UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices)
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Registrant’s telephone number, including area code
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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 ☒
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
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Trading Symbol |
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Name of each exchange on which registered |
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As of July 31, 2019, the registrant had
Table of Contents
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Page |
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PART I. |
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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28 |
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1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Cars.com Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
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June 30, 2019 |
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December 31, 2018 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Investments and other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders' equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued compensation |
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Unfavorable contracts liability |
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Current portion of long-term debt |
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Other accrued liabilities |
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Total current liabilities |
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Noncurrent liabilities: |
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Long-term debt |
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Deferred tax liability |
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Other noncurrent liabilities |
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Total noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred Stock at par, $ issued and outstanding as of June 30, 2019 and December 31, 2018, respectively |
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Common Stock at par, $ and December 31, 2018, respectively |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
2
Cars.com Inc.
Consolidated Statements of (Loss) Income
(In thousands, except per share data)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Revenue: |
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Retail |
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$ |
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$ |
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$ |
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$ |
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Wholesale |
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Total revenue |
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Operating expenses: |
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Cost of revenue and operations |
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Product and technology |
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Marketing and sales |
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General and administrative |
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Affiliate revenue share |
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Depreciation and amortization |
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Total operating expenses |
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Operating income (loss) |
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Nonoperating (expense) income: |
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Interest expense, net |
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Other income, net |
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Total nonoperating expense, net |
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(Loss) income before income taxes |
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Income tax (benefit) expense |
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Net (loss) income |
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$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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(Loss) earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
3
Cars.com Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
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Preferred Stock |
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Common Stock |
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Additional Paid-In |
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Retained |
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Accumulated Other Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at December 31, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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( |
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Other comprehensive loss, net |
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Repurchases of common stock |
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Shares issued in connection with stock-based compensation plans, net |
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( |
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Stock-based compensation expense |
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Transactions with TEGNA, net (1) |
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Balance at March 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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( |
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Other comprehensive loss, net |
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( |
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Repurchases of common stock |
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( |
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( |
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Shares issued in connection with stock-based compensation plans, net |
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Stock-based compensation expense |
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Transactions with TEGNA, net (1) |
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Balance at June 30, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Preferred Stock |
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Common Stock |
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Additional Paid-In |
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Retained |
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Accumulated Other Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at December 31, 2017 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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Repurchases of common stock |
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Shares issued in connection with stock-based compensation plans, net |
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( |
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( |
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Stock-based compensation expense |
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Transactions with TEGNA, net (1) |
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Balance at March 31, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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Repurchases of common stock |
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( |
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( |
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( |
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( |
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Shares issued in connection with stock-based compensation plans, net |
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Stock-based compensation expense |
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Transactions with TEGNA, net (1) |
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Balance at June 30, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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(1) |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
4
Cars.com Inc.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
(Unaudited)
|
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Net (loss) income |
$ |
( |
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$ |
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$ |
( |
) |
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$ |
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Other comprehensive loss, net of tax: |
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|
|
|
|
|
Interest rate swap |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total other comprehensive loss |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Comprehensive (loss) income |
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
Cars.com Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
Adjustments to reconcile Net (loss) income to Net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
Amortization of unfavorable contracts liability |
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
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 |
|
|
( |
) |
|
|
( |
) |
|
Payment for Acquisition, net |
|
|
|
|
|
|
( |
) |
|
Other, net |
|
|
( |
) |
|
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
|
|
|
Payments of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation plans, net |
|
|
( |
) |
|
|
( |
) |
|
Repurchases of common stock |
|
|
( |
) |
|
|
( |
) |
|
Transactions with TEGNA, net |
|
|
( |
) |
|
|
( |
) |
|
Net cash (used in) provided by financing activities |
|
|
( |
) |
|
|
|
|
|
Net decrease 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 paid for income taxes, net of refunds |
|
$ |
|
|
|
$ |
|
|
|
Cash paid for interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, Company History and Summary of Significant Accounting Policies
Description of Business. Cars.com is a leading digital marketplace and solutions provider for the automotive industry that connects car shoppers with sellers. Through a portfolio of brands including Cars.com, Dealer Inspire and DealerRater, in addition to Auto.com, PickupTrucks.com and NewCars.com, the Company empowers shoppers with the data, resources and digital tools needed to make informed buying decisions and seamlessly connect with automotive retailers. In a rapidly changing market, Cars.com enables dealerships and manufacturers (“OEMs”) with innovative technical solutions and data-driven intelligence to better reach and influence ready-to-buy shoppers, increase inventory turn and gain market share.
Company History. In May 2017, the Company separated from its former parent company, TEGNA Inc. (“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). On
In February 2018, the Company acquired all of the outstanding stock of Dealer Inspire Inc., an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of Launch Digital Marketing LLC, a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “Acquisition”). The post-Acquisition business related to Dealer Inspire, Inc. and Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”.
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 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 and Combined Financial Statements and the notes thereto for the year ended December 31, 2018, which are included in the Company's Annual Report on Form 10-K dated February 28, 2019 (the “December 31, 2018 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, 2018 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 six months ended June 30, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019.
Use of Estimates. The preparation of the accompanying Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.
Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of Cars.com Inc. and its
7
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
Reclassifications.
|
|
|
Three Months Ended June 30, 2018 |
|
|||||||||
|
|
|
As Reported |
|
|
Adjustments |
|
|
As Adjusted |
|
|||
|
Cost of revenue and operations |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Product and technology |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Marketing and sales |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate revenue share |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018 |
|
|||||||||
|
|
|
As Reported |
|
|
Adjustments |
|
|
As Adjusted |
|
|||
|
Cost of revenue and operations |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Product and technology |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Marketing and sales |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate revenue share |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 2. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Cloud Computing Arrangements. In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. The new guidance is effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating this new guidance and its impact on its Consolidated Financial Statements and related disclosures.
Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses changing the way credit losses on accounts receivable are estimated. Under current U.S. GAAP, credit losses on trade accounts receivable are recognized once it is probable that such losses will occur. Under this new guidance, the Company will be required to estimate credit losses based on the expected amount of future collections which may result in earlier recognition of allowance for doubtful accounts. The new guidance is effective for the Company on January 1, 2020 and will be adopted using a modified retrospective approach. The Company is currently evaluating this new guidance and its impact on its Consolidated Financial Statements and related disclosures.
8
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
Recently Adopted Accounting Pronouncements
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current U.S. GAAP. The new guidance requires a lessee to recognize a liability to make lease payments (the “lease liability”) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASU 2016-02 in the first quarter of 2019 utilizing the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the first quarter of 2019 and did not recast the comparative periods presented in the Consolidated Financial Statements upon adoption. The Company elected the ‘package of practical expedients’ and did not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the short-term lease recognition exemption for all leases that qualify and did not recognize right-of-use assets or lease liabilities for those leases. The Company’s lease agreements are principally related to real estate. The adoption of ASU 2016-02 resulted in the recognition of operating lease assets of $
NOTE 3. Revenue
Revenue Summary. In the table below (in thousands), revenue is disaggregated by sales channel and major products and services. The Company only has
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
Sales channel |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
National advertising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major products and services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription advertising and digital solutions |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Display advertising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay per lead |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 4. Debt
As of June 30, 2019, the Company is in compliance with the covenants under its credit agreement.
Term Loan. As of June 30, 2019, the outstanding principal amount under the Term Loan was $
Revolving Loan. As of June 30, 2019, the outstanding borrowings under the Revolving Loan were $
9
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
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. The carrying amount of the Company’s debt approximated the fair value as of June 30, 2019.
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 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
NOTE 6. Unfavorable Contracts Liability
In connection with the October 2014 acquisition of Cars.com by TEGNA, the Company entered into affiliate agreements with the former owners of Cars.com (Belo Corporation (“Belo”), The McClatchy Company (“McClatchy”), tronc, inc. (“tronc”), and the Washington Post). Under the affiliate agreements, affiliates have the exclusive right to sell and price Cars.com’s products in their local territories, paying Cars.com a wholesale rate for the Cars.com product. The Company charges the affiliates
Prior to the affiliate conversions discussed below, the Company recognized $
As of June 30, 2019, the Company has amended three of its affiliate agreements (McClatchy, tronc, and the Washington Post) and as a result, now has a direct relationship with these dealer customers and recognizes the revenue associated with converted dealers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of (Loss) Income. In addition, as part of the recent changes in the structure of the affiliate agreements, McClatchy, tronc and the Washington Post have agreed to perform certain marketing support and transition services through December 31, 2019, March 31, 2020 and October 1, 2019, respectively. The fees the Company pays associated with the amended affiliate agreements are recorded as Affiliate revenue share expense within Operating expenses in the Consolidated Statements of (Loss) Income.
In July 2019, the Company entered into agreements to convert the Gannett and TEGNA affiliate markets, approximately one year in advance of the contracts’ expiration dates. Upon conversion of the Belo affiliate market, all dealer customers will be served by the Cars.com direct sales force by the fourth quarter of 2019.
The Company no longer records the amortization of the Unfavorable contracts liability associated with the converted markets to revenue as the Company now recognizes this direct revenue at retail rates. The amortization of the Unfavorable contracts liability is now recorded as a reduction of Affiliate revenue share expense within Operating expenses in the Consolidated Statements of (Loss) Income.
Therefore, during the six months ended June 30, 2019, the Company recorded $
10
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
The Company’s Unfavorable contracts liability activity for the six months ended June 30, 2019 is as follows (in thousands):
|
Balance at December 31, 2018 |
|
$ |
|
|
|
Amortization into Wholesale revenue (1) |
|
|
( |
) |
|
Amortization into Affiliate revenue share expense (2) |
|
|
( |
) |
|
Balance at June 30, 2019 |
|
$ |
|
|
|
|
(1) |
Amount represents the amortization of the Unfavorable contracts liability related to the remaining affiliate agreement (Belo) into Wholesale revenue in the Consolidated Statements of (Loss) Income. |
|
|
(2) |
Amount represents the amortization of the Unfavorable contracts liability related to the converted McClatchy, tronc and the Washington Post affiliate agreements into Affiliate revenue share expense in the Consolidated Statements of (Loss) Income. |
NOTE 7. 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 8. Stockholders’ Equity
In March 2018, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $
NOTE 9. Stock-Based Compensation
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. During the six months ended June 30, 2019, the Company granted
Restricted Stock Units (“RSUs”). 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 one and
NOTE 10. (Loss) Earnings Per Share
Basic (loss) earnings per share is calculated by dividing Net (loss) income by the weighted-average number of shares of common stock outstanding. Diluted (loss) earnings 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 impact.
11
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Basic weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock-based compensation awards (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
(Loss) earnings per share, diluted |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
(1) |
There were |
NOTE 11. Leases
Leases. The Company is obligated as a lessee under certain non-cancelable operating leases for office space, and is also obligated to pay insurance, maintenance and other executory costs associated with the leases.
|
Remaining six months of 2019 |
|
$ |
|
|
|
2020 |
|
|
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total minimum lease payments |
|
|
|
|
|
Less: Imputed interest (1) |
|
|
( |
) |
|
Present value of the minimum lease payments |
|
|
|
|
|
Less: Current maturities of lease obligations |
|
|
( |
) |
|
Long-term lease obligations |
|
$ |
|
|
|
|
(1) |
The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available from the Company’s lessors. Therefore, in order to discount lease payments to present value, the Company has estimated its incremental borrowing rate based on information available at either the lease transition date (for those leases that commenced prior to January 1, 2019) or the lease commencement date (for those leases that commenced after January 1, 2019). |
As of June 30, 2019, the Company’s operating lease assets, included in Investments and other assets, were $
|
Income statement information: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019 |
|
|
Six Months Ended June 30, 2019 |
|
||
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
Short-term lease cost |
|
|
|
|
|
|
|
|
|
Variable lease cost |
|
|
|
|
|
|
|
|
|
Total lease cost |
|
$ |
|
|
|
$ |
|
|
12
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for operating leases for the six months ended June 30, 2019 |
|
$ |
|
|
||
|
Weighted-average remaining lease term (in months) as of June 30, 2019 |
|
|
136 |
|
||
|
Weighted-average discount rate as of June 30, 2019 |
|
|
|
% |
||
13
Note About Forward-Looking Information
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 our business strategies, strategic alternatives review process, plans and objectives, market potential, outlook, trends, future financial performance, planned operational and product improvements, potential strategic transactions, liquidity 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,” “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 and other factors we think are appropriate. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, 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:
|
• |
Our business is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic issues. |
|
• |
We participate in a highly competitive market, and pressure from existing and new competitors may materially and adversely affect our business, results of operations and financial condition. |
|
• |
If we fail to maintain or increase our base of subscribing dealers that purchase our solutions or to increase our revenue from subscribing dealers, our business, results of operations and financial condition would be materially and adversely affected. |
|
• |
We compete with other consumer automotive websites and mobile apps and other digital content providers for share of automotive-related digital advertising spend and may be unable to maintain or grow our base of advertising customers or increase our revenue from existing advertisers. |
|
• |
We may face difficulties in transitioning to a full-service solutions provider that helps automotive brands and dealers create enduring customer relationships. |
|
• |
We rely on third-party service providers for many aspects of our business, including automobile pricing and other data, and any failure to maintain these relationships could harm our business. |
|
• |
We rely on in-house content creation and development to drive traffic to the Cars.com sites and mobile apps. |
|
• |
We rely in part on Internet search engines and ‘mobile app download stores’ to drive traffic to the Cars.com sites and mobile apps. If the Cars.com sites and mobile apps fail to appear prominently in these search results, traffic to the Cars.com sites and mobile apps would decline and our business would be materially and adversely affected. |
|
• |
The value of our assets or operations may be diminished if our information technology systems fail to perform adequately. |
|
• |
We rely on technology systems’ availability and ability to prevent unauthorized access. If our security and resiliency measures fail to prevent all incidents, it could result in damage to our reputation, incur costs and create liabilities. |
|
• |
Our business depends on a strong Cars.com brand, and any failure to maintain, protect and enhance our brand could hurt our ability to retain or expand our base of consumers, customers and advertisers, and our ability to increase the frequency with which consumers, dealers and advertisers use our services. |
|
• |
We cannot assure you that we will be able to continue to successfully develop and launch new products or grow our complementary product offerings. |
|
• |
Our business is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenue will decrease. |
14
|
• |
If we do not adapt to automated buying strategies quickly, our display advertising revenue could be adversely affected. |
|
• |
If our mobile apps do not continue to meet consumer demands or we are unable to successfully monetize our mobile advertising solutions, our business, results of operations and financial condition may be materially and adversely affected. |
|
• |
Dealer closures or consolidation among dealers or OEMs could reduce demand for, and the pricing of, our marketing solutions and advertising on our sites and mobile apps, thereby leading to decreased earnings. |
|
• |
If growth in the online and mobile automotive advertising market stagnates or declines, our business, results of operations and financial condition could be materially and adversely affected. |
|
• |
Our ability to generate wholesale advertising revenue depends, in part, on the performance of third parties who sell our solutions pursuant to affiliation agreements. |
|
• |
Uncertainty exists in the application of various laws and regulations to our business, including tax laws such as the Tax Cuts and Jobs Act. New laws or regulations applicable to our business, or the expansion or interpretation of existing laws and regulations to apply to our business, could subject us to licensing requirements, claims, judgments and remedies, including sales and use taxes, other monetary liabilities and limitations on our business practices, and could increase administrative costs. |
|
• |
Strategic acquisitions, investments and partnerships could pose various risks, increase our leverage, dilute existing stockholders and significantly impact our ability to expand our overall profitability. |
|
• |
The value of our existing intangible assets may become impaired, depending upon future operating results. |
|
• |
Adverse results from litigation or governmental investigations could impact our business practices and operating results. |
|
• |
Misappropriation or infringement of our intellectual property and proprietary rights, enforcement actions to protect our intellectual property and claims from third parties relating to intellectual property could materially and adversely affect our business, results of operations and financial condition. |
|
• |
If we expand into new geographic markets, we may be prevented from using our brands in such markets. |
|
• |
Our ability to operate effectively could be impaired if we fail to attract and retain our key employees. |
|
• |
Seasonality may cause fluctuations in our revenue and operating results. |
|
• |
Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our common stock. |
|
• |
While we are exploring and evaluating strategic alternatives, we may not be successful in identifying or completing any strategic alternative and any such strategic alternative may not yield additional value for stockholders. |
|
• |
Our historical and pro forma financial information for periods prior to the Separation from our former parent may not be a reliable indicator of our future results. |
|
• |
There could be significant liability if the distribution is determined to be a taxable transaction. |
|
• |
We may be unable to engage in certain corporate transactions after the Separation because such transactions could jeopardize the intended tax-free status of the distribution. |
|
• |
Our debt agreements contain restrictions that may limit our flexibility in operating our business. |
|
• |
Increases in interest rates could increase interest payable under our variable rate indebtedness. |
|
• |
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the market value of our current or future debt obligations, including our long-term debt instruments and our bank credit facilities. |
|
• |
We do not expect to pay any cash dividends for the foreseeable future. |
|
• |
Your percentage of ownership in the Company may be diluted in the future. |
|
• |
Certain provisions of our certificate of incorporation, by-laws, tax matters agreement, separation and distribution agreement, employee matters agreement, transition services agreement, and Delaware law may discourage takeovers and limit our ability to use, acquire, or develop certain competing businesses. |
|
• |
Our amended and restated certificate of incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers. |
15
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, 2018, our subsequent Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and our other filings the Securities and Exchange Commission (“SEC”). 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.
16
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 Information” 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 “Cars.com,” “we,” “us,” “our” and similar terms refer to Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise.
Business Overview
Cars.com is a leading digital marketplace and solutions provider for the automotive industry that connects car shoppers with sellers. Through a portfolio of brands including Cars.com, Dealer Inspire and DealerRater, in addition to Auto.com, PickupTrucks.com and NewCars.com, we empower shoppers with the data, resources and digital tools needed to make informed buying decisions and seamlessly connect with automotive retailers. In a rapidly changing market, Cars.com enables dealerships and manufacturers (“OEMs”) with innovative technical solutions and data-driven intelligence to better reach and influence ready-to-buy shoppers, increase inventory turn and gain market share.
In May 2017, we separated from our former parent company, TEGNA Inc. (“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). Our common stock began trading “regular way” on the New York Stock Exchange on June 1, 2017.
In the time since Cars.com became an independent company, we have developed and commenced a new, ongoing multi-year business strategy to better support sustainable long-term growth and market leadership. We are making strides to transform from a listings business to an online media and digital solutions platform that is well-positioned to lead in the online automotive retail sector. In 2018 and 2019, we accomplished many product, technology, sales and go-to-market changes designed to underpin a strategy aimed at achieving sustainable market leadership during a dynamic period in the automobile and automotive-advertising sectors.
In conjunction with our digital solutions strategy, in February 2018, we acquired all of the outstanding stock of Dealer Inspire, Inc. and substantially all of the net assets of Launch Digital Marketing LLC (the “Acquisition”). The post-Acquisition business related to Dealer Inspire, Inc. and Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”. The results of operations for the three and six months ended June 30, 2018 includes Dealer Inspire’s financial results for the post-Acquisition period of February 21, 2018 through June 30, 2018.
Overview of Results
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(In thousands, except percentages) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Revenue |
|
$ |
148,207 |
|
|
$ |
168,512 |
|
|
$ |
302,405 |
|
|
$ |
328,469 |
|
|
Net (loss) income (1) |
|
|
(6,026 |
) |
|
|
12,726 |
|
|
|
(15,057 |
) |
|
|
13,655 |
|
|
Retail revenue as % of total revenue |
|
|
90 |
% |
|
|
87 |
% |
|
|
90 |
% |
|
|
85 |
% |
|
Wholesale revenue as % of total revenue |
|
|
10 |
% |
|
|
13 |
% |
|
|
10 |
% |
|
|
15 |
% |
|
(1) |
The net loss for the three and six months ended June 30, 2019 is primarily attributed to a decrease in national advertising revenue and increased depreciation and amortization expenses, primarily due to the reduction of the useful lives of certain assets related to the Technology Transformation. The six months ended June 30, 2019 also reflects increased depreciation due to the full six-month impact of the Acquisition. In addition, the net loss in each period was impacted by the following costs: |
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(In thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Severance, transformation and other exit costs |
|
$ |
1,058 |
|
|
$ |
590 |
|
|
$ |
7,511 |
|
|
$ |
1,097 |
|
|
Costs associated with stockholder activist campaign |
|
|
5,225 |
|
|
|
1,112 |
|
|
|
7,920 |
|
|
|
4,897 |
|
|
Transaction-related costs (1) |
|
|
2,579 |
|
|
|
1,026 |
|
|
|
4,623 |
|
|
|
11,133 |
|
|
Total |
|
$ |
8,862 |
|
|
$ |
2,728 |
|
|
$ |
20,054 |
|
|
$ |
17,127 |
|
|
(1) |
Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without |
17
|
limitation, (1) transaction-related bonuses and (2) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. |
2019 Highlights
Increases in Traffic. Traffic is critical to our business. Traffic to the Cars.com network of websites and mobile apps provides value to our advertisers in terms of audience, awareness, consideration and conversion. 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 dealers and national advertisers. Since 2017, we have been diligently working on restoring growth to our audience, the fundamental deliverable of any marketplace business. Driven by our product innovation and investments in search engine optimization and paid channels, we have experienced year-over-year Traffic growth for 18 consecutive months. In the second quarter of 2019, we achieved 16% growth in Traffic with 13% growth in Average Monthly Unique Visitors.
Affiliate Conversions. In July 2019, we entered into agreements to convert the Gannett and TEGNA affiliate markets, approximately one year in advance of the contracts’ expiration dates. Upon conversion of the Belo affiliate market, all dealer customers will be served by the Cars.com direct sales force by the fourth quarter of 2019. We record the revenue associated with converted markets as Retail revenue, rather than Wholesale revenue in the Consolidated Statements of Income. For information related to the Unfavorable contracts liability, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Technology Transformation. In February 2019, we announced a restructuring of the product and technology teams (the “Technology Transformation”). This restructuring is primarily focused on shifting our technology spend towards innovation to improve our speed of product delivery, to enable integration across current and future systems, and to migrate our systems to the cloud. In connection with the Technology Transformation, we have aligned our product and technology teams with our long-term growth strategy to expand beyond listings to a digital solutions marketplace. As part of this process, we have streamlined the existing teams as we modernize our technology platform and invest in a more efficient cloud-based infrastructure focused on machine learning, product innovation and growth. Further, we expect to achieve cost efficiencies upon completion of the Technology Transformation.
Strategic Alternatives to Enhance Shareholder Value. On August 5, 2019, we announced the conclusion of the strategic alternatives review process first announced on January 16, 2019. The strategic review process was public, comprehensive and deliberate, lasting ten months and ultimately involving 29 parties. After extensive negotiations and discussions, no actionable proposals for a sale were available to the Company. As a result, our board of directors unanimously concluded that the best interests of our shareholders are served by continuing to focus on the execution of the Company’s strategic plan and opportunities to drive growth and shareholder returns as an independent public company. The Company remains open to all potential value creating opportunities.
Sales Transformation. In December 2018, we restructured the sales team (the “Sales Transformation”), with the primary goal of better serving our customers. We reorganized the sales force into teams designed to provide the full range of enhanced services to current customers and a more tailored structure to win new customers. These changes reflect the expansion of our business beyond car listings to include value-added digital solutions such as innovations from Dealer Inspire and DealerRater. The Sales Transformation also reflects a realignment of territories following the conversion of the majority of the affiliate agreements.
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. We also review other key metrics including: unique visitors, average revenue per dealer and dealer customer and consumer satisfaction statistics.
Information regarding Traffic and Average Monthly Unique Visitors is as follows:
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
% Change |
|
|
2019 |
|
|
2018 |
|
|
% Change |
|
||||||
|
Traffic (Visits) |
|
|
130,626,000 |
|
|
|
112,954,000 |
|
|
|
16 |
% |
|
|
263,099,000 |
|
|
|
226,371,000 |
|
|
|
16 |
% |
|
Average Monthly Unique Visitors |
|
|
21,559,000 |
|
|
|
19,007,000 |
|
|
|
13 |
% |
|
|
21,984,000 |
|
|
|
19,179,000 |
|
|
|
15 |
% |
Information regarding our Dealer Customers and Direct Monthly Average Revenue Per Dealer is as follows:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019 |
|
|
June 30, 2018 |
|
|
% Change |
|
|
March 31, 2019 |
|
|
% Change |
|
|||||
|
Dealer Customers |
|
|
18,891 |
|
|
|
20,720 |
|
|
|
(9 |
)% |
|
|
19,300 |
|
|
|
(2 |
)% |
|
Direct Monthly Average Revenue Per Dealer (1) |
|
$ |
2,163 |
|
|
$ |
2,100 |
|
|
|
3 |
% |
|
$ |
2,225 |
|
|
|
(3 |
)% |
|
(1) |
Beginning in the first quarter of 2019, this key operating metric includes revenue from dealer websites and related digital solutions. |
Traffic (Visits). Traffic is critical to our business. Traffic to the Cars.com 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.com desktop and mobile properties (responsive sites and mobile apps), using Adobe Analytics. Visits refers to the number of times visitors accessed Cars.com properties during the period, no matter how many visitors make up those visits. 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 dealers and national advertisers.
The growth in Traffic was driven by our product innovations and investments in search engine optimization and paid channels. For the three and six months ended June 30, 2019, mobile traffic accounted for 71% of total Traffic. For the three and six months ended June 30, 2018, mobile traffic accounted for 67% and 66% of total Traffic, respectively.
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.com property on an individual device/browser combination, or installs one of our mobile apps on an individual device. If an individual 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 towards the number of UVs. We measure UVs using Adobe Analytics.
The growth in UVs was driven by increases in both organic and paid traffic.
Dealer Customers. Dealer Customers represent dealerships using our products as of the end of each reporting period. Each 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. Beginning June 30, 2018, this key operating metric includes Dealer Inspire customers.
Total Dealer Customers declined 2% from March 31, 2019. Dealer Customers decreased, primarily due to a decline in April and a continued decline in affiliate customers. Driven by improved sales and cancellation rates, Direct marketplace dealer customers experienced modest growth in May and June.
Total Dealer Customers declined 9% from June 30, 2018. Dealer Customers decreased, primarily due to higher cancellations of marketplace customers, partially offset by growth of Dealer Inspire only customers. Driven by improved sales and cancellation rates, Direct marketplace dealer customers experienced modest growth in May and June.
Average Revenue Per Dealer (“ARPD”). We believe that our ability to grow ARPD is an indicator of the value proposition of our products. We define ARPD as Direct retail revenue during the period divided by the average number of direct Dealer Customers during the same period. Beginning the first quarter of 2019, this key operating metric includes revenue from dealer websites and related digital solutions. ARPD prior to the first quarter of 2019 has not been recast to include Dealer Inspire as it would be impracticable to do so.
ARPD decreased 3% from March 31, 2019, primarily due to cancellations of certain product upsells and customer mix.
ARPD increased 3% from June 30, 2018, primarily driven by the addition of Dealer Inspire revenue. ARPD excluding revenue from dealer websites and related digital solutions from Dealer Inspire was $2,052, down 2% from the prior year.
Factors Affecting Our Performance. Our business is impacted by the larger automotive environment, including consumer demand and other macroeconomic factors, and changes related to automotive digital advertising solutions. We have recently observed softness in new car sales in the United States and reduced dealer profitability, which has impacted OEMs’ and dealerships’ willingness to increase spend with automotive marketplaces like Cars.com. Our success will depend in part on our ability to transform our business
19
toward a multi-faceted suite of digital solutions that complement our media offerings, and our continued integration of Dealer Inspire will be an important driver of our success. We are adapting our go-to-market sales and technology infrastructure, as described in the Sales and Technology Transformations discussions above, to support the execution of our strategy. To continue driving more value to our customers, we are increasing investments in product and marketing. The foundation of our continued success is the value we deliver to customers, and we believe that our large and growing audience of in-market, undecided car shoppers and innovative solutions deliver significant value to our customers.
Results of Operations
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
|
|
|
Three Months Ended June 30, |
|
|
Increase |
|
|
|
|
|
||||||
|
(In thousands, except percentages) |
|
2019 |
|
|
2018 |
|
|
(Decrease) |
|
|
% Change |
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
111,190 |
|
|
$ |
115,533 |
|
|
$ |
(4,343 |
) |
|
|
(4 |
)% |
|
National advertising |
|
|
19,296 |
|
|
|
27,230 |
|
|
|
(7,934 |
) |
|
|
(29 |
)% |
|
Other |
|
|
3,624 |
|
|
|
4,095 |
|
|
|
(471 |
) |
|
|
(12 |
)% |
|
Retail |
|
|
134,110 |
|
|
|
146,858 |
|
|
|
(12,748 |
) |
|
|
(9 |
)% |
|
Wholesale |
|
|
14,097 |
|
|
|
21,654 |
|
|
|
(7,557 |
) |
|
|
(35 |
)% |
|
Total revenue |
|
|
148,207 |
|
|
|
168,512 |
|
|
|
(20,305 |
) |
|
|
(12 |
)% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue and operations |
|
|
24,319 |
|
|
|
22,500 |
|
|
|
1,819 |
|
|
|
8 |
% |
|
Product and technology |
|
|
15,339 |
|
|
|
17,691 |
|
|
|
(2,352 |
) |
|
|
(13 |
)% |
|
Marketing and sales |
|
|
53,740 |
|
|
|
58,936 |
|
|
|
(5,196 |
) |
|
|
(9 |
)% |
|
General and administrative |
|
|
21,963 |
|
|
|
14,303 |
|
|
|
7,660 |
|
|
|
54 |
% |
|
Affiliate revenue share |
|
|
2,176 |
|
|
|
3,813 |
|
|
|
(1,637 |
) |
|
|
(43 |
)% |
|
Depreciation and amortization |
|
|
29,666 |
|
|
|
26,712 |
|
|
|
2,954 |
|
|
|
11 |
% |
|
Total operating expenses |
|
|
147,203 |
|
|
|
143,955 |
|
|
|
3,248 |
|
|
|
2 |
% |
|
Operating income |
|
|
1,004 |
|
|
|
24,557 |
|
|
|
(23,553 |
) |
|
|
(96 |
)% |
|
Nonoperating (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(7,711 |
) |
|
|
(7,343 |
) |
|
|
(368 |
) |
|
|
5 |
% |
|
Other income, net |
|
|
9 |
|
|
|
27 |
|
|
|
(18 |
) |
|
|
(67 |
)% |
|
Total nonoperating expense, net |
|
|
(7,702 |
) |
|
|
(7,316 |
) |
|
|
(386 |
) |
|
|
5 |
% |
|
(Loss) income before income taxes |
|
|
(6,698 |
) |
|
|
17,241 |
|
|
|
(23,939 |
) |
|
|
(139 |
)% |
|
Income tax (benefit) expense |
|
|
(672 |
) |
|
|
4,515 |
|
|
|
(5,187 |
) |
|
|
(115 |
)% |
|
Net (loss) income |
|
$ |
(6,026 |
) |
|
$ |
12,726 |
|
|
$ |
(18,752 |
) |
|
|
(147 |
)% |
Retail Revenue—Direct. Direct revenue consists of marketplace and digital solutions sold to Dealer customers. Direct revenue is our largest revenue stream, representing 75.0% and 68.6% of total revenue for the three months ended June 30, 2019 and 2018, respectively. Direct revenue decreased by $4.3 million, or 4%, compared to the prior year. Direct revenue decreased, primarily due to a 4% decline in direct dealer customers from June 30, 2018 and 2% from March 31, 2019.
During 2018, we amended our affiliate agreements with The McClatchy Company (“McClatchy”), tronc, Inc. (“tronc”) and the Washington Post to convert all of these affiliate markets prior to the expiration dates of the original affiliate agreements. During the three months ended June 30, 2019, the affiliate market conversions contributed an incremental $6.4 million to Direct revenue measured at the month of each of the conversions, while reducing Wholesale revenue by $5.4 million (of which $1.4 million relates to the Unfavorable contracts liability amortization). For information related to the affiliate market conversions, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Also included in retail revenue is revenue from Dealer Inspire including dealer websites and related digital solutions and digital marketing services, which together grew 31% year over year.
Retail Revenue—National Advertising. National advertising revenue consists of display advertising and other solutions sold to OEMs, advertising agencies and automotive adjacencies. National advertising revenue represents 13.0% and 16.2% of total revenue for the three months ended June 30, 2019 and 2018, respectively. National advertising revenue declined 29%, as OEMs reduced their
20
full year 2019 upfront commitments, reduced their advertising budgets and shifted their spending to programmatic. Incremental sales to OEMs have been lower in volume and rate.
Wholesale Revenue. Wholesale revenue represents the fees we charge for marketplace and digital solutions sold to dealers by affiliates. The fees represent approximately 60% of the retail value for the same online subscription products sold by our direct sales team. Wholesale revenue represents 9.5% and 12.9% of total revenue for the three months ended June 30, 2019 and 2018, respectively. Wholesale revenue decreased $7.6 million primarily due to affiliate market conversions from Wholesale revenue ($5.4 million, which includes $1.4 million of Unfavorable contracts liability amortization) to direct revenue ($6.4 million). Excluding the affiliate market conversions, Wholesale revenue was impacted by a 9% decline in affiliate dealer customers. For information related to the affiliate market conversions, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Cost of revenue and operations. Cost of revenue and operations primarily consist of expenses related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment, customer service and compensation costs. Cost of revenue and operations represents 16.4% and 13.4% of total revenue for the three months ended June 30, 2019 and 2018, respectively. Cost of revenue and operations increased, primarily due to product mix, partially offset by certain lower third party costs.
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 and data strategy teams. The technology team develops and supports the Cars.com products and websites. Product and technology expenses include compensation costs, as well as license fees for vehicle specifications, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology expenses represent 10.3% and 10.5% of total revenue for the three months ended June 30, 2019 and 2018, respectively. Product and technology expenses decreased, primarily due to cost efficiencies, principally from lower compensation costs as a result of the Technology Transformation.
Marketing and sales. Marketing and sales expenses primarily consist of traffic and lead acquisition costs (including search engine marketing 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. Marketing and sales expenses represent 36.3% and 35.0% of total revenue for the three months ended June 30, 2019 and 2018, respectively. Marketing and sales decreased, primarily due to lower compensation costs as a result of the Sales Transformation, partially offset by strategic marketing investments aimed at consumer acquisition, consumer engagement and brand awareness amongst auto shopping audiences.
General and administrative. General and administrative expenses primarily consist of compensation costs for the executive, finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative expenses include office space rent, legal and accounting services, other professional services, transaction-related costs and costs related to the write-off and loss on assets. General and administrative expenses represent 14.8% and 8.5% of total revenue for the three months ended June 30, 2019 and 2018, respectively. General and administrative expenses increased $7.7 million and 54% versus the prior year. During the three months ended June 30, 2019, we recognized $1.1 million related to severance, transformation and other exit costs; $5.2 million in costs associated with stockholder activist campaign and $2.6 million in transaction-related costs. During the three months ended June 30, 2018, we recognized $0.6 million related to severance, transformation and other exit costs; $1.1 million in costs associated with stockholder activist campaign; and $1.0 million in transaction-related costs. Excluding these costs, general and administrative expenses increased $1.5 million and 13% versus the prior year.
Affiliate revenue share. Affiliate revenue share expense primarily represents payments made to affiliates pursuant to our affiliate agreements. Affiliate revenue share expense decreased $1.6 million, driven by a $1.4 million increase in the benefit from the amortization of the Unfavorable contracts liability related to the converted affiliate markets, which is recorded as a reduction of Affiliate revenue share expense, rather than Wholesale revenue. During the three months ended June 30, 2019 and 2018, we incurred $6.6 million and $6.7 million, respectively, in costs associated with these early conversions. For information related to the Unfavorable contracts liability, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Depreciation and amortization. Depreciation and amortization expense increased 11%, primarily due to the reduction of the useful lives of certain assets related to the Technology Transformation.
Interest expense, net. Interest expense, net increased, primarily due to additional interest expense associated with the interest rate swap. For information related to our interest rate swap, see 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.
21
Income tax (benefit) expense. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income tax, was 10% for the three months ended June 30, 2019 and differed from the U.S. federal statutory rate of 21%, primarily due to certain tax credits, partially offset by an adjustment to the deferred tax liability, nondeductible benefits and excess tax benefits from stock-based compensation.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
|
|
|
|
||||||
|
In thousands (except percentages) |
|
2019 |
|
|
2018 |
|
|
(Decrease) |
|
|
% Change |
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
226,284 |
|
|
$ |
217,011 |
|
|
$ |
9,273 |
|
|
|
4 |
% |
|
National advertising |
|
|
39,591 |
|
|
|
54,048 |
|
|
|
(14,457 |
) |
|
|
(27 |
)% |
|
Other |
|
|
7,573 |
|
|
|
8,142 |
|
|
|
(569 |
) |
|
|
(7 |
)% |
|
Retail |
|
|
273,448 |
|
|
|
279,201 |
|
|
|
(5,753 |
) |
|
|
(2 |
)% |
|
Wholesale |
|
|
28,957 |
|
|
|
49,268 |
|
|
|
(20,311 |
) |
|
|
(41 |
)% |
|
Total revenue |
|
|
302,405 |
|
|
|
328,469 |
|
|
|
(26,064 |
) |
|
|
(8 |
)% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue and operations |
|
|
49,898 |
|
|
|
40,485 |
|
|
|
9,413 |
|
|
|
23 |
% |
|
Product and technology |
|
|
33,202 |
|
|
|
35,599 |
|
|
|
(2,397 |
) |
|
|
(7 |
)% |
|
Marketing and sales |
|
|
114,083 |
|
|
|
124,343 |
|
|
|
(10,260 |
) |
|
|
(8 |
)% |
|
General and administrative |
|
|
45,851 |
|
|
|
38,573 |
|
|
|
7,278 |
|
|
|
19 |
% |
|
Affiliate revenue share |
|
|
4,630 |
|
|
|
7,096 |
|
|
|
(2,466 |
) |
|
|
(35 |
)% |
|
Depreciation and amortization |
|
|
57,791 |
|
|
|
50,650 |
|
|
|
7,141 |
|
|
|
14 |
% |
|
Total operating expenses |
|
|
305,455 |
|
|
|
296,746 |
|
|
|
8,709 |
|
|
|
3 |
% |
|
Operating (loss) income |
|
|
(3,050 |
) |
|
|
31,723 |
|
|
|
(34,773 |
) |
|
|
(110 |
)% |
|
Nonoperating (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(15,277 |
) |
|
|
(13,300 |
) |
|
|
(1,977 |
) |
|
|
15 |
% |
|
Other income, net |
|
|
128 |
|
|
|
11 |
|
|
|
117 |
|
|
*** |
|
|
|
Total nonoperating expense, net |
|
|
(15,149 |
) |
|
|
(13,289 |
) |
|
|
(1,860 |
) |
|
|
14 |
% |
|
(Loss) income before income taxes |
|
|
(18,199 |
) |
|
|
18,434 |
|
|
|
(36,633 |
) |
|
|
(199 |
)% |
|
Income tax (benefit) expense |
|
|
(3,142 |
) |
|
|
4,779 |
|
|
|
(7,921 |
) |
|
|
(166 |
)% |
|
Net (loss) income |
|
$ |
(15,057 |
) |
|
$ |
13,655 |
|
|
$ |
(28,712 |
) |
|
|
(210 |
)% |
*** Not meaningful
Retail Revenue—Direct. Direct revenue is our largest revenue stream, representing 74.8% and 66.1% of total revenue for the six months ended June 30, 2019 and 2018, respectively. Direct revenue increased by $9.3 million, or 4%, compared to the prior year.
During 2018, we amended our affiliate agreements with McClatchy, tronc and the Washington Post to convert all of these affiliate markets prior to the expiration dates of the original affiliate agreements. During the six months ended June 30, 2019, the affiliate market conversions contributed an incremental $19.6 million to Direct revenue measured at the month of each of the conversions, while reducing Wholesale revenue by $16.8 million (of which $4.1 million relates to the Unfavorable contracts liability amortization). For information related to the affiliate market conversions, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Also included in Retail revenue is Dealer Inspire websites and digital marketing services, which grew 27% on a pro forma basis for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018.
Retail Revenue—National Advertising. National advertising revenue represents 13.1% and 16.5% of total revenue for the six months ended June 30, 2019 and 2018, respectively. National advertising revenue declined 27%, as OEMs reduced their full year 2019 upfront commitments, reduced their advertising budgets and shifted their spending to programmatic. Incremental sales to OEMs have been lower in volume and rate.
Wholesale Revenue. Wholesale revenue represents 9.6% and 15.0% of total revenue for the six months ended June 30, 2019 and 2018, respectively. Wholesale revenue decreased 41% primarily due to affiliate market conversions from Wholesale revenue ($16.8 million, which includes $4.1 million of Unfavorable contracts liability amortization) to Direct revenue ($19.6 million). Excluding the affiliate market conversions, Wholesale revenue was impacted by a 9% decline in affiliate dealer customers. For information related to
22
the affiliate market conversions, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Cost of revenue and operations. Cost of revenue and operations represents 16.5% and 12.3% of total revenue for the six months ended June 30, 2019 and 2018, respectively. Cost of revenue and operations increased, primarily due to higher third-party costs and higher compensation costs, principally associated with the full six-month impact of Dealer Inspire and new product offerings.
Product and technology. Product and technology expenses represent 11.0% and 10.8% of total revenue for the six months ended June 30, 2019 and 2018, respectively. Product and technology expenses decreased, primarily due to cost efficiencies, partially offset by the full six-month impact of Dealer Inspire.
Marketing and sales. Marketing and sales expenses represent 37.7% and 37.9% of total revenue for the six months ended June 30, 2019 and 2018, respectively. Marketing and sales decreased, primarily due to lower compensation costs as a result of the Sales Transformation and cost efficiencies associated with trade events. These decreases were partially offset by strategic marketing investments aimed at consumer acquisition, consumer engagement and brand awareness amongst auto shopping audiences and the full six-month impact of Dealer Inspire.
General and administrative. General and administrative expenses represent 15.2% and 11.7% of total revenue for the six months ended June 30, 2019 and 2018, respectively. General and administrative expenses increased $7.3 million and 19% versus the prior year. During the six months ended June 30, 2019, we recognized $7.5 million related to severance, transformation and other exit costs; $7.9 million in costs associated with stockholder activist campaign and $4.6 million in transaction-related costs. During the six months ended June 30, 2018, we recognized $1.1 million related to severance, transformation and other exit costs; $4.9 million in costs associated with stockholder activist campaign; and $11.1 million in transaction-related costs. Excluding these costs, general and administrative expenses increased $4.4 million and 20% versus the prior year, primarily due to increased stock-based compensation.
Affiliate revenue share. Affiliate revenue share expense decreased $2.5 million, driven by a $4.1 million increase in the benefit from the amortization of the Unfavorable contracts liability related to the converted affiliate markets, which is recorded as a reduction of Affiliate revenue share expense, rather than Wholesale revenue. During the six months ended June 30, 2019 and 2018, we incurred $13.4 million and $11.4 million, respectively, in costs associated with these early conversions. For information related to the Unfavorable contracts liability, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Depreciation and amortization. Depreciation and amortization expense increased 14%, primarily due to the reduction of the useful lives of certain assets related to the Technology Transformation and the full six-month impact of the Acquisition.
Interest expense, net. Interest expense, net increased, primarily due to the full six month impact of interest related to the borrowing utilized to fund the Acquisition, as well as additional interest expense associated with the interest rate swap. For information related to our Term and Revolving Loans and interest rate swap, see Note 4 (Debt) and Note 5 (Interest Rate Swap), respectively, to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Income tax (benefit) expense. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income tax, was 17% for the six months ended June 30, 2019 and differed from the U.S. federal statutory rate of 21%, primarily due to certain tax credits, partially offset by an adjustment to the deferred tax liability, nondeductible benefits and excess tax benefits from stock-based compensation.
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 operations have generated positive operating cash flows in 2019 and 2018 which, along with our Term and Revolving Loans described below, provides adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. In addition, we may raise additional funds through other public or private debt or equity financings. The tax matters agreement that we entered into with TEGNA prior to the Separation included restrictions that may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our stockholders, or that might increase the value of our business. See Part II, Item 1A., “Risk Factors” of this Quarterly Report on Form 10-Q. As of June 30, 2019, cash and cash equivalents were $9.5 million.
Term Loan and Revolving Loan. As of June 30, 2019, the outstanding principal amount under the Term Loan was $405.0 million, with an interest rate of 4.3%, including the impact of the interest rate swap. The outstanding borrowings under the Revolving Loan
23
were $275.0 million, with an interest rate of 3.9%. During the six months ended June 30, 2019, we made $11.3 million in mandatory Term Loan payments and $5.0 million in voluntary Revolving Loan payments, net of borrowings. As of June 30, 2019, $175.0 million was available to borrow under the Revolving Loan. Our borrowings are limited by our net leverage ratio, which is calculated in accordance with our credit agreement, and was 3.25 to 1.0 as of June 30, 2019.
Interest Rate Swap. The interest rate on borrowings under our Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing, we entered into an interest rate swap agreement (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, as defined in our Credit Agreement, on a notional amount of $300 million. As of June 30, 2019, the fair value of the Swap was an unrealized loss of $11.5 million. The Swap is designated as a cash flow hedge of interest rate risk and recorded at fair value in Other liabilities on the Consolidated Balance Sheets. Any gains or losses on the Swap will be reported as a component of Accumulated other comprehensive (loss) income until reclassed to Interest expense, net in the same period the hedge transaction impacts earnings.
Share Repurchase Program. In March 2018, our Board of Directors authorized a share repurchase program to acquire up to $200 million of our common stock over a two year period. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the share repurchase program will be based on market conditions and other factors including price. The repurchase program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. During the six months ended June 30, 2019 and 2018, we repurchased and subsequently retired 1.7 million shares for $40.0 million and 2.0 million shares for $50.0 million, respectively.
Cash Flows. Details of our cash flows are as follows:
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|||||
|
(In thousands) |
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
50,755 |
|
|
$ |
70,624 |
|
|
$ |
(19,869 |
) |
|
Investing activities |
|
|
(9,953 |
) |
|
|
(163,385 |
) |
|
|
153,432 |
|
|
Financing activities |
|
|
(56,726 |
) |
|
|
90,592 |
|
|
|
(147,318 |
) |
|
Net change in cash and cash equivalents |
|
$ |
(15,924 |
) |
|
$ |
(2,169 |
) |
|
$ |
(13,755 |
) |
Operating Activities. The decrease in cash provided by operating activities was primarily related to a $28.7 million reduction in net income, partially offset by changes in operating assets and liabilities. The net loss for the three and six months ended June 30, 2019 is primarily attributed to a decrease in national advertising revenue. In addition, the net loss in each period was impacted by the following costs:
|
|
|
Six Months Ended June 30, |
|
|||||
|
(In thousands) |
|
2019 |
|
|
2018 |
|
||
|
Severance, transformation and other exit costs |
|
$ |
7,511 |
|
|
$ |
1,097 |
|
|
Costs associated with stockholder activist campaign |
|
|
7,920 |
|
|
|
4,897 |
|
|
Transaction-related costs (1) |
|
|
4,623 |
|
|
|
11,133 |
|
|
Total |
|
$ |
20,054 |
|
|
$ |
17,127 |
|
|
(1) |
Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (1) transaction-related bonuses and (2) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. |
Investing Activities. The decrease in cash used in investing activities is primarily due to the Acquisition in February 2018, partially offset by an increase in purchases of property and equipment.
Financing Activities. During the six months ended June 30, 2019, cash used in financing activities is primarily related to $40.0 million in share repurchases and $16.3 million of loan repayments, net of borrowings, of which $5.0 million was voluntarily paid. During the six months ended June 30, 2018, cash provided by financing activities is primarily due to net loan borrowings of $143.8 million, principally related to the Acquisition in February 2018, partially offset by $50 million in share repurchases. For information related to our Term and Revolving Loans, 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.
24
Commitments and Contingencies. For information related to commitments and contingencies, see Note 7 (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.
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 the Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on February 28, 2019 and see Note 1 (Description of Business, Company History and Summary of Significant Accounting Polices) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. During the six months ended June 30, 2019, there have been no changes to our critical accounting policies.
Recent Accounting Pronouncements. For information related to recent accounting pronouncements, see Note 2 (New Accounting Pronouncements) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
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 the Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019. Our exposures to market risk have not changed materially since December 31, 2018.
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 Securities and Exchange Commission’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 Exchange Act Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
25
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
For information relating to legal proceedings, see Note 7 (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, 2018 as filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019, which could materially affect our business, financial condition, results of operations and future results. Other than as set forth below, there have been no material changes from the risk factors described in our Annual Report on Form 10-K.
We may not effectively integrate the new markets obtained from the conversion of our affiliate agreements. If we are unable to integrate new markets obtained from the conversion of our affiliate agreements successfully or if we realize a deterioration of the business prospects of or underperformance in these markets, we may not realize our projected return on investment and our business and results of operations may be adversely affected. Integrating these markets may be more difficult than we anticipate and the expansion of our business and operations, in terms of geography or magnitude, could strain our administrative and/or operational resources.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sales of Unregistered Securities by Issuer
None.
Purchases of Equity Securities by Issuer
Our stock repurchase activity for the three months ended June 30, 2019 is as follows:
|
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share (1) |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) |
|
|
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3) (in thousands) |
|
||||
|
April 1 through April 30, 2019 |
|
|
868,596 |
|
|
$ |
23.03 |
|
|
|
868,596 |
|
|
$ |
62,810 |
|
|
May 1 through May 31, 2019 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62,810 |
|
|
June 1 through June 30, 2019 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62,810 |
|
|
Total |
|
|
868,596 |
|
|
|
|
|
|
|
868,596 |
|
|
|
|
|
|
(1) |
The total number of shares purchased and subsequently retired and the average price paid per share reflects shares purchased pursuant to the share repurchase program. Our stock repurchases may occur through open market purchases or pursuant to a Rule 10b5-1 trading plan. |
|
(2) |
In March 2018, the Company’s Board of Directors authorized a share repurchase program to acquire up to $200 million of the Company’s common stock. The Company may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the share repurchase program will be based on market conditions and other factors including price. The repurchase program has a two-year duration, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The Company intends to fund the share repurchase program principally with cash from operations. |
|
(3) |
The amounts presented represent the remaining Board of Directors’ authorized value to be spent after each month's repurchases. |
26
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
As previously announced, it is currently anticipated that the Company’s 2019 Annual Meeting of Stockholders, or the 2019 Annual Meeting, will be held at 9:00 a.m. Central time on October 30, 2019. The location of the 2019 Annual Meeting will be specified in the Company’s proxy statement for the 2019 Annual Meeting. Because the 2019 Annual Meeting will be held more than 30 days after the anniversary of the Company’s 2018 Annual Meeting of Shareholders, the Company is disclosing a new deadline for submission of shareholder proposals for inclusion into the Company’s proxy materials for the 2019 Annual Meeting under Rule 14a-8 under the Exchange Act, or Rule 14a-8. Specifically, to be considered for inclusion in the Company’s proxy statement for the 2019 Annual Meeting, shareholder proposals submitted under Rule 14a-8 must be in writing and received by the Office of the Corporate Secretary at the Company’s principal executive offices at 300 S. Riverside Plaza, Suite 1000, Chicago, Illinois 60606, no later than 5:00 p.m. Central time, August 15, 2019. Such proposals must also comply with the remaining requirements of Rule 14a-8.
Item 6. Exhibits
Exhibit Index
|
Exhibit Number |
|
Description |
|
31.1* |
|
|
|
31.2* |
|
|
|
32.1* |
|
|
|
32.2* |
|
|
|
101.INS |
|
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 |
|
XBRL Taxonomy Extension Schema Document. |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
|
* |
Filed herewith. |
27
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: August 5, 2019 |
|
By: |
|
/s/ T. Alex Vetter |
|
|
|
|
|
T. Alex Vetter |
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
Date: August 5, 2019 |
|
By: |
|
/s/ Becky A. Sheehan |
|
|
|
|
|
Becky A. Sheehan |
|
|
|
|
|
Chief Financial Officer |
28