally due to the COVID-19 pandemic.
FUEL. Launched in early 2020, FUEL is a unique, high-ROI, targeted video advertising solution that generates superior returns compared to high-cost broadcast television, on which the auto industry spends approximately $10 billion per year, in addition to what is spent on other expensive advertising mediums. FUEL continues to be one of our fastest growing products. FUEL enables dealerships and OEMs to target and reach in-market car shoppers by leveraging the power of Cars.com's exclusive first-party audience data.
FordDirect Agreement. In April 2021, we announced that we were selected by FordDirect as a preferred website and technology platform provider for its approximately 3,000 U.S. dealerships.
Technology Transformation. In June 2021, we announced the completion of a transformed online platform and mobile app for our users. Our new Cars.com site offers load times up to 80% faster and real-time inventory updates of over 50,000 cars added to the site daily - an especially important feature in today's inventory-starved environment. The upgraded Cars.com site, built on cloud-based technology, now delivers a more streamlined and dynamic experience for both car shoppers and sellers. Our updated site experience builds on a wealth of content and offers even more advanced tools, interactive features and personalized content combined with a vibrant, intuitive and accelerated path to purchase.
Debt Repayments. During the nine months ended September 30, 2021, we made $107.5 million of debt repayments, of which $100.0 million were voluntary prepayments.
15
Impact of COVID-19 on our business. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it has since spread throughout the United States and the rest of the world with different geographical locations impacted more than others. The pandemic resulted in governmental authorities around the country implementing numerous measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns (the “related restrictions”). As cases of COVID-19 persist in various regions around the globe and new COVID-19 variants emerge, these related restrictions may still be enforced or be renewed in certain markets. During the year ended December 31, 2020 and to a lesser extent during the nine months ended September 30, 2021, our business, financial condition, liquidity and operating results were adversely affected by the COVID-19 pandemic, as a widespread increase in unemployment, reduced consumer spending and supply chain disruptions impacted the greater macroeconomic automotive industry.
Key Operating Metrics
We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make operating and strategic decisions. Information regarding Traffic and Average Monthly Unique Visitors is as follows:
|
|
Three Months Ended |
|
|
|
Nine Months Ended |
|
|
||||
(in thousands) |
|
2021 |
|
2020 |
|
% Change |
|
2021 |
|
2020 |
|
% Change |
Traffic |
|
142,418 |
|
158,791 |
|
(10)% |
|
457,460 |
|
461,684 |
|
(1)% |
Average Monthly Unique Visitors |
|
24,341 |
|
25,349 |
|
(4)% |
|
25,563 |
|
24,363 |
|
5% |
Information regarding Dealer Customers and Monthly Average Revenue Per Dealer is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
|
% Change |
|
|
June 30, 2021 |
|
|
% Change |
|
|||||
Dealer Customers |
|
|
19,029 |
|
|
|
18,130 |
|
|
|
5 |
% |
|
|
18,845 |
|
|
|
1 |
% |
Monthly Average Revenue Per Dealer |
|
$ |
2,332 |
|
|
$ |
2,183 |
|
|
|
7 |
% |
|
$ |
2,299 |
|
|
|
1 |
% |
Traffic. Traffic is fundamental to our business. Traffic to the CARS network of websites and mobile apps provides value to our advertisers in terms of audience, awareness, consideration and conversion. In addition to tracking traffic volume and sources, we monitor activity on our properties, allowing us to innovate and refine our consumer-facing offerings. Traffic is defined as the number of visits to CARS desktop and mobile properties (responsive sites and mobile apps), measured using Adobe Analytics. Traffic does not include traffic to Dealer Inspire websites. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealer customers and national advertisers.
Due to the record high traffic in the third quarter of 2020 in the midst of COVID-related restrictions, the Company experienced a decline in Traffic year-over-year for the three months ended September 30, 2021. In addition, during the three months ended September 30, 2021, the Company experienced certain short-term negative impacts to Traffic in connection with the completion of the Technology Transformation.
Traffic for the nine months ended September 30, 2021 was essentially flat compared to the prior year.
Average Monthly Unique Visitors (“UVs”). Growth in unique visitors and consumer traffic to our network of websites and mobile apps increases the number of impressions, clicks, leads and other events we can monetize to generate revenue. We define UVs in a given month as the number of distinct visitors that engage with our platform during that month. Visitors are identified when a user first visits an individual CARS property on an individual device/browser combination or installs one of our mobile apps on an individual device. If a visitor accesses more than one of our web properties or apps or uses more than one device or browser, each of those unique property/browser/app/device combinations counts toward the number of UVs. UVs do not include Dealer Inspire UVs. We measure UVs using Adobe Analytics.
Due to the record high traffic in the third quarter of 2020 in the midst of COVID-related restrictions, the Company experienced a decline in UVs year-over-year for the three months ended September 30, 2021. In addition, during the three months ended September 30, 2021, the Company experienced certain short-term negative impacts to UVs in connection with the completion of the Technology Transformation.
We believe the growth in UVs for the nine months ended September 30, 2021 was primarily related to heightened consumer demand resulting from an increase in consumer confidence due to the economic stimulus during the first half of 2021. This was partially offset by certain short-term negative impacts in connection with the completion of the Technology Transformation.
16
Average Revenue Per Dealer (“ARPD”). We believe that our ability to grow ARPD is an indicator of the value proposition of our platform. We define ARPD as Dealer revenue, excluding digital advertising services, during the period divided by the monthly average number of Dealer Customers during the same period.
ARPD increased 1% and 7% from June 30, 2021 and September 30, 2020, respectively, primarily driven by growth in FUEL revenue, as well as, growth in digital solutions.
Dealer Customers. Dealer Customers represent dealerships using our products as of the end of each reporting period. Each physical or virtual dealership location is counted separately, whether it is a single-location proprietorship or part of a large, consolidated dealer group. Multi-franchise dealerships at a single location are counted as one dealer.
Total Dealer Customers increased 1% from June 30, 2021, primarily driven by an increase in marketplace and solutions only customers and sustained high retention rates.
Total Dealer Customers increased 5% from September 30, 2020. This increase was a result of sustained high retention rates and new sales to Dealer Customers following the higher cancellations of marketplace customers in 2020, principally due to the COVID-19 pandemic.
Factors Affecting Our Performance. Our business is impacted by the changes in the larger automotive ecosystem, including inventory supply and supply chain disruptions, which is currently under pressure due to semiconductor shortages, and changes related to automotive advertising as well as other macroeconomic factors. Changes in vehicle sales volumes in the United States also influence OEMs’ and dealerships’ willingness to increase investments in technology solutions and automotive marketplaces like Cars.com and could impact our pricing strategies and/or revenue mix.
Our long-term success will depend in part on our ability to continue to transform our business toward a multi-faceted suite of digital solutions that complement our online marketplace offerings. We believe our core strategic strengths, including our powerful family of brands, growing high-quality audience and suite of digital solutions for advertisers, will assist us as we navigate a rapidly changing automotive environment. Additionally, we are focused on equipping our customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying customers are shopping online. These solutions include virtual showrooms, home delivery, online chat and our FUEL product that allows dealers to target in-market buyers on streaming platforms. The foundation of our continued success is the value we deliver to customers, and we believe that our large audience of in-market, car shoppers and innovative solutions deliver significant value to our customers.
The future effects of the COVID-19 pandemic are unknown and depend on numerous factors outside of our control. However, we believe our marketplace, advertising and digital solutions remain critical in helping our customers navigate certain challenges of the pandemic and related restrictions. We also believe our solutions will continue to be important tools for our customers in the future and, in particular, may help mitigate potential future impacts of the pandemic and related restrictions.
17
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
(In thousands, except percentages) |
|
2021 |
|
|
2020 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dealer |
|
$ |
139,321 |
|
|
$ |
123,955 |
|
|
$ |
15,366 |
|
|
|
12 |
% |
OEM and National |
|
|
15,273 |
|
|
|
17,753 |
|
|
|
(2,480 |
) |
|
|
(14 |
)% |
Other |
|
|
1,959 |
|
|
|
2,684 |
|
|
|
(725 |
) |
|
|
(27 |
)% |
Total revenue |
|
|
156,553 |
|
|
|
144,392 |
|
|
|
12,161 |
|
|
|
8 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue and operations |
|
|
28,928 |
|
|
|
25,434 |
|
|
|
3,494 |
|
|
|
14 |
% |
Product and technology |
|
|
20,132 |
|
|
|
15,455 |
|
|
|
4,677 |
|
|
|
30 |
% |
Marketing and sales |
|
|
51,948 |
|
|
|
45,776 |
|
|
|
6,172 |
|
|
|
13 |
% |
General and administrative |
|
|
17,919 |
|
|
|
13,289 |
|
|
|
4,630 |
|
|
|
35 |
% |
Depreciation and amortization |
|
|
25,552 |
|
|
|
25,375 |
|
|
|
177 |
|
|
|
1 |
% |
Total operating expenses |
|
|
144,479 |
|
|
|
125,329 |
|
|
|
19,150 |
|
|
|
15 |
% |
Operating income |
|
|
12,074 |
|
|
|
19,063 |
|
|
|
(6,989 |
) |
|
|
(37 |
)% |
Nonoperating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
(9,522 |
) |
|
|
(10,779 |
) |
|
|
1,257 |
|
|
|
(12 |
)% |
Other income, net |
|
|
19 |
|
|
|
1,957 |
|
|
|
(1,938 |
) |
|
|
(99 |
)% |
Total nonoperating expense, net |
|
|
(9,503 |
) |
|
|
(8,822 |
) |
|
|
(681 |
) |
|
|
8 |
% |
Income before income taxes |
|
|
2,571 |
|
|
|
10,241 |
|
|
|
(7,670 |
) |
|
|
(75 |
)% |
Income tax expense |
|
|
140 |
|
|
|
22,502 |
|
|
|
(22,362 |
) |
|
|
(99 |
)% |
Net income (loss) |
|
$ |
2,431 |
|
|
$ |
(12,261 |
) |
|
$ |
14,692 |
|
|
*** |
|
|
*** Not meaningful
Dealer revenue. Dealer revenue consists of marketplace and digital solutions sold to dealer customers. Dealer revenue is our largest revenue stream, representing 89.0% and 85.8% of total revenue for the three months ended September 30, 2021 and 2020, respectively. Dealer revenue increased $15.4 million or 12% compared to the three months ended September 30, 2020, driven by a 7% increase in ARPD from September 30, 2020, primarily due to growth in FUEL and digital solutions revenue and a 5% increase in Dealer Customers.
OEM and National revenue. OEM and National revenue consists of display advertising and other solutions sold to OEMs, advertising agencies, automotive dealer associations and auto adjacent businesses. OEM and National revenue represents 9.8% and 12.3% of total revenue for the three months ended September 30, 2021 and 2020, respectively. OEM and National revenue declined 14% due to pullbacks in OEM spending associated with fewer new model releases and continued inventory shortages, both driven by supply-chain disruptions.
Operating expenses. For the three months ended September 30, 2020, several of the financial statement line items described below were significantly lower as compared to the three months ended September 30, 2021, due to our management of expenses in 2020 in response to the COVID-19 pandemic. With respect to managing our expenses, beginning in the second quarter of 2020, we implemented multiple initiatives to align our expenses with the lower revenue resulting from our invoice credits. The impact of the COVID-19 pandemic expense adjustments primarily impacted the second quarter of 2020 and to a lesser extent, the third quarter of 2020.
Cost of revenue and operations. Cost of revenue and operations expense primarily consists of expenses related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment and compensation costs for the product fulfillment and customer service teams. Cost of revenue and operations expense represents 18.5% and 17.6% of total revenue for the three months ended September 30, 2021 and 2020, respectively. Cost of revenue and operations expense increased, primarily due to the growth in FUEL and digital solutions, which have an inherently higher cost of revenue.
Product and technology. The product team creates and manages consumer and dealer-facing innovation, manages consumer user experience and includes the costs associated with our editorial, data strategy and search engine optimization teams. The technology team develops and supports our products and websites. Product and technology expense includes compensation costs, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology expense represents 12.9% and 10.7% of total revenue for the three months ended September 30, 2021 and 2020, respectively. Product and technology expense increased,
18
primarily due to the prior year's COVID-19 pandemic expense adjustments, as well as timing of software license costs and continued investment in the business.
Marketing and sales. Marketing and sales expense primarily consists of traffic and lead acquisition costs (including search engine and other online marketing), TV and digital display/video advertising and creative production, market research, trade events and compensation costs for the marketing, sales and sales support teams, as well as bad debt expense related to the allowance for doubtful accounts. Marketing and sales expense represents 33.2% and 31.7% of total revenue for the three months ended September 30, 2021 and 2020, respectively. Marketing and sales expense increased, primarily due to the prior year COVID-19 pandemic expense adjustments, as well as, continued investment in marketing in 2021.
General and administrative. General and administrative expense primarily consists of compensation costs for certain of the executive, finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative expense includes office space rent, legal, accounting and other professional services, transaction-related costs, severance, transformation and other exit costs and costs related to the write-off and loss on assets, excluding the goodwill and intangible asset impairment discussed below. General and administrative expense represents 11.4% and 9.2% of total revenue for the three months ended September 30, 2021 and 2020, respectively. General and administrative expense increased, in part, due to the prior year COVID-19 pandemic expense adjustments, as well as, increased compensation costs, including stock-based compensation and investment in infrastructure of the business.
Interest expense, net. Interest expense, net decreased by $1.3 million compared to the prior year period. For information related to our debt, see Note 4 (Debt) and Note 5 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Income tax expense. The effective income tax rate, expressed by calculating the Income tax expense as a percentage of Income before income taxes, was 5.4% for the three months ended September 30, 2021, and the Income tax expense was $0.1 million.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
(In thousands, except percentages) |
|
2021 |
|
|
2020 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dealer |
|
$ |
409,145 |
|
|
$ |
332,558 |
|
|
$ |
76,587 |
|
|
|
23 |
% |
OEM and National |
|
|
49,671 |
|
|
|
53,167 |
|
|
|
(3,496 |
) |
|
|
(7 |
)% |
Other |
|
|
6,562 |
|
|
|
8,770 |
|
|
|
(2,208 |
) |
|
|
(25 |
)% |
Total revenue |
|
|
465,378 |
|
|
|
394,495 |
|
|
|
70,883 |
|
|
|
18 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue and operations |
|
|
84,978 |
|
|
|
74,376 |
|
|
|
10,602 |
|
|
|
14 |
% |
Product and technology |
|
|
56,326 |
|
|
|
42,359 |
|
|
|
13,967 |
|
|
|
33 |
% |
Marketing and sales |
|
|
156,468 |
|
|
|
132,734 |
|
|
|
23,734 |
|
|
|
18 |
% |
General and administrative |
|
|
46,800 |
|
|
|
43,866 |
|
|
|
2,934 |
|
|
|
7 |
% |
Affiliate revenue share |
|
|
— |
|
|
|
10,970 |
|
|
|
(10,970 |
) |
|
*** |
|
|
Depreciation and amortization |
|
|
76,530 |
|
|
|
87,529 |
|
|
|
(10,999 |
) |
|
|
(13 |
)% |
Goodwill and intangible asset impairment |
|
|
— |
|
|
|
905,885 |
|
|
|
(905,885 |
) |
|
*** |
|
|
Total operating expenses |
|
|
421,102 |
|
|
|
1,297,719 |
|
|
|
(876,617 |
) |
|
|
(68 |
)% |
Operating income (loss) |
|
|
44,276 |
|
|
|
(903,224 |
) |
|
|
947,500 |
|
|
*** |
|
|
Nonoperating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
(29,362 |
) |
|
|
(26,229 |
) |
|
|
(3,133 |
) |
|
|
12 |
% |
Other income (expense), net |
|
|
18 |
|
|
|
(6,987 |
) |
|
|
7,005 |
|
|
*** |
|
|
Total nonoperating expense, net |
|
|
(29,344 |
) |
|
|
(33,216 |
) |
|
|
3,872 |
|
|
|
(12 |
)% |
Income (loss) before income taxes |
|
|
14,932 |
|
|
|
(936,440 |
) |
|
|
951,372 |
|
|
*** |
|
|
Income tax expense (benefit) |
|
|
1,257 |
|
|
|
(112,101 |
) |
|
|
113,358 |
|
|
*** |
|
|
Net income (loss) |
|
$ |
13,675 |
|
|
$ |
(824,339 |
) |
|
$ |
838,014 |
|
|
*** |
|
|
*** Not meaningful
Dealer revenue. Dealer revenue represents 87.9% and 84.3% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. Dealer revenue increased $76.6 million, or 23%, compared to the nine months ended September 30, 2020. Dealer revenue was impacted significantly by our response to the COVID-19 pandemic. In an effort to assist our dealer customers impacted by the COVID-19 pandemic and related restrictions, we provided, among other measures, approximately $38.2 million of financial relief in
19
the form of certain invoice credits of 50% for April 2020 and 30% for May and June 2020. In addition, we experienced continued growth in our FUEL and digital solutions products, as well as a 5% increase in Dealer Customers.
OEM and National revenue. OEM and National revenue represents 10.7% and 13.5% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. OEM and National revenue declined 7% due to pullbacks in OEM spending associated with fewer new model releases and continued inventory shortages, both driven by supply-chain disruptions.
Operating expenses. For the nine months ended September 30, 2020, several of the financial statement line items described below were significantly lower as compared to the nine months ended September 30, 2021, due to our management of expenses in 2020 in response to the COVID-19 pandemic, as described above.
Cost of revenue and operations. Cost of revenue and operations expense represents 18.3% and 18.9% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. Cost of revenue and operations expense increased, primarily due to the prior year's COVID-19 pandemic expense adjustments, as well as growth in FUEL and digital solutions, which have an inherently higher cost of revenue.
Product and technology. Product and technology expense represents 12.1% and 10.7% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. Product and technology expense increased, primarily due to the prior year's COVID-19 pandemic expense adjustments, as well as, the timing of software licenses and continued investment in the business.
Marketing and sales. Marketing and sales expense represents 33.6% of total revenue for the nine months ended September 30, 2021 and 2020. Marketing and sales expense increased, primarily due to the prior year's COVID-19 pandemic expense adjustments.
General and administrative. General and administrative expense represents 10.1% and 11.1% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. General and administrative expense increased, primarily due to the prior year's COVID-19 pandemic expense adjustments, as well as, increased compensation costs, primarily related to stock-based compensation.
Affiliate revenue share. Affiliate revenue share expense ended in June 2020. For information related to affiliates, see Note 7 (Unfavorable Contracts Liability) in Part II, Item 8., “Financial Statements and Supplementary Data”, of our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on February 25, 2021.
Depreciation and amortization. Depreciation and amortization expense decreased, primarily due to certain assets being fully depreciated and amortized as compared to the prior year period, partially offset by depreciation and amortization on additional assets acquired.
Goodwill and intangible asset impairment. As of March 31, 2020, we determined there was a triggering event, caused by the economic impacts of the COVID-19 pandemic. We performed interim quantitative impairment tests as of March 31, 2020. The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, we recorded an impairment of $505.9 million and $400.0 million, respectively.
Interest expense, net. Interest expense, net increased by $3.1 million compared to the prior year period, due to a higher overall interest rate on our outstanding debt, partially offset by lower debt outstanding. For information related to our debt, see Note 4 (Debt) and Note 5 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.
Other income (expense), net. Other income (expense), net changed, primarily due to the $9.4 million impairment of a non-marketable investment, triggered by the COVID-19 pandemic during the first quarter of 2020. For information related to the impairment, see Note 9 (Other Income (Expense), net) to the accompanying Consolidated Financial Statements included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.
Income tax expense (benefit). The effective income tax rate, expressed by calculating the Income tax expense (benefit) as a percentage of Income (loss) before income taxes, was 8.4% for the nine months ended September 30, 2021, lower than the statutory federal income tax rate of 21%, primarily due to the tax benefit realized on stock-based compensation, partially offset by the valuation allowance on our net deferred tax asset position recorded during the nine months ended September 30, 2021.
20
Liquidity and Capital Resources
Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under our credit facilities. Our positive operating cash flow, along with our Revolving Loan described below, provide adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. However, our ability to maintain adequate liquidity for our operations in the future is dependent upon a number of factors, including our revenue, macroeconomic conditions, the duration and severity of the economic and operational impacts caused by the COVID-19 pandemic, our ability to contain costs, including capital expenditures, and to collect accounts receivable, and various other factors, many of which are beyond our direct control.
As discussed below, we are subject to certain financial and other covenants contained in our debt agreements, as amended, including by the Third Amendment to the Credit Agreement. For information related to the Credit Amendment, as amended, see Note 8 (Debt) in Part II, Item 8., “Financial Statements and Supplementary Data”, of our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on February 25, 2021.
We may also seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. As of September 30, 2021, Cash and cash equivalents were $51.5 million and including our undrawn Revolving Loan our total liquidity was $281.5 million.
Term Loan, Revolving Loan and Senior Unsecured Notes. As of September 30, 2021, the outstanding aggregate principal amount of our debt was $490.0 million, at an effective interest rate of 5.7%, including $90.0 million of outstanding principal under our Term Loan, with an effective interest rate of 2.5% and outstanding Senior Unsecured Notes of $400.0 million, at an effective interest rate of 6.375%. These effective rates do not include the impact of the interest rate swap. During the nine months ended September 30, 2021, we made $107.5 million in Term Loan payments, of which $100.0 million were voluntary prepayments. As of September 30, 2021, we had $230.0 million available to borrow under our Revolving Loan. Our borrowings are limited by our senior secured leverage ratio and consolidated interest coverage ratio, which are calculated in accordance with our Credit Agreement, and were 0.47x and 5.77x as of September 30, 2021, respectively and our total net leverage ratio, which is calculated in accordance with our bond indenture, and was 2.30x.
Interest Rate Swap. The interest rate on borrowings under our Term Loan and Revolving Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing under the initial Term Loan, we entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, on a notional amount of $300 million until May 31, 2022. The Swap was initially designated as a cash flow hedge of interest rate risk.
During the second quarter of 2020, we entered into the second amendment to the Credit Agreement, which triggered a quantitative hedge effectiveness test that resulted in the loss of hedge accounting. As a result, as of the date of the second amendment, the unrealized loss included within Accumulated other comprehensive loss was frozen and is now being ratably reclassified into Net income (loss) over the remaining life of the Swap through Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Income (Loss). Subsequent to the second amendment, any change in the fair value of the Swap is recorded within Other income (expense), net on the Consolidated Statements of Income (Loss).
During the fourth quarter of 2020, we entered into the third amendment to the Credit Agreement, which triggered a partial debt extinguishment, including a partial extinguishment of our underlying Term Loan. Due to the reduction in our Term Loan as compared to the notional amount of the Swap, we wrote-off a proportional amount of the frozen Accumulated other comprehensive loss balance as of the date of the partial extinguishment proportional to the reduction in the underlying notional amount of our Term Loan. We will continue to amortize the remaining Accumulated other comprehensive loss to Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Income (Loss) through the remainder of the term of the Swap. Any changes in the fair value of the Swap will continue to be recorded within Other income (expense), net on the Consolidated Statements of Income (Loss).
As of September 30, 2021, the fair value of the Swap was an unrealized loss of $5.8 million, which is recorded in Other accrued liabilities on the Consolidated Balance Sheets. As of December 31, 2020, the fair value of the Swap was an unrealized loss of $12.1 million, of which $8.5 million and $3.6 million was recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets. During the nine months ended September 30, 2021 and 2020, $4.3 million and $2.5 million was reclassified from Accumulated other comprehensive loss and recorded in Interest expense, net, respectively. During the nine months ended September 30, 2021, we made payments of $6.4 million related to the Swap and $0.7 million was reclassified as a tax benefit from Accumulated other comprehensive loss into Income tax expense (benefit) on the Consolidated Statements of Income (Loss).
21
Cash Flows. Details of our cash flows are as follows (in thousands):
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|||
Operating activities |
|
$ |
116,226 |
|
|
$ |
96,866 |
|
|
$ |
19,360 |
|
Investing activities |
|
|
(17,879 |
) |
|
|
(12,603 |
) |
|
|
(5,276 |
) |
Financing activities |
|
|
(114,559 |
) |
|
|
(54,043 |
) |
|
|
(60,516 |
) |
Net change in cash and cash equivalents |
|
$ |
(16,212 |
) |
|
$ |
30,220 |
|
|
$ |
(46,432 |
) |
Operating Activities. The increase in cash provided by operating activities was primarily related to the increase in Net income (loss), excluding the impact of non-cash items, primarily due to higher revenue in 2021 resulting from growth in the business as well as the impact of the COVID-19 pandemic on the prior year. In addition, during the nine months ended September 30, 2021, we received a $9.1 million tax refund related to the carryback of federal and state income tax net operating loss as a result of the CARES Act.
Investing Activities. The increase in cash used in investing activities is due to an increase in purchases of property and equipment.
Financing Activities. During the nine months ended September 30, 2021, cash used in financing activities was primarily related to $107.5 million of debt repayments, of which $100.0 million were voluntary prepayments. During the nine months ended September 30, 2020, cash used in financing activities was primarily related to $50.3 million of net debt repayments, inclusive of $215.3 million in debt repayments, partially offset by $165.0 million in proceeds related to our draw on our Revolving Loan during the first quarter of 2020. Additionally, there was $3.4 million of debt issuance costs paid during the nine months ended September 30, 2020. For information related to our debt, see Note 4 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Commitments and Contingencies. For information related to commitments and contingencies, see Note 6 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements. We do not have any material off-balance sheet arrangements.
Subsequent Event. In November 2021, we signed a definitive agreement to acquire CreditIQ, Inc. (the "Acquisition"), a cutting edge automotive fintech platform that provides instant online loan screening and approvals to facilitate online car buying. Through the Acquisition, we will provide dealers with access to advanced digital financing technology across the CARS platform. Using cash on hand, we will pay $30 million at the closing excluding transaction fees and expenses. In addition, we may pay additional consideration of up to $50 million based on future performance over a three-year period. The transaction is expected to close in November 2021.
Critical Accounting Policies. For information related to critical accounting policies, see “Critical Accounting Policies and Estimates” in Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on February 25, 2021 and see Note 1 (Description of Business, Company History and Summary of Significant Accounting Policies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. During the nine months ended September 30, 2021, there have been no changes to our critical accounting policies.
Recent Accounting Pronouncements. There were no significant new accounting pronouncements applicable to us in the period.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see “Quantitative and Qualitative Disclosures About Market Risk,” in Part II, Item 7A., of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021. Our exposures to market risk have not changed materially since December 31, 2020.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting. During the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
23
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
For information relating to legal proceedings, see Note 6 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
Our business and the ownership of our common stock are subject to a number of risks and uncertainties, including those described in Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021, which could materially affect our business, financial condition, results of operations and future results. There have been no material changes from the risk factors described in our Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
24
Item 6. Exhibits
Exhibit Index
Exhibit Number |
|
Description |
31.1* |
|
|
31.2* |
|
|
32.1* |
|
|
32.2* |
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 |
|
The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted with Inline XBRL (included with Exhibit 101 attachments) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Filed herewith.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Cars.com Inc. |
||
|
|
|
|
|
Date: November 4, 2021 |
|
By: |
|
/s/ T. Alex Vetter |
|
|
|
|
T. Alex Vetter |
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
Date: November 4, 2021 |
|
By: |
|
/s/ Sonia Jain |
|
|
|
|
Sonia Jain |
|
|
|
|
Chief Financial Officer |
26