UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20182019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37869

 

Cars.com Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

81-3693660

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

 

300 S. Riverside Plaza, Suite 1000

Chicago, Illinois 60606

(Address of principal executive offices)

(312) 601-5000

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.     Yes      No  

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).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

☒  

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

CARS

New York Stock Exchange

As of OctoberJuly 31, 2018,2019, the registrant had 68,568,10266,671,855 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Financial Statements (unaudited):

2

 

Consolidated and Combined Balance Sheets

2

 

Consolidated and Combined Statements of (Loss) Income

3

 

Consolidated and Combined Statements of Stockholders’ Equity

4

 

Consolidated and Combined Statements of Cash FlowsComprehensive (Loss) Income

5

 

Consolidated Statements of Cash Flows

6

Notes to Unaudited Consolidated and Combined Financial Statements

67

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1917

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2825

Item 4.

Controls and Procedures

2825

PART II.

OTHER INFORMATION

2926

Item 1.

Legal Proceedings

2926

Item 1A.

Risk Factors

2926

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

2926

Item 3.

Defaults Upon Senior Securities

3027

Item 4.

Mine Safety Disclosures

3027

Item 5.

Other Information

3027

Item 6.

Exhibits

3027

Signatures

3128

 

 

 


PART IFINANCIALI—FINANCIAL INFORMATION

Item 1. Financial Statements.

Cars.com Inc.

Consolidated and Combined Balance Sheets

(In thousands, except per share data)

 

 

September 30, 2018

 

 

December 31, 2017

 

 

June 30, 2019

 

 

December 31, 2018

 

 

(unaudited)

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,809

 

 

$

20,563

 

 

$

9,539

 

 

$

25,463

 

Accounts receivable, net

 

 

107,687

 

 

 

100,857

 

 

 

95,197

 

 

 

108,921

 

Prepaid expenses

 

 

11,662

 

 

 

11,408

 

 

 

7,916

 

 

 

9,264

 

Other current assets

 

 

9,558

 

 

 

9,811

 

 

 

192

 

 

 

10,289

 

Total current assets

 

 

146,716

 

 

 

142,639

 

 

 

112,844

 

 

 

153,937

 

Property and equipment, net

 

 

40,850

 

 

 

39,740

 

 

 

40,981

 

 

 

41,482

 

Goodwill

 

 

884,339

 

 

 

788,107

 

 

 

885,049

 

 

 

884,449

 

Intangible assets, net

 

 

1,533,442

 

 

 

1,529,500

 

 

 

1,461,697

 

 

 

1,510,410

 

Investments and other assets

 

 

10,451

 

 

 

11,053

 

 

 

26,821

 

 

 

10,271

 

Total assets

 

$

2,615,798

 

 

$

2,511,039

 

 

$

2,527,392

 

 

$

2,600,549

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,040

 

 

$

6,581

 

 

$

13,466

 

 

$

11,631

 

Accrued compensation

 

 

10,889

 

 

 

14,185

 

 

 

10,590

 

 

 

16,821

 

Unfavorable contracts liability

 

 

25,185

 

 

 

25,200

 

 

 

6,285

 

 

 

18,885

 

Current portion of long-term debt

 

 

24,022

 

 

 

21,158

 

 

 

32,495

 

 

 

26,853

 

Other accrued liabilities

 

 

45,736

 

 

 

23,025

 

 

 

49,682

 

 

 

36,520

 

Total current liabilities

 

 

113,872

 

 

 

90,149

 

 

 

112,518

 

 

 

110,710

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unfavorable contracts liability

 

 

 

 

 

18,885

 

Long-term debt

 

 

678,426

 

 

 

557,194

 

 

 

644,046

 

 

 

665,306

 

Deferred tax liability

 

 

168,360

 

 

 

146,482

 

 

 

159,656

 

 

 

177,916

 

Other noncurrent liabilities

 

 

20,297

 

 

 

19,201

 

 

 

42,024

 

 

 

19,694

 

Total noncurrent liabilities

 

 

867,083

 

 

 

741,762

 

 

 

845,726

 

 

 

862,916

 

Total liabilities

 

 

980,955

 

 

 

831,911

 

 

 

958,244

 

 

 

973,626

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock at par, $0.01 par value; 5,000 shares authorized; no shares

issued and outstanding as of September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common Stock at par, $0.01 par value; 300,000 shares authorized; 68,926

and 71,628 shares issued and outstanding as of September 30, 2018

and December 31, 2017, respectively

 

 

689

 

 

 

716

 

Preferred Stock at par, $0.01 par value; 5,000 shares authorized; no shares

issued and outstanding as of June 30, 2019 and December 31, 2018,

respectively

 

 

 

 

 

 

Common Stock at par, $0.01 par value; 300,000 shares authorized; 66,672

and 68,262 shares issued and outstanding as of June 30, 2019 and

December 31, 2018, respectively

 

 

667

 

 

 

683

 

Additional paid-in capital

 

 

1,505,279

 

 

 

1,501,830

 

 

 

1,513,852

 

 

 

1,508,001

 

Retained earnings

 

 

128,875

 

 

 

176,582

 

 

 

63,200

 

 

 

118,239

 

Accumulated other comprehensive loss

 

 

(8,571

)

 

 

 

Total stockholders' equity

 

 

1,634,843

 

 

 

1,679,128

 

 

 

1,569,148

 

 

 

1,626,923

 

Total liabilities and stockholders' equity

 

$

2,615,798

 

 

$

2,511,039

 

 

$

2,527,392

 

 

$

2,600,549

 

 

The accompanying notes are an integral part of the Consolidated and Combined Financial Statements.


Cars.com Inc.

Consolidated and Combined Statements of (Loss) Income

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

151,627

 

 

$

118,825

 

 

$

430,828

 

 

$

346,780

 

 

$

134,110

 

 

$

146,858

 

 

$

273,448

 

 

$

279,201

 

Wholesale(1)

 

 

17,685

 

 

 

41,074

 

 

 

66,953

 

 

 

122,917

 

 

 

14,097

 

 

 

21,654

 

 

 

28,957

 

 

 

49,268

 

Total revenues

 

 

169,312

 

 

 

159,899

 

 

 

497,781

 

 

 

469,697

 

Total revenue

 

 

148,207

 

 

 

168,512

 

 

 

302,405

 

 

 

328,469

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues and operations

 

 

24,034

 

 

 

18,176

 

 

 

65,924

 

 

 

49,618

 

Cost of revenue and operations

 

 

24,319

 

 

 

22,500

 

 

 

49,898

 

 

 

40,485

 

Product and technology

 

 

15,918

 

 

 

18,422

 

 

 

56,202

 

 

 

56,861

 

 

 

15,339

 

 

 

17,691

 

 

 

33,202

 

 

 

35,599

 

Marketing and sales

 

 

56,083

 

 

 

50,733

 

 

 

181,645

 

 

 

160,246

 

 

 

53,740

 

 

 

58,936

 

 

 

114,083

 

 

 

124,343

 

General and administrative

 

 

14,345

 

 

 

9,180

 

 

 

45,609

 

 

 

34,364

 

 

 

21,963

 

 

 

14,303

 

 

 

45,851

 

 

 

38,573

 

Affiliate revenue share

 

 

4,097

 

 

 

2,121

 

 

 

11,193

 

 

 

6,837

 

 

 

2,176

 

 

 

3,813

 

 

 

4,630

 

 

 

7,096

 

Depreciation and amortization

 

 

26,504

 

 

 

21,893

 

 

 

77,154

 

 

 

66,343

 

 

 

29,666

 

 

 

26,712

 

 

 

57,791

 

 

 

50,650

 

Total operating expenses

 

 

140,981

 

 

 

120,525

 

 

 

437,727

 

 

 

374,269

 

 

 

147,203

 

 

 

143,955

 

 

 

305,455

 

 

 

296,746

 

Operating income

 

 

28,331

 

 

 

39,374

 

 

 

60,054

 

 

 

95,428

 

Operating income (loss)

 

 

1,004

 

 

 

24,557

 

 

 

(3,050

)

 

 

31,723

 

Nonoperating (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(7,005

)

 

 

(5,431

)

 

 

(20,305

)

 

 

(7,160

)

 

 

(7,711

)

 

 

(7,343

)

 

 

(15,277

)

 

 

(13,300

)

Other income, net

 

 

65

 

 

 

64

 

 

 

76

 

 

 

199

 

 

 

9

 

 

 

27

 

 

 

128

 

 

 

11

 

Total nonoperating expense, net

 

 

(6,940

)

 

 

(5,367

)

 

 

(20,229

)

 

 

(6,961

)

 

 

(7,702

)

 

 

(7,316

)

 

 

(15,149

)

 

 

(13,289

)

Income before income taxes

 

 

21,391

 

 

 

34,007

 

 

 

39,825

 

 

 

88,467

 

Income tax expense

 

 

5,594

 

 

 

13,019

 

 

 

10,373

 

 

 

15,782

 

Net income

 

$

15,797

 

 

$

20,988

 

 

$

29,452

 

 

$

72,685

 

(Loss) income before income taxes

 

 

(6,698

)

 

 

17,241

 

 

 

(18,199

)

 

 

18,434

 

Income tax (benefit) expense

 

 

(672

)

 

 

4,515

 

 

 

(3,142

)

 

 

4,779

 

Net (loss) income

 

$

(6,026

)

 

$

12,726

 

 

$

(15,057

)

 

$

13,655

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,652

 

 

 

71,699

 

 

 

70,900

 

 

 

71,693

 

 

 

66,779

 

 

 

71,119

 

 

 

67,181

 

 

 

71,531

 

Diluted

 

 

70,029

 

 

 

71,767

 

 

 

71,153

 

 

 

71,763

 

 

 

66,779

 

 

 

71,330

 

 

 

67,181

 

 

 

71,721

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

 

$

0.29

 

 

$

0.42

 

 

$

1.01

 

 

$

(0.09

)

 

$

0.18

 

 

$

(0.22

)

 

$

0.19

 

Diluted

 

 

0.23

 

 

 

0.29

 

 

 

0.41

 

 

 

1.01

 

 

 

(0.09

)

 

 

0.18

 

 

 

(0.22

)

 

 

0.19

 

The accompanying notes are an integral part of the Consolidated Financial Statements.


Cars.com Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

 

$

 

 

 

68,262

 

 

$

683

 

 

$

1,508,001

 

 

$

118,239

 

 

$

 

 

$

1,626,923

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,031

)

 

 

 

 

 

(9,031

)

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,279

)

 

 

(7,279

)

Repurchases of common stock

 

 

 

 

 

 

 

(881

)

 

 

(9

)

 

 

 

 

 

(19,991

)

 

 

 

 

 

(20,000

)

Shares issued in connection with

   stock-based compensation plans, net

 

 

 

 

 

 

 

62

 

 

 

1

 

 

 

(744

)

 

 

 

 

 

 

 

 

(743

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

2,981

 

 

 

 

 

 

 

 

 

2,981

 

Transactions with TEGNA, net (1)

 

 

 

 

 

 

 

12

 

 

 

 

 

 

(181

)

 

 

 

 

 

 

 

 

(181

)

Balance at March 31, 2019

 

 

 

$

 

 

 

67,455

 

 

$

675

 

 

$

1,510,057

 

 

$

89,217

 

 

$

(7,279

)

 

$

1,592,670

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,026

)

 

 

 

 

 

(6,026

)

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,292

)

 

 

(1,292

)

Repurchases of common stock

 

 

 

 

 

 

 

(869

)

 

 

(9

)

 

 

 

 

 

(19,991

)

 

 

 

 

 

(20,000

)

Shares issued in connection with

   stock-based compensation plans, net

 

 

 

 

 

 

 

84

 

 

 

1

 

 

 

447

 

 

 

 

 

 

 

 

 

448

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

3,348

 

 

 

 

 

 

 

 

 

3,348

 

Transactions with TEGNA, net (1)

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

 

$

 

 

 

66,672

 

 

$

667

 

 

$

1,513,852

 

 

$

63,200

 

 

$

(8,571

)

 

$

1,569,148

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

 

$

 

 

 

71,628

 

 

$

716

 

 

$

1,501,830

 

 

$

176,582

 

 

$

 

 

$

1,679,128

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

929

 

 

 

 

 

 

929

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued in connection with

   stock-based compensation plans, net

 

 

 

 

 

 

 

62

 

 

 

1

 

 

 

(618

)

 

 

 

 

 

 

 

 

(617

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

1,600

 

 

 

 

 

 

 

 

 

1,600

 

Transactions with TEGNA, net (1)

 

 

 

 

 

 

 

175

 

 

 

2

 

 

 

(2,685

)

 

 

 

 

 

 

 

 

(2,683

)

Balance at March 31, 2018

 

 

 

$

 

 

 

71,865

 

 

$

719

 

 

$

1,500,127

 

 

$

177,511

 

 

$

 

 

$

1,678,357

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,726

 

 

 

 

 

 

12,726

 

Repurchases of common stock

 

 

 

 

 

 

 

(2,013

)

 

 

(20

)

 

 

 

 

 

(49,980

)

 

 

 

 

 

(50,000

)

Shares issued in connection with

   stock-based compensation plans, net

 

 

 

 

 

 

 

21

 

 

 

 

 

 

142

 

 

 

 

 

 

 

 

 

142

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

2,876

 

 

 

 

 

 

 

 

 

2,876

 

Transactions with TEGNA, net (1)

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

 

$

 

 

 

69,896

 

 

$

699

 

 

$

1,503,145

 

 

$

140,257

 

 

$

 

 

$

1,644,101

 

(1)

(1)

For informationAs a result of the Separation, certain stock-based awards previously granted by TEGNA to its employees were converted into stock of both TEGNA and Cars.com. The Company is responsible for any employee payroll taxes related to related party transactions, see Note 12 (Related Party Transactions).awards settled in Cars.com common stock for which stock was withheld for payroll tax purposes.

 

The accompanying notes are an integral part of the Consolidated and Combined Financial Statements.



Cars.com Inc.

Consolidated and Combined Statements of Stockholders’ EquityComprehensive (Loss) Income

(In thousands)

(Unaudited)

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained Earnings

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

 

$

 

 

 

71,628

 

 

$

716

 

 

$

1,501,830

 

 

$

176,582

 

 

$

1,679,128

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,452

 

 

 

29,452

 

Transactions with TEGNA, net (1)

 

 

 

 

 

 

 

200

 

 

 

2

 

 

 

(3,568

)

 

 

 

 

 

(3,566

)

Repurchases of common stock

 

 

 

 

 

 

 

(2,986

)

 

 

(30

)

 

 

 

 

 

(77,159

)

 

 

(77,189

)

Shares issued in connection with stock-based

   compensation plans, net

 

 

 

 

 

 

 

84

 

 

 

1

 

 

 

(478

)

 

 

 

 

 

(477

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

7,495

 

 

 

 

 

 

7,495

 

Balance at September 30, 2018

 

 

 

$

 

 

 

68,926

 

 

$

689

 

 

$

1,505,279

 

 

$

128,875

 

 

$

1,634,843

 

(1)

For information related to related party transactions, see Note 12 (Related Party Transactions).

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(6,026

)

 

$

12,726

 

 

$

(15,057

)

 

$

13,655

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Interest rate swap

 

(1,292

)

 

 

 

 

 

(8,571

)

 

 

 

Total other comprehensive loss

 

(1,292

)

 

 

 

 

 

(8,571

)

 

 

 

Comprehensive (loss) income

$

(7,318

)

 

$

12,726

 

 

$

(23,628

)

 

$

13,655

 

 

The accompanying notes are an integral part of the Consolidated and Combined Financial Statements.


Cars.com Inc.

Consolidated and Combined Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Nine Months Ended September 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

29,452

 

 

$

72,685

 

Adjustments to reconcile Net income to Net cash provided by operating

activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(15,057

)

 

$

13,655

 

Adjustments to reconcile Net (loss) income to Net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

9,195

 

 

 

7,941

 

 

 

9,078

 

 

 

5,903

 

Amortization of intangible assets

 

 

67,959

 

 

 

58,402

 

 

 

48,713

 

 

 

44,747

 

Amortization of unfavorable contracts liability

 

 

(18,900

)

 

 

(18,900

)

 

 

(12,600

)

 

 

(12,600

)

Stock-based compensation expense

 

 

7,495

 

 

 

1,493

 

 

 

6,329

 

 

 

4,476

 

Deferred income taxes

 

 

7,137

 

 

 

8,388

 

 

 

(18,260

)

 

 

3,145

 

Provision for doubtful accounts

 

 

3,451

 

 

 

2,561

 

 

 

2,165

 

 

 

2,164

 

Amortization of debt issuance costs

 

 

971

 

 

 

463

 

 

 

632

 

 

 

643

 

Other, net

 

 

762

 

 

 

1,247

 

 

 

495

 

 

 

500

 

Changes in operating assets and liabilities, net of Acquisition:

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,119

 

 

 

2,665

 

 

 

11,559

 

 

 

4,934

 

Prepaid expenses

 

 

66

 

 

 

(238

)

 

 

1,348

 

 

 

(2,044

)

Other current assets

 

 

330

 

 

 

(5,519

)

 

 

10,225

 

 

 

(545

)

Other assets

 

 

602

 

 

 

616

 

 

 

(16,550

)

 

 

614

 

Accounts payable

 

 

(2,397

)

 

 

(209

)

 

 

1,909

 

 

 

(1,541

)

Accrued compensation

 

 

(3,363

)

 

 

(8,451

)

 

 

(6,231

)

 

 

(1,792

)

Other accrued liabilities

 

 

18,306

 

 

 

10,430

 

 

 

10,301

 

 

 

10,088

 

Other noncurrent liabilities

 

 

(1,104

)

 

 

3,652

 

 

 

16,699

 

 

 

(1,723

)

Cash received from lessor for lease incentives

 

 

 

 

 

9,970

 

Net cash provided by operating activities

 

 

121,081

 

 

 

147,196

 

 

 

50,755

 

 

 

70,624

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,354

)

 

 

(6,417

)

Payment for Acquisition, net (1)

 

 

(157,153

)

 

 

 

 

 

 

 

 

(156,968

)

Purchase of property and equipment

 

 

(9,966

)

 

 

(27,631

)

Other, net

 

 

(599

)

 

 

 

Net cash used in investing activities

 

 

(167,119

)

 

 

(27,631

)

 

 

(9,953

)

 

 

(163,385

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

195,000

 

 

 

675,000

 

 

 

10,000

 

 

 

190,000

 

Payments of debt issuance costs and other fees

 

 

 

 

 

(6,208

)

Payments of long-term debt

 

 

(71,875

)

 

 

(50,625

)

 

 

(26,250

)

 

 

(46,250

)

Payments related to stock-based compensation plans, net

 

 

(477

)

 

 

 

Stock-based compensation plans, net

 

 

(295

)

 

 

(475

)

Repurchases of common stock

 

 

(76,681

)

 

 

 

 

 

(40,000

)

 

 

(50,000

)

Cash distribution to TEGNA related to Separation

 

 

 

 

 

(650,000

)

Transactions with TEGNA, net

 

 

(2,683

)

 

 

(69,200

)

 

 

(181

)

 

 

(2,683

)

Net cash provided by (used in) financing activities

 

 

43,284

 

 

 

(101,033

)

Net (decrease) increase in cash and cash equivalents

 

 

(2,754

)

 

 

18,532

 

Net cash (used in) provided by financing activities

 

 

(56,726

)

 

 

90,592

 

Net decrease in cash and cash equivalents

 

 

(15,924

)

 

 

(2,169

)

Cash and cash equivalents at beginning of period

 

 

20,563

 

 

 

8,896

 

 

 

25,463

 

 

 

20,563

 

Cash and cash equivalents at end of period

 

$

17,809

 

 

$

27,428

 

 

$

9,539

 

 

$

18,394

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes, net of refunds

 

$

500

 

 

$

5,726

 

 

$

53

 

 

$

293

 

Cash paid for interest

 

 

19,472

 

 

 

6,826

 

 

 

14,916

 

 

 

12,487

 

 

 

 

 

 

 

 

 

(1)

For information related to the Acquisition, see Note 3 (Business Combination and Goodwill).

The accompanying notes are an integral part of the Consolidated and Combined Financial Statements.

 

 


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements

(Unaudited)

NOTE 1. Description of Business, Company History and Summary of Significant Accounting Policies

Description of Business and Company History. Business. Cars.com (“the Company”) is a leading two-sided digital marketplace and solutions provider for the automotive marketplaceindustry that creates meaningful connections between consumers (individuals researching cars or lookingconnects car shoppers with sellers. Through a portfolio of brands including Cars.com, Dealer Inspire and DealerRater, in addition to purchaseAuto.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 car)rapidly changing market, Cars.com enables dealerships and partners, dealer customers and automotive original equipment manufacturers (“OEMs”). While connecting advertising partners with in-market car shoppersinnovative technical solutions and providing data-driven intelligence to better reach and influence ready-to-buy shoppers, increase inventory turn and gain market share, the share. 

Company empowers consumers with resources and information to assist them in making better informed buying decisions around The 4Ps of Automotive MarketingTM: Product, Price, Place and Person. The Company has evolved into one of the largest digital automotive platforms, connecting tens of thousands of local dealers across the country with millions of consumers. Through trusted expert content, on-the-lot mobile features and intelligence, millions of new and used vehicle listings, a comprehensive set of pricing and research tools, and the largest database of consumer reviews in the industry, the Company believes Cars.com is transforming the car shopping experience.

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”). The Company filed a Registration Statement on Form 10 relating to the Separation with the U.S. Securities and Exchange Commission (the “SEC”), which was declared effective on May 15, 2017. On May 31, 2017, the Company made a $650.0 million cash transfer to TEGNA and TEGNA completed the Separation through a pro rata distribution to its stockholders of all of the outstanding shares of the Company’s common stock. Each holder of TEGNA common stock received one share of the Company’s common stock for every three shares of TEGNA common stock held on May 18, 2017, the record date for the distribution. TEGNA structured the distribution to be tax-free to its U.S. stockholders for U.S. federal income tax purposes. The Company’s common stock began trading “regular way” on the New York Stock Exchange on June 1, 2017.

In February 2018, the Company acquired all of the outstanding stock of Dealer Inspire Inc. (“DI”), 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, (“LDM”a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “Acquisition”). For additional information, see Note 3 (Business CombinationThe post-Acquisition business related to Dealer Inspire, Inc. and Goodwill)Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”.

 

Basis of Presentation. These accompanying unaudited interim Consolidated and Combined 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 and Combined 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, 2017,2018, which are included in the Company's Annual Report on Form 10-K dated March 6, 2018February 28, 2019 (the “December 31, 2017 Consolidated and Combined2018 Financial Statements”).

 

The significant accounting policies used in preparing these Consolidated and Combined Financial Statements were applied on a basis consistent with those reflected in the December 31, 2017 Consolidated and Combined2018 Financial Statements. In the opinion of management, the Consolidated and Combined 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 ninesix months ended SeptemberJune 30, 20182019 are not necessarily indicative of results that may be expected for the year endedending December 31, 2018.2019.

 

Use of Estimates. The preparation of the accompanying unaudited interim Consolidated and Combined Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated and Combined 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 unaudited Consolidated and Combined Financial Statements include the accounts of Cars.com Inc. and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation. The accompanying unaudited Consolidated and Combined Financial Statements for the period prior to the Separation are derived from the historical accounting records of TEGNA and present its financial position, results of operations and cash flows as if the Company were a separate entity for the period prior to the Separation and include allocations of certain TEGNA corporate expenses, such as insurance and other general corporate overhead expenses. All significant intercompany transactions between either (i) the Company and TEGNA or (ii) the Company and TEGNA affiliates have been included within the Consolidated and Combined Financial Statements and are considered to be effectively settled through equity contributions or distributions at the time the transactions were recorded. The total net effect of these intercompany transactions is reflected in “Transactions with TEGNA, net” in the Consolidated and Combined Statements of Cash Flows as financing activities.


 

67


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

 

Reclassifications. CertainHistorically, certain costs related to severance, transformation and other exit costs; costs associated with the stockholder activist campaign; transaction-related costs and the write-off of long-lived assets were reflected in various operating expense line items in the Consolidated Statements of (Loss) Income. Beginning on January 1, 2019, these costs are reflected within General and administrative expenses. Therefore, certain prior year balances have been reclassified to conform to the current year presentation. Cost of revenuespresentation and operations have been reclassified fromare summarized in the product support, technology and operations line item into a separate line item. Depreciation expense amounts have also been reclassified from the General and administrative line item into the amortization of intangible assets line item, which has been renamed Depreciation and amortization.table below (in thousands). There areis no changeschange to total Operating expenses, Operating income or Net income.(loss) as a result of these reclassifications.

 

 

Three Months Ended June 30, 2018

 

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

Cost of revenue and operations

 

$

22,804

 

 

$

(304

)

 

$

22,500

 

Product and technology

 

 

17,951

 

 

 

(260

)

 

 

17,691

 

Marketing and sales

 

 

59,527

 

 

 

(591

)

 

 

58,936

 

General and administrative

 

 

13,148

 

 

 

1,155

 

 

 

14,303

 

Affiliate revenue share

 

 

3,813

 

 

 

 

 

 

3,813

 

Depreciation and amortization

 

 

26,712

 

 

 

 

 

 

26,712

 

Total operating expenses

 

$

143,955

 

 

$

 

 

$

143,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

Cost of revenue and operations

 

$

41,890

 

 

$

(1,405

)

 

$

40,485

 

Product and technology

 

 

40,284

 

 

 

(4,685

)

 

 

35,599

 

Marketing and sales

 

 

125,562

 

 

 

(1,219

)

 

 

124,343

 

General and administrative

 

 

31,264

 

 

 

7,309

 

 

 

38,573

 

Affiliate revenue share

 

 

7,096

 

 

 

 

 

 

7,096

 

Depreciation and amortization

 

 

50,650

 

 

 

 

 

 

50,650

 

Total operating expenses

 

$

296,746

 

 

$

 

 

$

296,746

 

NOTE 2. RecentNew Accounting Pronouncements

Revenue Recognition. The FinancialRecently Issued Accounting Standards Board (the “FASB”) amended the FASB Accounting Standards Codification (“ASC”) and created Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue recognition occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. Pronouncements

Cloud Computing Arrangements.In addition, ASC 606 requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company’s primary source of revenue is the sale of online subscription advertising products and services, which will continue to be recognized ratably over the contract term as the service is provided to the customer. Effective January 1,August 2018, the Company adopted ASC 606 using the modified retrospective method. The adoption did not have a material impact on its Consolidated and Combined Financial Statements. For further information, see Note 10 (Revenues).

Financial Instruments – Equity Investments. In January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments—Overall2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, amending several elements surroundingaligning the recognition and measurement of financial instruments and requiring equity investments (except those accountedrequirements for undercapitalizing implementation costs incurred in a hosting arrangement that is a service contract with the equity method of accounting or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income. Effectiverequirements for capitalizing implementation costs for internal-use software. The new guidance is effective for the Company on January 1, 2018, the2020 and early adoption is permitted. The Company adoptedis currently evaluating this ASU on a prospective basis. The adoption did not have a materialnew guidance and its impact on its Consolidated and Combined Financial Statements and related disclosures.

Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU No. 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 does not expect it to have a materialits impact on its Consolidated and Combined Financial Statements and related disclosures.

Stock-Based Compensation. In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation, clarifying when changes to the terms or conditions of a stock-based payment award must be accounted for as modifications and allowing for certain changes to awards without accounting for them as modifications. Effective January 1, 2018, the Company adopted the ASU on a prospective basis. The adoption did not have a material impact on its Consolidated and Combined Financial Statements and related disclosures.

Definition of a Business. In January 2017, the FASB issued ASU 2017-01, Business Combinations, clarifying the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Effective January 1, 2018, the Company adopted this ASU on a prospective basis. The adoption did not have a material impact on its Consolidated and Combined Financial Statements and related disclosures.

 

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) requiring lessees to recognize assets and liabilities on the Consolidated and Combined Balance Sheets for leases with lease terms of more than 12 months and to disclose additional quantitative and qualitative information about leasing arrangements. The new guidance is effective for the Company on January 1, 2019. The Company plans to utilize the package of practical expedients and to initially apply Topic 842 as of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings. Although the Company is currently evaluating the provisions of the ASU to determine its full impact on the Company’s Consolidated and Combined Financial Statements, the primary impact will be to record assets and liabilities for current operating leases, which are principally related to real estate.

Cloud Computing Arrangements. In August 2018, the FASB issued 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

7


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

Company is currently evaluating this new guidance and does not expect it to have a material impact on its Consolidated and Combined Financial Statements and related disclosures.

NOTE 3. Business Combination and Goodwill

On February 21, 2018, the Company acquired all of the outstanding stock of DI, an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of LDM, a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “Acquisition”). The Acquisition consists of proprietary solutions that are complementary extensions of the Company’s online marketplace platform and current suite of dealer solutions.

The Company expensed as incurred total acquisition costs of $4.9 million, of which $4.3 million was recorded during the nine months ended September 30, 2018. These costs were recorded in General and administrative in the Consolidated and Combined Statements of Income. In connection with the Acquisition, DI’s unvested equity awards were cash settled for a total of $5.7 million. The fair value of these awards was based on the price paid per common share to the owners of the acquired businesses and recognized immediately after the Acquisition as compensation expense in the Company’s Consolidated and Combined Statements of Income.

Purchase Price Allocation. The fair values assigned to the tangible and intangible assets acquired and liabilities assumed were determined based on management’s estimates and assumptions, as well as other information compiled by management, including third party valuations that utilize customary valuation procedures and techniques, such as the income approach. These preliminary fair values are subject to change within the one-year measurement period. The Acquisition purchase price allocation is as follows (in thousands):

 

 

 

 

 

 

 

Acquisition-date

Fair Value

 

Cash consideration (1)

 

$

164,333

 

Contingent consideration (2)

 

 

2,200

 

Cash settlement of DI's unvested equity awards (3)

 

 

(5,700

)

Total consideration

 

$

160,833

 

 

 

 

 

 

Cash

 

$

1,480

 

Accounts receivable

 

 

11,400

 

Property and equipment

 

 

1,215

 

Other assets

 

 

320

 

Identified intangible assets (4)

 

 

71,900

 

    Total assets acquired

 

 

86,315

 

Accounts payable

 

 

(2,514

)

Deferred tax liability

 

 

(14,741

)

Other liabilities

 

 

(4,459

)

    Total liabilities assumed

 

 

(21,714

)

Net identifiable assets

 

 

64,601

 

Goodwill

 

 

96,232

 

Total consideration

 

$

160,833

 

(1)

A reconciliation of cash consideration to Payment for Acquisition, net in the Consolidated and Combined Statements of Cash Flows is as follows (in thousands):

Cash consideration

 

$

164,333

 

Less: Cash settlement of DI's unvested equity awards (3)

 

 

(5,700

)

Less: Cash acquired

 

 

(1,480

)

Payment for Acquisition, net

 

$

157,153

 

(2)

As part of the Acquisition, the Company may be required to pay up to an additional $15 million in cash consideration to the former owners of DI and LDM. The actual amount to be paid will be based on DI’s and LDM’s future performance

8


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

 

Recently Adopted Accounting Pronouncements

related to certain revenue targets to be attained over a three-year performance period. The fair value was estimated utilizing the income approach valuation technique. The contingent consideration liability is recorded in Other noncurrent liabilities in the Consolidated and Combined Balance Sheets.

(3)

In connection with the Acquisition, DI’s unvested equity awards were cash settled. The fair value of these awards was based on the price paid per common share to the owners of the acquired businesses and recognized immediately after the Acquisition as compensation expense in the Company’s Consolidated and Combined Income Statements, as follows: $3.9 million in Product and technology, $1.0 million in Cost of revenues and operations, $0.5 million in Marketing and sales and $0.3 million in General and administrative.

(4)

Information regarding the identifiable intangible assets acquired is as follows:

 

 

Acquisition-Date

Fair Value

(in thousands)

 

 

Weighted-Average

Amortization Period

(in years)

Acquired software

 

$

39,500

 

 

4

Customer relationships

 

 

18,300

 

 

4

Trade names

 

 

14,100

 

 

10

Total

 

$

71,900

 

 

 

 

Leases.In additionFebruary 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 $18.2 million and $35.0 million in operating lease liabilities on its Consolidated Balance Sheets. The difference between the operating lease assets and the operating lease liabilities is primarily due to a lease incentive received in 2017 related to the total consideration300 South Riverside Lease in Chicago, Illinois. There was no material impact to its Consolidated Statements of $160.8 million, the Company granted stock-based compensation awards, worth up to $25.5 million, to certain employees. These awards require continued employee service(Loss) Income and are based on DI’s and LDM’s future performance related to certain revenue targets to be attained over a three-year performance period.Consolidated Statements of Cash Flows. For further information, seesee Note 9 (Stock-Based Compensation)11 (Leases).

 

Goodwill. NOTE 3. Revenue

Revenue Summary. In connectionthe table below (in thousands), revenue is disaggregated by sales channel and major products and services. The Company only has one reportable segment; therefore, further disaggregation is not applicable at this time.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Sales channel

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Direct

 

$

111,190

 

 

$

115,533

 

 

$

226,284

 

 

$

217,011

 

National advertising

 

 

19,296

 

 

 

27,230

 

 

 

39,591

 

 

 

54,048

 

Other

 

 

3,624

 

 

 

4,095

 

 

 

7,573

 

 

 

8,142

 

   Retail

 

 

134,110

 

 

 

146,858

 

 

 

273,448

 

 

 

279,201

 

   Wholesale

 

 

14,097

 

 

 

21,654

 

 

 

28,957

 

 

 

49,268

 

Total revenue

 

$

148,207

 

 

$

168,512

 

 

$

302,405

 

 

$

328,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Major products and services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription advertising and digital solutions

 

$

116,447

 

 

$

128,476

 

 

$

237,761

 

 

$

252,253

 

Display advertising

 

 

22,418

 

 

 

29,863

 

 

 

44,707

 

 

 

55,886

 

Pay per lead

 

 

6,613

 

 

 

7,479

 

 

 

14,547

 

 

 

15,035

 

Other

 

 

2,729

 

 

 

2,694

 

 

 

5,390

 

 

 

5,295

 

Total revenue

 

$

148,207

 

 

$

168,512

 

 

$

302,405

 

 

$

328,469

 

NOTE 4. Debt

As of June 30, 2019, the Company is in compliance with the Acquisition,covenants under its credit agreement.

Term Loan. As of June 30, 2019, the outstanding principal amount under the Term Loan was $405.0 million and the interest rate in effect was 4.3%, including the impact of the interest rate swap discussed in Note 5 (Interest Rate Swap). During the six months ended June 30, 2019, the Company recorded goodwillmade $11.3 million in the amount of $96.2 million, which is primarily attributable to sales growth from existing and future technology, product offerings and customers and the value of the acquired assembled workforce. Of the total goodwill recorded in connection with the Acquisition, approximately $15.0 million is deductible for income tax purposes. The Company’s goodwill activity for the nine months ended September 30, 2018 is as follows (in thousands):mandatory quarterly Term Loan payments.

 

December 31, 2017

 

$

788,107

 

Additions

 

 

96,232

 

September 30, 2018

 

$

884,339

 

Pro forma Financial Information (unaudited). The unaudited pro forma information presented below summarizesRevolving Loan. As of June 30, 2019, the combined revenues and net income of the Company and DI and LDM, as if the Acquisition had been completed on January 1, 2017 and gives effect to pro forma events that are factually supportable and directly attributable to the transaction. The unaudited pro forma results reflect adjustments for incremental intangible asset amortization based on the fair values of each identifiable intangible asset, interest expense on theoutstanding borrowings under the revolving loanRevolving Loan were $275.0 million and the interest rate in effect was 3.9%. During the six months ended June 30, 2019, the Company made $5.0 million in voluntary Revolving Loan payments, net of borrowings. As of June 30, 2019, $175.0 million was available to fundborrow under the Acquisition, certain other compensation related costs including stock-based compensationRevolving Loan. The Company’s borrowings are limited by its net leverage ratio, which is calculated in accordance with the credit agreement and retention bonuses, and integration costs. Pro forma adjustments were tax-affected at the Company’s corporate blended statutory tax rate applicable during the respective periods presented.was 3.25 to 1.0 as of June 30, 2019.

 

This unaudited pro forma information is presented for informational purposes only and may not be indicative of the historical results of operations that would have been obtained if the Acquisition had taken place on January 1, 2017, nor the results that may be obtained in the future. The unaudited pro forma information does not reflect future synergies or other such costs or savings.

Selected unaudited pro forma information for the three months ended September 30, 2018 and 2017, respectively, is as follows (in thousands):

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

Revenues

 

$

169,312

 

 

$

171,025

 

Net income

 

 

16,540

 

 

 

17,342

 

9


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

 

FromFair Value. The Company’s debt is classified as Level 2 in the datefair 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 Acquisition,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 included DI’sentered 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 2.96% plus an applicable margin, as defined in the Credit Agreement, on a notional amount of $300 million. The Swap is designated as a cash flow hedge of interest rate risk. As of June 30, 2019, the fair value of the Swap was an unrealized loss of $11.5 million, of which $4.0 million and LDM’s financial results$7.5 million is recorded in itsOther accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated and Combined Statements of Income forBalance Sheets. During the three and ninesix months ended SeptemberJune 30, 2018. A summary of DI and LDM contributed revenues and net loss is as follows:  2019, $0.7 million was reclassified from Accumulated other comprehensive (loss) into Interest expense, net.

 

 

Three Months Ended

September 30, 2018 (1)

 

 

Nine Months Ended

September 30, 2018 (2)

 

Revenues

 

$

15,800

 

 

$

35,999

 

Net loss

 

 

(1,983

)

 

 

(10,120

)

(1)

The net loss includes $4.1 million of incremental intangible asset amortization related to the Acquisition and $0.7 million in acquisition-related costs, both of which are on a pre-tax basis.

(2)

The net loss includes $9.9 million of incremental intangible asset amortization and $7.5 million of costs related to the Acquisition, primarily related to the cash settlement of DI’s unvested equity awards and acquisition-related costs, both of which are on a pre-tax basis.

 

NOTE 4.6. 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.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 and services in their local territories, paying Cars.com a wholesale rate for the Cars.com product. The Company charges the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers and recognizes revenue generated from these agreements as Wholesale revenuesrevenue in the Consolidated and Combined Statements of (Loss) Income. The unfavorableUnfavorable contracts liability was established as a result of these unfavorable affiliate agreements that the Company entered into as part of TEGNA’s acquisition of the Company in 2014. The Unfavorable contracts liability is being amortized on a straight-line basis over the five year contract period.

 

Prior to the affiliate conversions discussed below, over the annual contract period, the Company recognized $25.2 million of Wholesale revenuesrevenue with a corresponding reduction of the unfavorableUnfavorable contracts liability.liability on an annual basis. As of SeptemberJune 30, 20182019 and December 31, 2017,2018, the unfavorableUnfavorable contracts liability on the Consolidated and Combined Balance Sheets was $25.2$6.3 million and $44.1$18.9 million, respectively. Of the total unfavorable contracts liability balances, $25.2 million wasrespectively, and is recorded in currentCurrent liabilities on the Consolidated and Combined Balance Sheet as of September 30, 2018 and December 31, 2017.Sheets.

 

In January 2018, the Company announced it amended its affiliate agreement with The McClatchy Company (“McClatchy”) to convert McClatchy’s 22 affiliate markets into the Company’s direct sales channel in phases, on or before October 2018, prior to the original October 2019 affiliate agreement expiration date. As of October 1, 2018,June 30, 2019, the Company has completed the McClatchy affiliate market conversions.

In January 2018, the Company amended three of its affiliate agreement withagreements (McClatchy, tronc, Inc. (“tronc”) to convert tronc’s eight affiliate markets into the Company’s direct sales channel, effective February 1, 2018.

In July 2018, the Company amended its affiliate agreement withand the Washington Post) and agreed to convert the Washington, DC market into the Company’s direct sales channel, effective August 1, 2018, which was prior to the October 2019 expiration of the original agreement.

The Companyas a result, now has a direct relationship with thethese dealer customers and recognizes the revenue associated with converted marketsdealers as Retail revenues,revenue, rather than Wholesale revenues,revenue, in the Consolidated and Combined Statements of (Loss) Income. In addition, as part of the recent changes in the structure of the affiliate agreements, the Company engaged 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 and Combined 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 unfavorableUnfavorable contracts liability associated with the converted markets to revenuesrevenue as the Company is recognizingnow recognizes this direct revenue at retail rates. The amortization of the unfavorableUnfavorable contracts liability is now recorded as a reduction of Affiliate revenue share expense within Operating expenses in the Consolidated and Combined Statements of (Loss) Income.

10


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

 

Therefore, during the three and ninesix months ended SeptemberJune 30, 2018,2019, the Company recorded $5.4$11.7 million and $12.9 million, respectively,of unfavorable contracts liability amortization as a reduction to Affiliate revenue share expense, rather than Wholesale revenues,revenue, in the Consolidated and Combined Statements of (Loss) Income. The reduction to Affiliate revenue share expense was partially offset by the fees associated with the marketing support and transition services.

 


10


Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

The Company’s unfavorableUnfavorable contracts liability activity for the ninesix months ended SeptemberJune 30, 20182019 is as follows (in thousands):

 

Balance at December 31, 2017

 

$

44,085

 

Amortization into Wholesale revenues (1)

 

 

(5,992

)

Amortization into Affiliate revenue share (2)

 

 

(12,908

)

Balance at September 30, 2018

 

$

25,185

 

Balance at December 31, 2018

 

$

18,885

 

Amortization into Wholesale revenue (1)

 

 

(931

)

Amortization into Affiliate revenue share expense (2)

 

 

(11,669

)

Balance at June 30, 2019

 

$

6,285

 

 

 

(1)

Amount represents the amortization of the unfavorableUnfavorable contracts liability related to the remaining affiliate agreementsagreement (Belo) into Wholesale revenuesrevenue in the Consolidated and Combined Statements of (Loss) Income.

 

 

(2)

Amount represents the amortization of the unfavorableUnfavorable contracts liability related to the converted McClatchy, tronc and the Washington Post affiliate agreements into Affiliate revenue share within Operating expensesexpense in the Consolidated and Combined Statements of (Loss) Income.

NOTE 5. Debt

As of September 30, 2018, the Company is in compliance with the covenants under its various credit agreements.

Term Loan. As of September 30, 2018, the outstanding principal amount under the term loan was $421.9 million and the interest rate in effect was 3.9%. During the nine months ended September 30, 2018, the Company made $16.9 million in quarterly term loan payments.

Revolving Loan. As of September 30, 2018, the outstanding borrowings under the revolving loan was $285.0 million and the interest rate in effect was 3.8%. During the nine months ended September 30, 2018, the Company borrowed $165.0 million to fund the Acquisition and $30.0 million to fund share repurchases. The Company also made $55.0 million in voluntary revolving loan payments. As of September 30, 2018, the Company was permitted to borrow an additional $165.0 million under the revolving loan. The Company’s borrowings are limited by its net leverage ratio, which was 2.9 to 1.0 as of September 30, 2018.

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 September 30, 2018.

NOTE 6. Income Taxes

Prior to the Separation, Cars.com LLC was a multi-member LLC that was considered a partnership for U.S. income tax purposes. Multi-member LLCs are generally considered flow-through entities and therefore are not subject to federal, state or local income taxes. Effective with the Separation, the Company established a corporate legal entity structure that is subject to U.S. corporate income tax on a stand-alone basis post-Separation.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The new legislation contains several key tax provisions that impact the Company, including the reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company continues to evaluate the impacts of the Tax Cuts and Jobs Act and will consider additional guidance from the U.S. Treasury Department, Internal Revenue Service or other standard-setting bodies. Further adjustments, if any, will be recorded by the Company during the measurement period in 2018 as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.


11


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

A summary of income tax expense (dollars in thousands) and the effective tax rate for the three and nine months ended September 30, 2018 and 2017, respectively, is as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Income tax expense

 

$

5,594

 

 

$

13,019

 

 

$

10,373

 

 

$

15,782

 

Effective tax rate

 

 

26.2

%

 

 

38.3

%

 

 

26.0

%

 

 

17.8

%

Income tax expense was $5.6 million and $10.4 million for the three and nine months ended September 30, 2018, respectively, compared to $13.0 million and $15.8 million for the three and nine months ended September 30, 2017, respectively. The current period income tax expense reflects the financial activity for Cars.com and DMR Holdings, Inc. (“DealerRater”), the Company’s only subsidiary prior to the Acquisition, and the financial results of DI and LDM for the post-acquisition period of February 21, 2018 through September 30, 2018. The prior period income tax expense represents the financial activity of DealerRater and corporate income tax for the Company upon its Separation from TEGNA on June 1, 2017. The effective income tax rate, expressed by calculating the income tax expense as a percentage of income before income taxes, was 26.2% and 26.0% for the three and nine months ended September 30, 2018, respectively, and differed from the U.S. federal statutory rate primarily due to state income taxes, nondeductible transaction costs and the impact of the Tax Cuts and Jobs Act, partially offset by certain tax credits and excess tax benefits from stock-based compensation.    

 

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 sharestock repurchase program to acquire up to $200 million of the Company’s common stock. The Company may repurchase sharesstock 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 sharestock 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. During the ninesix months ended September June 30, 2019 and 2018, the Company repurchased and subsequently retired 3.01.7 million shares for $77.2 million.$40.0 million and 2.0 million shares for $50.0 million, respectively.

 

NOTE 9. Stock-Based Compensation

 

Performance ShareStock 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 ninesix months ended SeptemberJune 30, 2018,2019, the Company granted 780,000212,000 PSUs at a weighted averageweighted-average grant date fair value of $27.41$23.99 per unit. Of the totalThese PSUs granted, 632,000 PSUs were granted to certain employees in connection with the Acquisition and require continued employee service. The percentage of PSUs that shall vest will range from 0% to 150% of the number of PSUs granted based on DI’s and LDM’s future performance related to certain revenue targets over a three-year performance period. These PSUs are subject to graded vesting over three years. The remaining PSUs granted during the nine months ended September 30, 2018 require continued employee service. The percentage of these PSUs that shall vest will range from 0% to 200% of the number of PSUs granted based on the Company’s future performance related to certain revenue and adjusted earnings before interest, income taxes, depreciation and amortization targets over a two-yearthree-year performance period. These PSUs are subject to gradedcliff vesting over three years.at the end of the three-year performance period.

 

Restricted ShareStock 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. RSU’sRSUs are subject to graded vesting, generally ranging between one and four years and the fair value of the RSUs is equal to the Company’s common stock price on the

12


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

date of grant. During the ninesix months ended SeptemberJune 30, 2018,2019, the Company granted 519,000558,000 RSUs at a weighted-average grant-dategrant date fair value of $26.74$23.84 per unit.

Employee Stock Purchase Plan (“ESPP”). During the nine months ended September 30, 2018, the Company issued  21,000 shares of the Company’s common stock in connection with the first ESPP offering period. In September 2018, the Company completed its second ESPP offering period and will issue 36,000 shares of the Company’s common stock during the fourth quarter of 2018.

NOTE 10. Revenues

The Company accounts for a customer arrangement when the Company and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and the Company believes it is probable it will collect substantially all of the consideration to which it will be entitled in exchange for the services that will be provided to the customer. The Company allocates the contractual transaction price to each distinct performance obligation and recognizes revenue when it satisfies a performance obligation by providing a service to a customer. Revenue is generated through the Company’s direct sales force (Retail revenues) and affiliate sales channels (Wholesale revenues).

Online Subscription Advertising Products and Services Revenue. The Company’s primary source of Retail and Wholesale revenues is through the sale of online subscription advertising products to dealer customers through varying levels of subscription packages. The Company’s subscription packages provide the dealer customer’s available new and used vehicle inventory to in-market shoppers on the Cars.com website. The subscription packages are generally a fixed price arrangement with a one-year contract term that is automatically renewed, typically on a month-to-month basis. The Company recognizes subscription package revenues ratably as the service is provided over the contract term. Online subscription advertising products and services revenue is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

The Company also offers its customers several add-on products to the subscription packages. Add-on products include premium advertising products that can be uniquely tailored to an individual dealer customer’s current needs. The Company does not sell add-on products separately from the subscription packages as the customer cannot benefit from add-on products on their own. Therefore, the subscription packages and add-on products are combined as a single performance obligation and the Company recognizes the related revenue ratably as the services are provided over the contract term.

As part of the acquisition of DI, the Company also provides services related to flexible, custom designed website platforms supporting highly personalized digital marketing campaigns, digital retailing and messaging platform products. The Company recognizes revenue related to these services ratably as the services are provided over the contract term. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

The Company’s affiliates also sell online subscription advertising products to dealer customers and the Company earns Wholesale revenues through its affiliate agreements. Affiliates are assigned certain sales territories in which they sell the Company’s products. Under these agreements, the Company charges the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers. The Company recognizes Wholesale revenues ratably as the service is provided over the contract term. In situations where the Company’s direct sales force sells the Company’s products within an affiliate’s assigned territory, the Company pays the affiliate a revenue share which is classified as “Affiliate revenue share” in the Consolidated and Combined Statements of Income. Wholesale revenues also includes a portion of the amortization of the unfavorable contracts liability. For information related to the unfavorable contracts liability, see Note 4 (Unfavorable Contracts Liability).

Display Advertising Products and Services Revenue. The Company also earns revenue through the sale of display advertising on the Company’s website to national advertisers, pursuant to transaction-based contracts, which are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. The Company recognizes revenue as the impressions or click-throughs are delivered. If the impressions or click-throughs delivered are less than the amount invoiced to the customer, the difference is recorded as deferred revenue and recognized as revenue when earned. Display advertising products revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

As part of the acquisition of LDM, the Company also provides services related to customized digital marketing and customer acquisition services, including paid, organic, social and creative services. The Company recognizes revenue related to these services

13


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

primarily at the point in time the service is provided. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

Pay(Loss) Earnings Per Lead Revenue. The Company also sells certain leads, which are connections from consumers to dealer customers in the form of phone calls, emails and text messages, to dealer customers, OEMs and third-party resellers. The Company recognizes pay per lead revenue primarily on a per-lead basis at the point in time in which the lead has been delivered. Revenue related to pay per leads is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

Other Revenue.  Other revenue primarily includes revenues related to vehicle listing data sold to third-parties and peer-to-peer vehicle advertising. The Company recognizes Other revenue either ratably as the services are provided or at the point in time the services have been performed. Other revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

Revenue Summary. In the table below (in thousands), revenue is disaggregated by sales channel and major products and services. The Company only has one reportable segment; therefore, further disaggregation is not applicable at this time.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Sales channel

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Direct

 

$

119,510

 

 

$

82,504

 

 

$

336,521

 

 

$

249,412

 

National advertising

 

 

28,107

 

 

 

32,002

 

 

 

82,155

 

 

 

85,379

 

Other

 

 

4,010

 

 

 

4,319

 

 

 

12,152

 

 

 

11,989

 

Retail

 

 

151,627

 

 

 

118,825

 

 

 

430,828

 

 

 

346,780

 

Wholesale

 

 

17,685

 

 

 

41,074

 

 

 

66,953

 

 

 

122,917

 

Total revenues

 

$

169,312

 

 

$

159,899

 

 

$

497,781

 

 

$

469,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Major products and services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Online subscription advertising

 

$

127,965

 

 

$

120,144

 

 

$

380,218

 

 

$

362,328

 

Display advertising

 

 

30,748

 

 

 

28,155

 

 

 

86,634

 

 

 

76,422

 

Pay per lead

 

 

7,933

 

 

 

9,141

 

 

 

22,968

 

 

 

23,952

 

Other

 

 

2,666

 

 

 

2,459

 

 

 

7,961

 

 

 

6,995

 

Total revenues

 

$

169,312

 

 

$

159,899

 

 

$

497,781

 

 

$

469,697

 

Practical Expedient and Exemption. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

NOTE 11. Earnings per shareShare

 

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. The computation of (Loss) earnings per share is as follows (in thousands, except per share data):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

15,797

 

 

$

20,988

 

 

$

29,452

 

 

$

72,685

 

Basic weighted-average common shares outstanding

 

 

69,652

 

 

 

71,699

 

 

 

70,900

 

 

 

71,693

 

Effect of dilutive stock-based compensation awards

 

 

377

 

 

 

68

 

 

 

253

 

 

 

70

 

Diluted weighted-average common shares outstanding

 

 

70,029

 

 

 

71,767

 

 

 

71,153

 

 

 

71,763

 

Earnings per share, basic

 

$

0.23

 

 

$

0.29

 

 

$

0.42

 

 

$

1.01

 

Earnings per share, diluted

 

 

0.23

 

 

 

0.29

 

 

 

0.41

 

 

 

1.01

 

NOTE 12. Related Party Transactions

As a result of the Separation, certain stock-based awards previously granted by TEGNA to its employees were converted into stock of both TEGNA and Cars.com. The Company is responsible for any employee payroll taxes related to awards settled in Cars.com common stock for which stock was withheld for payroll tax purposes. During the nine months ended September 30, 2018, the

1411


Cars.com Inc.

Notes to the Consolidated and Combined Financial Statements (continued)

(Unaudited)

 

Company withheld $3.6 million, which is recorded as a reduction of Additional paid-in capital on the Consolidated and Combined Balance Sheets.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net (loss) income

 

$

(6,026

)

 

$

12,726

 

 

$

(15,057

)

 

$

13,655

 

Basic weighted-average common shares outstanding

 

 

66,779

 

 

 

71,119

 

 

 

67,181

 

 

 

71,531

 

Effect of dilutive stock-based compensation awards (1)

 

 

 

 

 

211

 

 

 

 

 

 

190

 

Diluted weighted-average common shares outstanding

 

 

66,779

 

 

 

71,330

 

 

 

67,181

 

 

 

71,721

 

(Loss) earnings per share, basic

 

$

(0.09

)

 

$

0.18

 

 

$

(0.22

)

 

$

0.19

 

(Loss) earnings per share, diluted

 

 

(0.09

)

 

 

0.18

 

 

 

(0.22

)

 

 

0.19

 

(1)

There were 0.8 million potential common shares excluded from diluted weighted-average common shares outstanding for both the three and six months ended June 30, 2019, as their inclusion would have had an anti-dilutive effect.

NOTE 11. Leases

 

Leases.The Company is partyobligated 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. As of June 30, 2019, Cars.com’s scheduled future minimum lease payments under operating leases having initial or remaining noncancelable lease terms of more than one year, were as follows (in thousands):

Remaining six months of 2019

 

$

1,509

 

2020

 

 

4,368

 

2021

 

 

4,014

 

2022

 

 

3,751

 

2023

 

 

3,850

 

Thereafter

 

 

35,117

 

Total minimum lease payments

 

 

52,609

 

Less: Imputed interest (1)

 

 

(18,781

)

Present value of the minimum lease payments

 

 

33,828

 

Less: Current maturities of lease obligations

 

 

(1,553

)

Long-term lease obligations

 

$

32,275

 

(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 $17.2 million and operating lease liabilities were $33.8 million, the current maturities of which is included in Other accrued liabilities and the long-term portion of which is included in Other noncurrent liabilities. The difference between the operating lease assets and the operating lease liabilities is primarily due to a commercial agreement with TEGNA, who was considered alease incentive received in 2017 related party throughto the Separation date of May 31, 2017. During300 South Riverside Lease in Chicago, Illinois. Other information related to the Company’s operating leases for the three and ninesix months ended SeptemberJune 30, 2017, related party revenue generated with this agreement was zero and $3.4 million, respectively. Although TEGNA2019 is no longer a related party,as follows (in thousands, except percentage):

Income statement information:

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019

 

 

Six Months Ended June 30, 2019

 

Operating lease cost

 

$

972

 

 

$

1,930

 

Short-term lease cost

 

 

339

 

 

 

720

 

Variable lease cost

 

 

974

 

 

 

1,968

 

Total lease cost

 

$

2,285

 

 

$

4,618

 

12


Cars.com Inc.

Notes to the commercial agreement with TEGNA is still effective after the Separation.Consolidated Financial Statements (continued)

(Unaudited)

Other information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for operating leases for the six months ended June 30, 2019

 

$

2,126

 

Weighted-average remaining lease term (in months) as of June 30, 2019

 

 

136

 

Weighted-average discount rate as of June 30, 2019

 

 

7.4

%

 

 

 


Note About Forward-Looking Information

 

This Quarterly Report on Form 10-Qreport 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.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 companies may materially and adversely affect our business, results of operations and financial condition.

If we fail to maintain or increase our base of subscribing dealer customers that purchase listings on our sites or to increase our revenue from subscribing dealer customers, our business, results of operations and financial condition would be materially and adversely affected.

We compete with other consumer automotive websites and mobile applications and other digital content providers for share of automotive-related digital advertising spending and may be unable to maintain or grow our base of third-party advertising customers or increase our revenue from existing third-party advertisers.

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.comsites and mobile applications.apps.

We rely in part on Internet search engines and “mobile application download stores” to drive traffic to the Cars.com sites and mobile applications. If the Cars.com sites and mobile applications fail to appear prominently in these search results, traffic to the Cars.com sites and mobile applications 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 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, additionalincur 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, dealer customers and advertisers, and our ability to increase the frequency with which consumers, dealer customers 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 revenues will decrease.

If we do not adapt to automated buying strategies quickly, our display advertising revenue could be adversely affected.

If our mobile applications 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 dealer customers or Original Equipment Manufacturers ("OEMs”) could reduce demand for, and the pricing of, our marketing solutions and advertising on our sites and mobile applications, thereby leading to decreased earnings.

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.


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 revenuesadvertising revenue depends, in part, on the performance of third parties who sell our solutions pursuant to affiliateaffiliation 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. In addition, acquisitions may divert management’s attention from the operation of our core business and we may be unable to successfully implement effective cost controls or achieve expected synergies.

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.

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.

We have a limited history of operating as an independent company.

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 spin-off of Cars.com Inc. from TEGNA, Inc. (the “Separation”)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.

We may not achieve some or all of the expected benefits of the Separation, and the Separation may materially and adversely affect our business.

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.

FulfillingOur debt agreements contain restrictions that may limit our obligations incidental to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act, will place significant demands onflexibility in operating our management, administrative and operational resources, including accounting and information technology resources.business.

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.

We do not expect to pay any cash dividends for the foreseeable future.

Your percentage of ownership in Cars.com may be diluted in the future.

We are an “emerging growth company,” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

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.

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.


For a detailed discussion of many of these risks and uncertainties, see Part“Part I, Item 1A— “Risk Factors,”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, 2017, as filed with2018, 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”) on March 6, 2018.. All forward-looking statements madecontained in this this Quarterly Report on Form 10-Qreport 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 hereinin this report are based only on information currently available to us and speak only as of the date of this this Quarterly Report on Form 10-Q.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 Quarterly Report on Form 10-Qreport are intended to be subject to the safe harbor protection provided by the Federalfederal securities laws.

 


Item 2. Management’s DiscussionDiscussion and Analysis of Financial Condition and Results of Operations.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 and Combined 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 also 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 would have been had we been a stand-alone company during the applicable periods presented or 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

 

We areCars.com is a leading two-sided digital marketplace and solutions provider for the automotive marketplaceindustry that creates meaningful connections between consumers (individuals researching cars or lookingconnects car shoppers with sellers. Through a portfolio of brands including Cars.com, Dealer Inspire and DealerRater, in addition to purchaseAuto.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 car)rapidly changing market, Cars.com enables dealerships and partners, dealer customers and automotive original equipment manufacturers (“OEMs”). While connecting advertising partners with in-market car shoppersinnovative technical solutions and providing data-driven intelligence to better reach and influence ready-to-buy shoppers, increase inventory turn and gain market share, we empower consumers with resources and information to assist them in making better- informed buying decisions around The 4Ps of Automotive MarketingTM: Product, Price, Place and Person. We have evolved into one of the largest digital automotive platforms, connecting tens of thousands of local dealers across the country with millions of consumers. Through trusted expert content, on-the-lot mobile features and intelligence, millions of new and used vehicle listings, a comprehensive set of pricing and research tools, and the largest database of consumer reviews in the industry, we believe Cars.com is transforming the car shopping experience.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”). We filed a Registration Statement on Form 10 relating to the Separation with the U.S. Securities and Exchange Commission (the “SEC”), which was declared effective on May 15, 2017. On May 31, 2017, we made a $650.0 million cash transfer to TEGNA and TEGNA completed the Separation through a pro rata distribution to its stockholders of all of the outstanding shares of our common stock. Each holder of TEGNA common stock received one share of our common stock for every three shares of TEGNA common stock held on May 18, 2017, the record date for the distribution. TEGNA structured the distribution to be tax-free to its U.S. stockholders for U.S. federal income tax purposes. 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. (“DI”) and substantially all of the net assets of Launch Digital Marketing LLC (“LDM”) (collectively, “the Acquisition”(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


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 additional information seerelated to the Unfavorable contracts liability, see Note 3 (Business Combination and Goodwill)6 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

 

OverviewTechnology Transformation. In February 2019, we announced a restructuring of Resultsthe 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.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

In thousands (except percentages)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

169,312

 

 

$

159,899

 

 

$

497,781

 

 

$

469,697

 

Net income

 

 

15,797

 

 

 

20,988

 

 

 

29,452

 

 

 

72,685

 

Retail revenues as % of total revenues

 

 

90

%

 

 

74

%

 

 

87

%

 

 

74

%

Wholesale revenues as % of total revenues

 

 

10

%

 

 

26

%

 

 

13

%

 

 

26

%

 

2018 Highlights

Affiliate Conversions. DuringStrategic Alternatives to Enhance Shareholder Value. On August 5, 2019, we announced the nineconclusion of the strategic alternatives review process first announced on January 16, 2019. The strategic review process was public, comprehensive and deliberate, lasting ten months ended September 30, 2018, we amended our affiliate agreements with McClatchy, tronc and the Washington Post to convert several markets priorultimately involving 29 parties. After extensive negotiations and discussions, no actionable proposals for a sale were available to the expiration dates of the original affiliate agreements. In addition, on October 1, 2018, we converted the remaining McClatchy markets and currently serve 84% of our dealer customers through our direct sales force.Company. As a result, our board of these early conversions, we successfully migrated over 3,200 dealer customers fromdirectors unanimously concluded that the best interests of our affiliate sales channel into our direct sales channel. We will continueshareholders are served by continuing to focus on pursuing transactions to facilitate early conversionsthe execution of the remaining affiliate markets.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 now recordreorganized the revenues associated with converted marketssales 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 Retail revenues, rather than Wholesale revenues ininnovations from Dealer Inspire and DealerRater. The Sales Transformation also reflects a realignment of territories following the Consolidated and Combined Statementsconversion of Income. For additional information onthe majority of the affiliate market conversions, see Note 4 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.agreements.


Acquisition of DI and LDM. In February 2018, we completed the acquisition of privately-held DI and LDM. DI is an innovative technology leader that has been rapidly increasing its market share by providing progressive dealer websites, digital retailing and messaging platform products. LDM is a provider of digital marketing services, including paid, organic, social and creative services. The Acquisition aligns with our strategy of integrating new capabilities and additional talent to accelerate organic growth, strengthen the retail experience, deepen dealer connections and improve clarity of attribution while generating additional revenues and cash flow and ultimately, enhancing stockholder value. Our results of operations for the nine months ended September 30, 2018 include DI and LDM financial results for the post-acquisition period of February 21, 2018 through September 30, 2018.

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. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. We intend to fund the share repurchase program principally with cash from operations. During the nine months ended September 30, 2018, the Company repurchased and subsequently retired 3.0 million shares for $77.2 million.

 

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 Vehicle ListingsMonthly Unique Visitors is as follows:

 

 

Three Months Ended September 30,

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

% Change

 

 

2018

 

 

2017

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

Traffic (Visits)

 

 

113,751,000

 

 

 

101,698,000

 

 

 

12

%

 

 

340,121,000

 

 

 

311,612,000

 

 

 

9

%

 

 

130,626,000

 

 

 

112,954,000

 

 

 

16

%

 

 

263,099,000

 

 

 

226,371,000

 

 

 

16

%

Average Vehicle Listings

 

 

4,655,000

 

 

 

4,869,000

 

 

 

(4

)%

 

 

4,785,000

 

 

 

4,956,000

 

 

 

(3

)%

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:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)%

 

 

 

September 30, 2018

 

 

June 30, 2018

 

 

% Change

 

 

September 30, 2017

 

 

% Change

 

 

Direct

 

 

17,011

 

 

 

16,592

 

 

 

3

%

 

 

13,963

 

 

 

22

%

 

Affiliate

 

 

3,396

 

 

 

4,128

 

 

 

(18

)%

 

 

7,344

 

 

 

(54

)%

 

Total

 

 

20,407

 

 

 

20,720

 

 

 

(2

)%

 

 

21,307

 

 

 

(4

)%

 

(1)

Beginning in the first quarter of 2019, this key operating metric includes revenue from dealer websites and related digital solutions.

 

Traffic (Visits). Traffic and our ability to generate traffic are keyis critical to our business. Tracking our traffic performance is a critical measure. 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 an internal metric representingdefined as the number of visits to Cars.com desktop and mobile properties (web browser(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. We measure traffic using Adobe Analytics. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach diverse demographic audiencesin-market car shoppers is attractive to our dealers and national advertisers.

 

The growth in Traffic increases were primarilywas driven by an increaseour product innovations and investments in search engine optimization and planned strategic marketing investments aimed at consumer acquisition, engagementpaid channels. For the three and brand awareness amongst auto shopping audiences. Mobilesix months ended June 30, 2019, mobile traffic accounted for 68%71% of total Traffic. For the three and six months ended June 30, 2018, mobile traffic accounted for 67% and 66% of total Traffic, for the three and nine months ended September 30, 2018, respectively.

Average monthlyMonthly Unique Visitors (“UVs”). Growth in unique visitors increased 10% and 9% forconsumer traffic to our network of websites and mobile apps increases the threenumber of impressions, clicks, leads and nine months ended September 30, 2018, respectively.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. Our value to consumers tracks to our ability to showcase the inventory of our dealer and OEM customers. The larger the advertiser base, the more inventory and options that are available for consumers to review. Dealer Customers represents the carrepresent 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 DI and LDMDealer Inspire customers.

 

Total Dealer Customers declined 2% from June 30, 2018.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 increased 419, resulting from dealer customers converted from affiliate markets, partially offset by higher cancellationsexperienced modest growth in previously converted affiliate marketsMay and lower overall sales.June.


 

Total Dealer Customers declined 4%9% from SeptemberJune 30, 2017.2018. 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 increased 3,048, resultingexperienced 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 customers convertedwebsites 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 affiliate marketsMarch 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 incremental customersDealer Inspire revenue. ARPD excluding revenue from dealer websites and related digital solutions from Dealer Inspire was $2,052, down 2% from the Acquisition, partially offset by higher cancellations in previously converted affiliate markets and due to the sunsetting of a lower priced, legacy DealerRater baseline product.

Average Vehicle Listings. Our value to consumers tracks to our ability to showcase the inventory of our dealer and OEM customers. The more vehicle listings that are available for consumers to review, the more traffic we attract and the higher the consumer engagement. Average Vehicle Listings represents the daily average of vehicles listed for sale on Cars.com properties. The daily average is calculated on a monthly basis and averaged for the reporting period.

Declines in Average Vehicle Listings for the three and nine months ended September 30, 2018 were due to fewer new car listings, primarily related to fewer dealer customers. For the three and nine months ended September 30, 2018, used car listings were flat and increased 3%, respectively.prior year.

 

Factors Affecting Our Performance

Performance. Our continuedbusiness 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 addresstransform our business


toward a multi-faceted suite of digital solutions that complement our media offerings, and successfully manage challenges, both specificour 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 businesscustomers, we are increasing investments in product and in the digital advertising marketplace generally. In the near term, we may experience compressed margins as a resultmarketing. The foundation of our transition from a wholly-owned subsidiary of TEGNA to an independent publicly traded company. Due to the transition, we have further developed our internal infrastructure and support functions through the recruiting and hiring of managers and employees required to strengthen our legal, treasury, finance, tax, investor relations and other similar functions. Similarly, we will incur ongoing public company costs, including those related to an independent board of directors, compliance with regulatory and stock exchange requirements and increased auditing and insurance fees. Further, the indebtedness we incurred in connection with the Separation from TEGNA in May 2017 and the Acquisition in February 2018, has reduced our free cash flow, which may limit our ability to make strategic acquisitions or other transactions that we believe to be in the best interests of our stockholders or that might increase the value of our business. We expect to manage these incremental costs and the associated increased risk by focusing on improving our operating efficiency and continued growth in our business to drive operating margins and generate free cash flow. In addition, our businesssuccess is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic factors. We have recently observed the beginning of a cyclical downturn in the United States auto market, which has impacted new car sales and thus OEMs’ and dealers’ spending. While our customers may weigh lower-priced and other options in the market, we believe that the value we deliver will provide continuity as they evaluate their spend.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 SeptemberJune 30, 20182019 Compared to Three Months Ended SeptemberJune 30, 20172018

 

 

Three Months Ended September 30,

 

 

Increase

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Increase

 

 

 

 

 

In thousands (except percentages)

 

2018

 

 

2017

 

 

(Decrease)

 

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2019

 

 

2018

 

 

(Decrease)

 

 

% Change

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

119,510

 

 

$

82,504

 

 

$

37,006

 

 

 

45

%

 

$

111,190

 

 

$

115,533

 

 

$

(4,343

)

 

 

(4

)%

National advertising

 

 

28,107

 

 

 

32,002

 

 

 

(3,895

)

 

 

(12

)%

 

 

19,296

 

 

 

27,230

 

 

 

(7,934

)

 

 

(29

)%

Other

 

 

4,010

 

 

 

4,319

 

 

 

(309

)

 

 

(7

)%

 

 

3,624

 

 

 

4,095

 

 

 

(471

)

 

 

(12

)%

Retail

 

 

151,627

 

 

 

118,825

 

 

 

32,802

 

 

 

28

%

 

 

134,110

 

 

 

146,858

 

 

 

(12,748

)

 

 

(9

)%

Wholesale

 

 

17,685

 

 

 

41,074

 

 

 

(23,389

)

 

 

(57

)%

 

 

14,097

 

 

 

21,654

 

 

 

(7,557

)

 

 

(35

)%

Total revenues

 

 

169,312

 

 

 

159,899

 

 

 

9,413

 

 

 

6

%

Total revenue

 

 

148,207

 

 

 

168,512

 

 

 

(20,305

)

 

 

(12

)%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues and operations

 

 

24,034

 

 

 

18,176

 

 

 

5,858

 

 

 

32

%

Cost of revenue and operations

 

 

24,319

 

 

 

22,500

 

 

 

1,819

 

 

 

8

%

Product and technology

 

 

15,918

 

 

 

18,422

 

 

 

(2,504

)

 

 

(14

)%

 

 

15,339

 

 

 

17,691

 

 

 

(2,352

)

 

 

(13

)%

Marketing and sales

 

 

56,083

 

 

 

50,733

 

 

 

5,350

 

 

 

11

%

 

 

53,740

 

 

 

58,936

 

 

 

(5,196

)

 

 

(9

)%

General and administrative

 

 

14,345

 

 

 

9,180

 

 

 

5,165

 

 

 

56

%

 

 

21,963

 

 

 

14,303

 

 

 

7,660

 

 

 

54

%

Affiliate revenue share

 

 

4,097

 

 

 

2,121

 

 

 

1,976

 

 

 

93

%

 

 

2,176

 

 

 

3,813

 

 

 

(1,637

)

 

 

(43

)%

Depreciation and amortization

 

 

26,504

 

 

 

21,893

 

 

 

4,611

 

 

 

21

%

 

 

29,666

 

 

 

26,712

 

 

 

2,954

 

 

 

11

%

Total operating expenses

 

 

140,981

 

 

 

120,525

 

 

 

20,456

 

 

 

17

%

 

 

147,203

 

 

 

143,955

 

 

 

3,248

 

 

 

2

%

Operating income

 

 

28,331

 

 

 

39,374

 

 

 

(11,043

)

 

 

(28

)%

 

 

1,004

 

 

 

24,557

 

 

 

(23,553

)

 

 

(96

)%

Nonoperating (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(7,005

)

 

 

(5,431

)

 

 

(1,574

)

 

 

29

%

 

 

(7,711

)

 

 

(7,343

)

 

 

(368

)

 

 

5

%

Other income, net

 

 

65

 

 

 

64

 

 

 

1

 

 

 

2

%

 

 

9

 

 

 

27

 

 

 

(18

)

 

 

(67

)%

Total nonoperating expense, net

 

 

(6,940

)

 

 

(5,367

)

 

 

(1,573

)

 

 

29

%

 

 

(7,702

)

 

 

(7,316

)

 

 

(386

)

 

 

5

%

Income before income taxes

 

 

21,391

 

 

 

34,007

 

 

 

(12,616

)

 

 

(37

)%

Income tax expense

 

 

5,594

 

 

 

13,019

 

 

 

(7,425

)

 

 

(57

)%

Net income

 

$

15,797

 

 

$

20,988

 

 

$

(5,191

)

 

 

(25

)%

(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 Revenues—Revenue—Direct.Direct revenues primarily represent online subscription productsrevenue consists of marketplace and digital solutions sold to dealer customers who purchase advertising packages to market their vehicle inventory and other aspects of their dealership.Dealer customers. Direct revenuesrevenue is our largest revenue stream, representing 70.6%75.0% and 68.6% of total revenuesrevenue for the three months ended SeptemberJune 30, 2018. The addition of DI’s2019 and LDM’s business contributed $15.82018, 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 revenue increase.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 $25.6an incremental $6.4 million to directDirect revenue measured at the month of each of the conversions, while reducing wholesale revenues $22.6Wholesale revenue by $5.4 million ($5.4(of which $1.4 million relates to the unfavorableUnfavorable contracts liability amortization). Excluding the impact of the Acquisition and affiliate market conversions, direct revenues declined $4.4 million, primarily due to a 7% decline in dealer customers. Direct dealer customers decreased 2% from June 30, 2018. For information related to the affiliate market conversions, see Note 46 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “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 Revenues—Revenue—National Advertising. National advertising revenuesrevenue consists of display advertising and other solutions sold to OEMs, advertising agencies and OEMs, as well as leads sold to OEMs. Display ads are placed throughout the Cars.com website and apps.automotive adjacencies. National advertising revenues represented 16.6%revenue represents 13.0% and 16.2% of total revenuesrevenue for the three months ended SeptemberJune 30, 2018.2019 and 2018, respectively. National advertising revenue declined 12%29%, as OEMs reduced their


full year 2019 upfront commitments, reduced their advertising budgets and shifted their spending on display ads mostly due to the cyclical nature of the auto industry.programmatic. Incremental sales to OEMs have been lower in volume and rate.

 

Wholesale RevenuesRevenue.Wholesale revenues representrevenue represents the fees we charge for online subscription productsmarketplace 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 revenues represented 10.4%revenue represents 9.5% and 12.9% of total revenuesrevenue for the three months ended SeptemberJune 30, 2018.2019 and 2018, respectively. Wholesale revenuesrevenue decreased $7.6 million primarily due to the affiliate market conversions from wholesale revenuesWholesale revenue ($22.65.4 million, which includes $5.4$1.4 million of unfavorableUnfavorable contracts liability amortization) to direct revenuesrevenue ($25.66.4 million). In addition, excludingExcluding the affiliate market conversions, wholesale revenuesWholesale revenue was impacted by a 7%9% decline in affiliate dealer customers. For information related to the affiliate market conversions, see Note 46 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

 

Cost of revenuesrevenue and operations. Cost of revenuesrevenue 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 related compensation costs. Cost of revenuesrevenue and operations represents 14.2%16.4% and 11.4%13.4% of total revenuesrevenue for the three months ended SeptemberJune 30, 2019 and 2018, and 2017,


respectively. The additionCost of DI’s and LDM’s business contributed $6.5 million to the overall increase. Excluding the impact of the Acquisition, cost of revenuesrevenue and operations decreased $0.7 million and 4%,increased, primarily due to reduced compensation.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 website.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 9.4%10.3% and 11.5%10.5% of total revenuesrevenue for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Product and technology expenses decreased, 14%, primarily due to reducedcost efficiencies, principally from lower compensation costs associated with lower headcount, partially offset byas a result of the addition of DI’s and LDM’s business.Technology Transformation.

 

Marketing and sales. Marketing and sales expenses primarily consist of traffic and lead acquisition costs (including search engine managementmarketing and other online marketing), TV and onlinedigital display/video advertising and creative production, of ad creative, market research, trade events and compensation costs for the marketing, sales support and sales support teams. Marketing and sales expenses represent 33.1%36.3% and 31.7%35.0% of total revenuesrevenue for the three months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. The addition of DI’s and LDM’s business contributed $4.2 million to the overall increase, as we expanded the salesforce to support our new product offerings. Excluding the impact of the Acquisition, marketingMarketing and sales expenses increased $1.2 million and 2%,decreased, primarily due to plannedlower 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 and search engine optimization, partially offset by cost efficiencies related to investments aimed at consumer acquisition.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 8.5%14.8% and 5.7%8.5% of total revenuesrevenue for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. General and administrative expenses increased $5.2$7.7 million and 56%, primarily due54% versus the prior year. During the three months ended June 30, 2019, we recognized $1.1 million related to $2.9severance, 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 consulting services incurred as part of our settlement agreementseverance, transformation and other exit costs; $1.1 million in costs associated with our stockholder activist $0.8campaign; and $1.0 million in incremental stock-based compensationtransaction-related costs. Excluding these costs, general and administrative expenses increased $1.5 million and 13% versus the addition of DI’s and LDM’s business.prior year.

 

Affiliate revenue share. Affiliate revenue share expensesexpense primarily representrepresents payments made to affiliates pursuant to our affiliate agreements. Affiliate revenue share expenses increased 93%, primarily dueexpense decreased $1.6 million, driven by a $1.4 million increase in the benefit from the amortization of the Unfavorable contracts liability related to increasethe 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 thethese early conversions of the McClatchy, tronc and Washington Post markets, partially offset by amortization of the unfavorable contracts liability which was previously recorded in wholesale revenues.conversions. For information related to the unfavorableUnfavorable contracts liability, see Note 46 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

 

Depreciation and amortization. Depreciation and amortization expense increased 21%11%, primarily due to the incremental amortization expensereduction of the useful lives of certain assets related to the Acquisition.Technology Transformation.

 

Interest expense, net. Interest expense, net increased, primarily due to additional interest expense associated with the Credit Agreement principally utilized to fund the Separation and the Acquisition.interest rate swap. For information related to our term and revolving loans,interest rate swap, see Note 5 (Debt)(Interest Rate Swap) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.  

 


Income tax expense.(benefit) expense. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes,tax, was 26.2%10% for the three months ended SeptemberJune 30, 20182019 and differed from the U.S. federal statutory rate of 21%, primarily due to state income taxes, nondeductible transaction costs and the impact of the Tax Cuts and Jobs Act,certain tax credits, partially offset by certainan adjustment to the deferred tax creditsliability, nondeductible benefits and excess tax benefits from stock-based compensation. For information related

Six Months Ended June 30, 2019 Compared to income taxes, see Note 6 (Income Taxes) to the Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.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

)%

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

 

 

 

Nine Months Ended September 30,

 

 

Increase

 

 

 

 

 

In thousands (except percentages)

 

2018

 

 

2017

 

 

(Decrease)

 

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Direct

 

$

336,521

 

 

$

249,412

 

 

$

87,109

 

 

 

35

%

  National advertising

 

 

82,155

 

 

 

85,379

 

 

 

(3,224

)

 

 

(4

)%

  Other

 

 

12,152

 

 

 

11,989

 

 

 

163

 

 

 

1

%

    Retail

 

 

430,828

 

 

 

346,780

 

 

 

84,048

 

 

 

24

%

    Wholesale

 

 

66,953

 

 

 

122,917

 

 

 

(55,964

)

 

 

(46

)%

       Total revenues

 

 

497,781

 

 

 

469,697

 

 

 

28,084

 

 

 

6

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Cost of revenues and operations

 

 

65,924

 

 

 

49,618

 

 

 

16,306

 

 

 

33

%

  Product and technology

 

 

56,202

 

 

 

56,861

 

 

 

(659

)

 

 

(1

)%

  Marketing and sales

 

 

181,645

 

 

 

160,246

 

 

 

21,399

 

 

 

13

%

  General and administrative

 

 

45,609

 

 

 

34,364

 

 

 

11,245

 

 

 

33

%

  Affiliate revenue share

 

 

11,193

 

 

 

6,837

 

 

 

4,356

 

 

 

64

%

  Depreciation and amortization

 

 

77,154

 

 

 

66,343

 

 

 

10,811

 

 

 

16

%

       Total operating expenses

 

 

437,727

 

 

 

374,269

 

 

 

63,458

 

 

 

17

%

         Operating income

 

 

60,054

 

 

 

95,428

 

 

 

(35,374

)

 

 

(37

)%

Nonoperating (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest expense, net

 

 

(20,305

)

 

 

(7,160

)

 

 

(13,145

)

 

 

184

%

  Other income, net

 

 

76

 

 

 

199

 

 

 

(123

)

 

 

(62

)%

     Total nonoperating expense, net

 

 

(20,229

)

 

 

(6,961

)

 

 

(13,268

)

 

 

191

%

       Income before income taxes

 

 

39,825

 

 

 

88,467

 

 

 

(48,642

)

 

 

(55

)%

       Income tax expense

 

 

10,373

 

 

 

15,782

 

 

 

(5,409

)

 

 

(34

)%

          Net income

 

$

29,452

 

 

$

72,685

 

 

$

(43,233

)

 

 

(59

)%

*** Not meaningful

 

Retail Revenues—Revenue—Direct.Direct revenuesrevenue is our largest revenue stream, representing 67.6%74.8% and 66.1% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 2018. The addition2019 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 DI’s and LDM’s business sincethese affiliate markets prior to the dateexpiration dates of the Acquisition contributed $36.0 million tooriginal affiliate agreements. During the direct revenue increase. Thesix months ended June 30, 2019, the affiliate market conversions contributed $61.3an incremental $19.6 million to directDirect revenue measured at the month of each of the conversions, while reducing wholesale revenues $54.5Wholesale revenue by $16.8 million ($12.9(of which $4.1 million relates to the unfavorableUnfavorable contracts liability amortization). Excluding the impact of the Acquisition and affiliate market conversions, direct revenues declined $10.2 million, primarily due to a 7% decline in dealer customers. Direct dealer customers decreased 2% from June 30, 2018. For information related to the affiliate market conversions, see Note 46 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

 

Also included in Retail Revenues—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 revenues representedrevenue represents 13.1% and 16.5% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 2018.2019 and 2018, respectively. National advertising revenue decreased 4%declined 27%, as OEMs reduced their full year 2019 upfront commitments, reduced their advertising budgets and shifted their spending on display ads mostly due to the cyclical nature of the auto industry.programmatic. Incremental sales to OEMs have been lower in volume and rate.

 

Wholesale RevenuesRevenue.Wholesale revenues represented 13.5%revenue represents 9.6% and 15.0% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 2018.2019 and 2018, respectively. Wholesale revenuesrevenue 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, from wholesale revenues ($54.5 million, which includes $12.9 million of unfavorable contracts liability amortization) to direct revenues ($61.3 million). In addition, excluding the affiliate market conversions, wholesale revenuesWholesale revenue was impacted by a 7%9% decline in affiliate dealer customers. For information related to


the affiliate market conversions, see Note 46 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

 

Cost of revenuesrevenue and operations. Cost of revenuesrevenue and operations represents 13.2%16.5% and 10.6%12.3% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. The additionCost of DI’s and LDM’s business contributed $16.5 million to the overall increase. Excluding the impact of the Acquisition, cost of revenuesrevenue and operations was flat,increased, primarily due to reduced compensation costs associated with lower headcount, offset by higher third-party costs related toand 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 11.3%11.0% and 12.1%10.8% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Product and technology expenses decreased, 1%, primarily due to reduced compensation costs associated with lower headcount and lower third-party costs,cost efficiencies, partially offset by the additionfull six-month impact of DI’s and LDM’s business.Dealer Inspire.

 


Marketing and sales. Marketing and sales expenses represent 36.5%37.7% and 34.1%37.9% of total revenues revenue for the ninesix months ended September June 30, 2019 and 2018, and 2017, respectively. The addition of DI’s and LDM’s business contributed $11.0 million to the overall increase, as we expanded our salesforce to support our new product offerings. Excluding the impact of the Acquisition, marketingMarketing and sales expenses increased $10.4 million and 6%,decreased, primarily due to plannedlower 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 search engine optimization. Sales compensation costs were flat despite serving an incremental 3,400 dealer customers from converted markets.the full six-month impact of Dealer Inspire.

 

General and administrative.General and administrative expenses represent 9.2%15.2% and 7.3%11.7% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. General and administrative expenses increased $11.2$7.3 million and 33%,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 $7.8 million in consulting services and other costs incurred as part of our settlement agreement with our stockholder activist, $5.0 million in costs related to the Acquisition, $3.1 million in incrementalincreased stock-based compensation, $2.8 million in incremental costs of being a public company and the addition of DI’s and LDM’s business since the date of the Acquisition. These increases were partially offset by $1.6 million in lower costs associated with the separation of certain employees and the prior year impacts of $5.0 million related to the Separation and $3.6 million related to the move to our new corporate headquarters location.compensation.

 

Affiliate revenue share.Affiliate revenue share expenses increased 64%, primarily dueexpense decreased $2.5 million, driven by a $4.1 million increase in the benefit from the amortization of the Unfavorable contracts liability related to increasethe 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 thethese early conversions of the McClatchy, tronc and Washington Post markets, partially offset by amortization of the unfavorable contracts liability.conversions. For information related to the unfavorableUnfavorable contracts liability, see Note 46 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

 

Depreciation and amortization. Depreciation and amortization expense increased 16%14%, primarily due to the incremental amortization expensereduction 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 associated withrelated to the Credit Agreement principallyborrowing utilized to fund the Separation andAcquisition, as well as additional interest expense associated with the Acquisition.interest rate swap. For information related to our termTerm and revolving loans,Revolving Loans and interest rate swap, see Note 4 (Debt) and Note 5 (Debt)(Interest Rate Swap), respectively, to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.  

 

Income tax expense. Effective with the Separation, we established a corporate legal entity structure that is subject to U.S. corporate income tax on a stand-alone basis post-Separation. (benefit) expense. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes,tax, was 26.0%17% for the ninesix months ended SeptemberJune 30, 20182019 and differed from the U.S. federal statutory rate of 21%, primarily due to state income taxes, nondeductible transaction costs and the impact of the Tax Cuts and Jobs Act,certain tax credits, partially offset by certainan adjustment to the deferred tax creditsliability, nondeductible benefits and excess tax benefits from stock-based compensation. We recorded $15.8 million of income tax expense for the same period 2017 related to DealerRater.com LLC and corporate income tax upon our Separation from TEGNA on June 1, 2017. For information related to income taxes, see Note 6 (Income Taxes) to the Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

 

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 20182019 and 20172018 which, along with our termTerm and revolving loansRevolving Loans described below, provides adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. In addition, we couldmay raise additional funds through other public or private debt or equity financings. The tax matters agreement that we entered into with TEGNA priorto 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 bestinterests 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 SeptemberJune 30, 2018,2019, cash and cash equivalents were $17.8$9.5 million.

 

Term Loan and Revolving Loan. As of SeptemberJune 30, 2018,2019, the outstanding principal amount under the term loanTerm Loan was $421.9$405.0 million, with an interest rate of 3.9%4.3%, andincluding the impact of the interest rate swap. The outstanding borrowings under the revolving loan Revolving Loan


were $285.0$275.0 million, with an interest rate of 3.8%3.9%. During the ninesix months ended SeptemberJune 30, 2018,2019, we borrowed $165.0made $11.3 million under the revolving loan to fund the Acquisitionin mandatory Term Loan payments and $30.0 million to fund share repurchases. We also made $55.0$5.0 million in voluntary revolving loanRevolving Loan payments, and $16.9 million in quarterly term loan payments.net of borrowings. As of SeptemberJune 30, 2018, we were permitted2019, $175.0 million was available to borrow an aggregate of $165.0 million under the revolving loan.Revolving Loan. Our borrowings are limited by our net leverage ratio, which is calculated in accordance with our credit agreement, and was 2.93.25 to 1.0 as of SeptemberJune 30, 2018.2019.

 


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.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 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. We intend to fund the share repurchase program principally with cash from operations. During the ninesix months ended September June 30, 2019 and 2018, the Companywe repurchased and subsequently retired 3.01.7 million shares for $77.2 million.$40.0 million and 2.0 million shares for $50.0 million, respectively.

 

Cash Flows.  Details of our cash flows are as follows (in thousands):

follows:  

 

Nine Months Ended September 30,

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

(In thousands)

 

2019

 

 

2018

 

 

Change

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

121,081

 

 

$

147,196

 

 

$

(26,115

)

 

$

50,755

 

 

$

70,624

 

 

$

(19,869

)

Investing activities

 

 

(167,119

)

 

 

(27,631

)

 

 

(139,488

)

 

 

(9,953

)

 

 

(163,385

)

 

 

153,432

 

Financing activities

 

 

43,284

 

 

 

(101,033

)

 

 

144,317

 

 

 

(56,726

)

 

 

90,592

 

 

 

(147,318

)

Net change in cash and cash equivalents

 

$

(2,754

)

 

$

18,532

 

 

$

(21,286

)

 

$

(15,924

)

 

$

(2,169

)

 

$

(13,755

)

 

Operating Activities. The decrease in cash provided by operating activities iswas primarily due to higher interest payments related to our term and revolving loans, costs associated with the stockholder activist campaign, the cash settlement of DI’s unvested equity awards, costs related to the Acquisition and higher incremental costs of being a public company,$28.7 million reduction in net income, partially offset by other changes in operating assets and liabilitiesliabilities. The net loss for the three and lower cash tax payments. During the ninesix months ended SeptemberJune 30, 2017, we also received $10.0 million2019 is primarily attributed to a decrease in cash fromnational advertising revenue. In addition, the lessor for lease incentives related tonet loss in each period was impacted by the move to our new corporate headquarters location.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 increasedecrease in cash used in investing activities is primarily due to the Acquisition. 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 the Acquisition,our Term and Revolving Loans, see Note 3 (Business Combination and Goodwill)4 (Debt) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Financing Activities. The increase in cash provided by financing activities is primarily driven by net revolving loan borrowings of $140.0 million to fund the Acquisition and share repurchases and $16.9 million in quarterly term loan payments. During the nine months ended September 30, 2017, cash used in financing activities was primarily driven by transactions with TEGNA. Prior to the Separation, TEGNA utilized a centralized approach to cash management and the financing of its operations. Under this approach, we provided funds to TEGNA and vice versa until the cash distribution to TEGNA at the time of the Separation. Thus, the net cash flow between TEGNA and us was presented as a financing activity. For information related to our term and revolving loans, see Note 5 (Debt) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.  


 

Commitments and Contingencies

Contingencies. For information related to commitments and contingencies, see Note 7 (Commitments and Contingencies) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

Arrangements. We do not have any material off-balance sheet arrangements.

 

Critical Accounting Policies

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” in Part II, Item 7, of the Annual Report on Form 10-K for the year ended December 31, 20172018 as filed with the SEC on March 6, 2018February 28, 2019 and see Note 2 (Recent1 (Description of Business, Company History and Summary of Significant Accounting Pronouncements)Polices) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q. During the ninesix months ended SeptemberJune 30, 2018,2019, there have been no changes to our critical accounting policies, except for our revenue recognition policy, which reflects the adoption of the Financial Accounting Standards Oversight Board Accounting Standards Codification 606, Revenue from Contracts with Customers.


Revenue Recognition. We account for a customer arrangement when we and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and we believe it is probable we will collect substantially all of the consideration to which we will be entitled in exchange for the services that will be provided to the customer. We allocate the contractual transaction price to each distinct performance obligation and recognize revenue when it satisfies a performance obligation by providing a service to a customer. Revenue is generated through our direct sales force (Retail revenues) and affiliate sales channels (Wholesale revenues).policies.

 

Online Subscription Advertising Products and Services Revenue. Our primary source of Retail and Wholesale revenues is through the sale of online subscription advertising products to dealer customers through varying levels of subscription packages. Our subscription packages provide the dealer customer’s available new and used vehicle inventory to in-market shoppers on the Cars.com website. The subscription packages are generally a fixed price arrangement with a one-year contract term that is automatically renewed, typically on a month-to month basis. We recognize subscription package revenues ratably as the service is provided over the contract term. Online subscription advertising products and services revenue is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

We also offer our customers several add-on products to the subscription packages. Add-on products include premium advertising products that can be uniquely tailored to an individual dealer customer’s current needs. We do not sell add-on products separately from the subscription packages as the customer cannot benefit from add-on products on their own. Therefore, the subscription packages and add-on products are combined as a single performance obligation and we recognize the related revenue ratably as the services are provided over the contract term.

As part of the acquisition of DI, we also provide services related to flexible, custom designed website platforms supporting highly personalized digital marketing campaigns, digital retailing and messaging platform products. We recognize revenue related to these services ratably as the service is provided over the contract term. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

Our affiliates also sell online subscription advertising products to dealer customers and we earn wholesale revenues through our affiliate agreements. Affiliates are assigned certain sales territories in which they sell our products. Under these agreements, we charge the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers. We recognize wholesale revenue ratably as the service is provided over the contract term. In situations where our direct sales force sells our products within an affiliate’s assigned territory, we pay the affiliate a revenue share which is classified as “Affiliate revenue share” within Operating Expenses in the Consolidated and Combined Statements of Income. Wholesale revenues also includes the amortization of the unfavorable contracts liability. For information related to the unfavorable contracts liability, see Note 4 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Display Advertising Products and Services Revenue. We also earn revenue through the sale of display advertising on our website to national advertisers, pursuant to transaction-based contracts, which are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. We recognize revenue as the impressions or click-throughs are delivered. If the impressions or click-throughs delivered are less than the amount invoiced to the customer, the difference is recorded as deferred revenue and recognized as revenue when earned. Display advertising products revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

As part of the acquisition of LDM, we also provide services related to customized digital marketing and customer acquisition services, including paid, organic, social and creative services. We recognize revenue related to these services primarily at the point in time the service is provided. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

Pay Per Lead Revenue. We also sell leads, which are connections from consumers to dealer customers in the form of phone calls, emails and text messages, to dealer customers, OEMs and third-party resellers. We recognize pay per lead revenue primarily on a per-lead basis at the point in time in which the lead has been delivered. Revenue related to pay per leads is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

Other Revenue.  Other revenue primarily includes revenues related to vehicle listing data sold to third-parties and peer-to-peer vehicle advertising. We recognize other revenue either ratably as the services are provided or at the point in time the services have been performed. Other revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.


Recent Accounting Pronouncements

Pronouncements. For information related to recent accounting pronouncements, see Note 2 (Recent(New Accounting Pronouncements) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “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 Item 7A “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, 2017,2018, as filed with the Securities and Exchange Commission (“SEC”) on March 6, 2018.February 28, 2019. Our exposures to market risk have not changed materially since December 31, 2017.2018.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

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 reportReport on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities 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.To assist management, we have established an internal audit function to verify and monitor our internal controls and procedures. Our internal control system is supported by written policies and procedures, contains self-monitoring mechanisms and is audited by the internal audit function.

 

Changes in Internal Control Over Financial Reporting

Reporting. During the period covered by this Quarterly reportReport 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).


PART II—OTHER INFORMATION

 

 

For information relating to legal proceedings, see Note 7 (Commitments and Contingencies) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 11., “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 1A1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018 as filed with the Securities and Exchange Commission (“SEC”) on March 6, 2018,February 28, 2019, which could materially affect our business, financial condition, results of operations and future results. ThereOther 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 SeptemberJune 30, 2018 was2019 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)

 

July 1 through July 31, 2018

 

 

192,574

 

 

$

30.06

 

 

 

192,574

 

 

$

144,211

 

August 1 through August 31, 2018

 

 

310,131

 

 

 

27.31

 

 

 

310,131

 

 

 

135,741

 

September 1 through September 30, 2018

 

 

489,339

 

 

 

26.43

 

 

 

489,339

 

 

 

122,810

 

Total

 

 

992,044

 

 

 

 

 

 

 

992,044

 

 

 

 

 

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 total Board of DirectorsDirectors’ authorized value to be spent after each month's repurchases.  

 


ItemItem 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

NoneAs 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

  3.2  31.1*

 

Amended and Restated Bylaws of Cars.com Inc. (incorporated by reference to Exhibit 3.2 to the Company’s current Report on Form 8-K filed with the SEC on October 22, 2018, File No. 001-37869).

  31.1*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2*

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document.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.


SIGNATURESSIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Cars.com Inc.

 

 

 

 

 

Date:  November 7, 2018August 5, 2019

 

By:

 

/s/ T. Alex Vetter

 

 

 

 

T. Alex Vetter

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

Date:  November 7, 2018August 5, 2019

 

 

By:

 

 

/s/ Becky A. Sheehan

 

 

 

 

Becky A. Sheehan

 

 

 

 

Chief Financial Officer

 

3128