0001564590-20-021913.txt : 20200506 0001564590-20-021913.hdr.sgml : 20200506 20200506160635 ACCESSION NUMBER: 0001564590-20-021913 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 71 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200506 DATE AS OF CHANGE: 20200506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Cars.com Inc. CENTRAL INDEX KEY: 0001683606 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 813693660 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37869 FILM NUMBER: 20852622 BUSINESS ADDRESS: STREET 1: 300 S. RIVERSIDE PLAZA STREET 2: SUITE 1000 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 312-601-5000 MAIL ADDRESS: STREET 1: 300 S. RIVERSIDE PLAZA STREET 2: SUITE 1000 CITY: CHICAGO STATE: IL ZIP: 60606 10-Q 1 cars-10q_20200331.htm 10-Q cars-10q_20200331.htm
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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

 

b

For the quarterly period ended March 31, 2020

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

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

 

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  

As of April 30, 2020, the registrant had 67,144,823 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 Balance Sheets

2

 

Consolidated Statements of Loss

3

 

Consolidated Statements of Comprehensive Loss

4

 

Consolidated Statements of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

PART II.

OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

29

Signatures

31

 

 

 


1


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Cars.com Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

187,344

 

 

$

13,549

 

Accounts receivable, net

 

 

95,069

 

 

 

101,762

 

Prepaid expenses

 

 

8,092

 

 

 

6,526

 

Other current assets

 

 

782

 

 

 

603

 

Total current assets

 

 

291,287

 

 

 

122,440

 

Property and equipment, net

 

 

43,782

 

 

 

43,696

 

Goodwill

 

 

 

 

 

505,885

 

Intangible assets, net

 

 

904,221

 

 

 

1,329,499

 

Investments and other assets

 

 

16,634

 

 

 

26,471

 

Total assets

 

$

1,255,924

 

 

$

2,027,991

 

Liabilities and stockholders' equity:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,626

 

 

$

12,431

 

Accrued compensation

 

 

9,056

 

 

 

16,738

 

Current portion of long-term debt

 

 

31,425

 

 

 

31,391

 

Other accrued liabilities

 

 

40,203

 

 

 

38,246

 

Total current liabilities

 

 

98,310

 

 

 

98,806

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

763,361

 

 

 

611,277

 

Deferred tax liability

 

 

 

 

 

132,996

 

Other noncurrent liabilities

 

 

46,363

 

 

 

43,844

 

Total noncurrent liabilities

 

 

809,724

 

 

 

788,117

 

Total liabilities

 

 

908,034

 

 

 

886,923

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

  issued and outstanding as of March 31, 2020 and December 31, 2019,

  respectively

 

 

 

 

 

 

Common Stock at par, $0.01 par value; 300,000 shares authorized; 66,961

  and 66,764 shares issued and outstanding as of March 31, 2020 and

  December 31, 2019, respectively

 

 

670

 

 

 

668

 

Additional paid-in capital

 

 

1,516,174

 

 

 

1,515,109

 

Accumulated deficit

 

 

(1,154,501

)

 

 

(367,067

)

Accumulated other comprehensive loss

 

 

(14,453

)

 

 

(7,642

)

Total stockholders' equity

 

 

347,890

 

 

 

1,141,068

 

Total liabilities and stockholders' equity

 

$

1,255,924

 

 

$

2,027,991

 

 

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

 

2


 

Cars.com Inc.

Consolidated Statements of Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

  Retail

 

$

148,094

 

 

$

139,338

 

  Wholesale

 

 

 

 

 

14,860

 

     Total revenue

 

 

148,094

 

 

 

154,198

 

Operating expenses:

 

 

 

 

 

 

 

 

  Cost of revenue and operations

 

 

26,030

 

 

 

25,579

 

  Product and technology

 

 

14,873

 

 

 

17,863

 

  Marketing and sales

 

 

54,922

 

 

 

60,343

 

  General and administrative

 

 

14,117

 

 

 

23,888

 

  Affiliate revenue share

 

 

6,369

 

 

 

2,454

 

  Depreciation and amortization

 

 

30,961

 

 

 

28,125

 

  Goodwill and intangible asset impairment

 

 

905,885

 

 

 

 

     Total operating expenses

 

 

1,053,157

 

 

 

158,252

 

        Operating loss

 

 

(905,063

)

 

 

(4,054

)

Nonoperating expense:

 

 

 

 

 

 

 

 

  Interest expense, net

 

 

(7,526

)

 

 

(7,566

)

  Other (expense) income, net

 

 

(9,501

)

 

 

119

 

     Total nonoperating expense, net

 

 

(17,027

)

 

 

(7,447

)

       Loss before income taxes

 

 

(922,090

)

 

 

(11,501

)

       Income tax benefit

 

 

(134,656

)

 

 

(2,470

)

          Net loss

 

$

(787,434

)

 

$

(9,031

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

66,938

 

 

 

67,584

 

Diluted

 

 

66,938

 

 

 

67,584

 

Loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(11.76

)

 

$

(0.13

)

Diluted

 

 

(11.76

)

 

 

(0.13

)

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

 


3


 

Cars.com Inc.

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Net loss

$

(787,434

)

 

$

(9,031

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

    Interest rate swap

 

(6,811

)

 

 

(7,279

)

Total other comprehensive loss

 

(6,811

)

 

 

(7,279

)

Comprehensive loss

$

(794,245

)

 

$

(16,310

)

 

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

 

4


 

Cars.com Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at December 31, 2019

 

 

 

$

 

 

 

66,764

 

 

$

668

 

 

$

1,515,109

 

 

$

(367,067

)

 

$

(7,642

)

 

$

1,141,068

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(787,434

)

 

 

 

 

 

(787,434

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,811

)

 

 

(6,811

)

Shares issued in connection with

   stock-based compensation plans, net

 

 

 

 

 

 

 

197

 

 

 

2

 

 

 

(906

)

 

 

 

 

 

 

 

 

(904

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1,971

 

 

 

 

 

 

 

 

 

1,971

 

Balance at March 31, 2020

 

 

 

$

 

 

 

66,961

 

 

$

670

 

 

$

1,516,174

 

 

$

(1,154,501

)

 

$

(14,453

)

 

$

347,890

 

 

 

 

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 of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

2,981

 

 

 

 

 

 

 

 

 

2,981

 

Other

 

 

 

 

 

 

 

12

 

 

 

 

 

 

(181

)

 

 

 

 

 

 

 

 

(181

)

Balance at March 31, 2019

 

 

 

$

 

 

 

67,455

 

 

$

675

 

 

$

1,510,057

 

 

$

89,217

 

 

$

(7,279

)

 

$

1,592,670

 

 

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

 

5


 

Cars.com Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(787,434

)

 

$

(9,031

)

Adjustments to reconcile Net loss to Net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

5,683

 

 

 

4,033

 

Amortization of intangible assets

 

 

25,278

 

 

 

24,092

 

Amortization of unfavorable contracts liability

 

 

 

 

 

(6,300

)

Goodwill and intangible asset impairment

 

 

905,885

 

 

 

 

Impairment of non-marketable security

 

 

9,447

 

 

 

 

Stock-based compensation

 

 

1,971

 

 

 

2,981

 

Deferred income taxes

 

 

(133,064

)

 

 

(2,570

)

Provision for doubtful accounts

 

 

1,606

 

 

 

1,055

 

Amortization of debt issuance costs

 

 

556

 

 

 

311

 

Other, net

 

 

75

 

 

 

(9

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,087

 

 

 

12,274

 

Prepaid expenses

 

 

(1,566

)

 

 

1,847

 

Other current assets

 

 

(218

)

 

 

886

 

Other assets

 

 

458

 

 

 

(17,208

)

Accounts payable

 

 

5,133

 

 

 

574

 

Accrued compensation

 

 

(7,682

)

 

 

(4,075

)

Other accrued liabilities

 

 

(1,661

)

 

 

14,087

 

Other noncurrent liabilities

 

 

(662

)

 

 

15,442

 

Net cash provided by operating activities

 

 

28,892

 

 

 

38,389

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

     Purchase of property and equipment

 

 

(5,755

)

 

 

(3,363

)

     Other, net

 

 

 

 

 

(600

)

Net cash used in investing activities

 

 

(5,755

)

 

 

(3,963

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

     Proceeds from revolving loan borrowings

 

 

165,000

 

 

 

 

     Payments of long-term debt

 

 

(13,438

)

 

 

(10,625

)

     Stock-based compensation plans, net

 

 

(904

)

 

 

(743

)

     Repurchases of common stock

 

 

 

 

 

(20,000

)

     Other

 

 

 

 

 

(181

)

Net cash provided by (used in) financing activities

 

 

150,658

 

 

 

(31,549

)

Net increase in cash and cash equivalents

 

 

173,795

 

 

 

2,877

 

Cash and cash equivalents at beginning of period

 

 

13,549

 

 

 

25,463

 

Cash and cash equivalents at end of period

 

$

187,344

 

 

$

28,340

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes, net of refunds

 

$

124

 

 

$

38

 

Cash paid for interest

 

 

6,956

 

 

 

7,413

 

 

 

 

 

 

 

 

 

 

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

 

 

6


 

Cars.com Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

Description of Business. Cars.com Inc., (the “Company” or CARS) is a leading digital marketplace and solutions provider for the automotive industry that connects car shoppers with sellers and original equipment manufacturers (“OEM”s). The Company’s marketplace empowers shoppers with the resources and information to make confident car buying decisions while our digital solutions and technology platform help sellers improve operational efficiency, profitability and sales. The Company’s portfolio of brands includes Cars.com, Dealer Inspire and DealerRater, in addition to Auto.com, PickupTrucks.com and NewCars.com.  

Company History. In May 2017, the Company separated from its former parent company, TEGNA Inc. (“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). On 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 outstanding shares of the Company’s common stock. 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., an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of Launch Digital Marketing LLC, a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “DI Acquisition”). The post-DI Acquisition business related to Dealer Inspire, Inc. and Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”.

 

Basis of Presentation. These accompanying unaudited interim Consolidated Financial Statements (“Consolidated Financial Statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2019, which are included in the Company's Annual Report on Form 10-K dated February 26, 2020 (the “December 31, 2019 Financial Statements”).

 

The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in the December 31, 2019 Financial Statements. In the opinion of management, the Consolidated Financial Statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, cash flows and changes in stockholders' equity as of the dates and for the periods indicated. The unaudited results of operations for the three months ended March 31, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020.

 

Use of Estimates. The preparation of the accompanying Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.

Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of Cars.com Inc. and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation.

 

NOTE 2. New Accounting Pronouncements 

Recently Adopted Accounting Pronouncements

 

Cloud Computing Arrangements. In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. The Company adopted this new guidance as of January 1, 2020. The adoption did not have a material impact on its Consolidated Financial Statements and related disclosures.

Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses changing the way credit losses on accounts receivable are estimated. Under current U.S. GAAP, credit losses on trade accounts receivable are recognized once it is probable that such losses will occur. Under this new guidance, the Company is required to

7


Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

 

estimate credit losses based on the expected amount of future collections which may result in earlier recognition of allowance for doubtful accounts. The Company adopted this new guidance as of January 1, 2020. The adoption did not have a material impact on its Consolidated Financial Statements and related disclosures.

Reference Rate Reform. In March 2020, the FASB concluded its reference rate reform project and issued ASU 2020-04. The Board undertook the reference rate reform project to address constituents’ concerns about the anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company adopted this new guidance as of January 1, 2020. The adoption did not have a material impact on its Consolidated Financial Statements and related disclosures.

 

NOTE 3. Revenue

 

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

 

 

 

Three Months Ended March 31,

 

Sales channel

 

2020

 

 

2019

 

Direct

 

$

125,361

 

 

$

115,094

 

National advertising

 

 

19,393

 

 

 

20,295

 

Other

 

 

3,340

 

 

 

3,949

 

   Retail

 

 

148,094

 

 

 

139,338

 

   Wholesale

 

 

 

 

 

14,860

 

Total revenue

 

$

148,094

 

 

$

154,198

 

 

 

 

 

 

 

 

 

 

Major products and services

 

 

 

 

 

 

 

 

Subscription advertising and digital solutions

 

$

117,263

 

 

$

121,314

 

Display advertising

 

 

23,359

 

 

 

22,289

 

Pay per lead

 

 

5,743

 

 

 

7,934

 

Other

 

 

1,729

 

 

 

2,661

 

Total revenue

 

$

148,094

 

 

$

154,198

 

 

NOTE 4. Goodwill and Indefinite-lived Intangible Asset

 

The changes in the carrying amount of goodwill and indefinite-lived intangible asset are as follows (in thousands):

 

 

 

December 31, 2019

 

 

Additions

 

 

Impairment

 

 

March 31, 2020

 

Goodwill

 

$

505,885

 

 

$

 

 

$

(505,885

)

 

$

 

Indefinite-lived intangible asset

 

 

790,020

 

 

 

 

 

 

(400,000

)

 

 

390,020

 

 

Triggering Event. In the three months ended March 31, 2020, the Company determined there was a triggering event, caused by the economic impacts of the novel coronavirus disease 2019 (“COVID-19”) pandemic and related restrictions.

 

In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it continues to spread throughout the United States and the rest of the world with different geographical locations impacted more than others. The rapid spread of COVID-19 has resulted in governmental authorities around the country implementing numerous measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns. This has had, and is expected to continue to have, a negative impact on regional and national economies and the automotive industry for an uncertain duration.

 

The COVID-19 pandemic and related restrictions have caused a widespread increase in unemployment and are expected to result in reduced consumer spending and an economic slowdown or recession. Automobile dealers operate in a highly competitive market and are vulnerable to both decreased demand for new and used vehicles and periods of an economic slowdown or recession. Furthermore, dealerships have temporarily or permanently closed and more may close in the near future in light of the COVID-19 pandemic and related restrictions. As a result of negative changes in the financial condition of dealers, in the second half of March 2020, the

8


Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

 

Company’s customers began to adjust, reduce or suspend their operating activities. This has resulted and may continue to result in decreased subscription revenue and reduced demand for the Company’s services.

 

In an effort to assist its dealer customers impacted by the COVID-19 pandemic and related restrictions, the Company has announced, among other measures, financial relief in the form of certain invoice credits of 50% for April 2020 and 30% for May and June 2020. With respect to managing its expenses, the Company has multiple initiatives underway to adjust its expenses with changes in revenue.

 

The effects of the COVID-19 pandemic and the related restrictions, particularly reduced consumer spending and in light of the discounts that the Company has provided its dealer customers for the second quarter of 2020, will negatively impact the Company’s results of operations, cash flows and financial position. In addition, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of the COVID-19 pandemic and related restrictions. Thus, the amount and timing of future cash flows, used in the valuation models to estimate the current fair value of the Company’s assets, has been significantly and negativity impacted by the COVID-19 pandemic and related restrictions.

 

Impairment Assessment. The Company performed interim quantitative impairment tests as of March 31, 2020. The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, the Company recorded an impairment of $505.9 million and $400.0 million related to its goodwill and indefinite-lived intangible asset, respectively.

 

Goodwill. Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed. Goodwill is tested for impairment on an annual basis or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s goodwill is tested for impairment at a level referred to as the reporting unit. The level at which the Company tests goodwill for impairment requires us to determine whether the operations below the business segment level constitute a business for which discrete financial information is available and segment management regularly reviews the operating results. The Company has determined that CARS operates as a single reporting unit.

 

The process of estimating the fair value of goodwill is subjective and requires us to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment is performed at least annually and considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company performs the quantitative test.

 

Under the quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.

 

The Company estimated the fair value of the reporting unit with an income approach using the discounted cash flow (“DCF”) analysis and the Company also considered a market-based valuation methodology using comparable public company trading values. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, the discount rate and relevant comparable public company earnings multiples. The cash flows employed in the DCF analysis are based on the Company’s best estimate of future sales, earnings and cash flows after considering factors such as general market conditions and recent operating performance. The discount rate utilized in the DCF analysis is based on the reporting unit’s weighted-average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the Company’s reporting unit.

 

Impairment assessment inherently involves management judgments regarding a number of assumptions described above. The reporting unit fair value also depends on the future strength of the U.S. economy. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the Company’s recorded goodwill, differences in assumptions could have a material effect on the estimated fair values.

 

9


Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

 

Indefinite-lived Intangible Asset. The Company’s indefinite-lived intangible asset relates to the Cars.com trade name and resulted from TEGNA’s 2014 acquisition of Cars.com. Intangible assets with indefinite lives are tested annually, or more often if circumstances dictate, such as in the quarter ended March 31, 2020, for impairment and written down to fair value as required. The estimates of fair value are determined using the “relief from royalty” methodology, which is a variation of the income approach. The discount rate assumption is based on an assessment of the risk inherent in the projected future cash flows generated by the trade name intangible asset.

NOTE 5. Debt

 

As of March 31, 2020, the Company was in compliance with the covenants under its Credit Agreement.

 

Term Loan. As of March 31, 2020, the outstanding principal amount under the Term Loan was $379.7 million and the interest rate in effect was 4.3%, including the impact of the interest rate swap discussed below. During the three months ended March 31, 2020, the Company made $8.4 million in mandatory quarterly Term Loan payments.

 

Revolving Loan. As of March 31, 2020, the outstanding borrowings under the Revolving Loan were $420.0 million and the interest rate in effect was 2.7%. During the three months ended March 31, 2020, the Company borrowed $165.0 million. Additionally, the Company made $5.0 million in voluntary Revolving Loan payments. The Company drew down $165.0 million on the Company’s Revolving Loan for additional liquidity and flexibility, ending the quarter with $187.3 million in available cash. As of March 31, 2020, $30.0 million was available to borrow under the Revolving Loan. The Company’s borrowings are limited by its total net leverage ratio, which is calculated in accordance with the Credit Agreement and was 4.1 to 1.0 as of March 31, 2020.

 

Fair Value. The Company's debt is classified as Level 2 in the fair value hierarchy and the fair value is measured based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments. As of March 31, 2020, the fair value of the outstanding indebtedness was approximately $658.7 million, compared to the carrying value of $799.7 million. As of December 31, 2019, the fair value approximated the carrying value.  

 

Credit Agreement. In October 2019, the Company entered into an amendment to its Credit Agreement to increase the total net leverage covenant during the remaining term of the Credit Agreement while preserving the favorable pricing structure from the original agreement. The amendment increased the Company’s maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through the maturities of the Term Loan and the Revolving Loan on May 31, 2022.

 

NOTE 6. Interest Rate Swap

 

The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on its borrowing under the Term Loan, the Company entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, the Company is locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in the Company’s Credit Agreement, on a notional amount of $300 million. The Swap is designated as a cash flow hedge of interest rate risk. As of March 31, 2020, the fair value of the Swap was an unrealized loss of $17.0 million, of which $7.8 million and $9.2 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets. During the three months ended March 31, 2020 and March 31, 2019, $1.0 million and $0.3 million was reclassified from Accumulated other comprehensive loss into Interest expense, net, respectively.

 

NOTE 7. Unfavorable Contracts Liability

 

In connection with the October 2014 acquisition of Cars.com by TEGNA, the Company entered into affiliate agreements with the former owners of Cars.com (Belo Corporation (“Belo”), The McClatchy Company (“McClatchy”), tronc, inc. (“tronc”), and the Washington Post). Under the affiliate agreements, affiliates had the exclusive right to sell and price Cars.com’s products in their local territories, paying Cars.com a wholesale rate for the Cars.com product. The Company charged the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers and recognized revenue generated from these agreements as Wholesale revenue in the Consolidated Statements of Loss. The Unfavorable 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 was amortized on a straight-line basis over the five-year contract period.

 

Prior to the affiliate conversions discussed below, the Company recognized $25.2 million of Wholesale revenue with a corresponding reduction of the Unfavorable contracts liability on an annual basis. After the affiliate conversions, the amortization of the Unfavorable

10


Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

 

contracts liability was recorded as a reduction of Affiliate revenue share within Operating expenses in the Consolidated Statements of Loss Income. As of September 30, 2019, the Unfavorable contracts liability was fully amortized.

 

The Company amended five of its affiliate agreements (Gannett, McClatchy, TEGNA, tronc, and the Washington Post) and as a result, has a direct relationship with these dealer customers and recognizes the revenue associated with converted dealers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. On October 1, 2019, the Belo affiliate agreement expired and the Company now directly serves all dealer customers.

 

As part of the amendments to the affiliate agreements, Gannett, McClatchy, TEGNA, tronc, and the Washington Post have agreed to perform certain marketing support and transition services through varying dates, the latest of which is June 29, 2020. The fees the Company pays associated with the amended affiliate agreements are recorded as Affiliate revenue share expense within Operating expenses in the Consolidated Statements of Loss.

 

Therefore, during the three months ended March 31, 2020 and March 31, 2019, the Company recorded zero and $5.8 million of unfavorable contracts liability amortization as a reduction to Affiliate revenue share expense, rather than Wholesale revenue, in the Consolidated Statements of Loss, respectively.

 

NOTE 8. 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 9. Stockholders’ Equity

 

In March 2018, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $200 million of the Company’s common stock. The Company was allowed to repurchase stock 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 stock repurchase program was based on market conditions and other factors including price. The repurchase program had a two-year duration, did 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 funded the share repurchase program principally with cash from operations. As of March 31, 2020, the repurchase program is expired. The Company repurchased and subsequently retired zero shares during the three months ended March 31, 2020 and 0.9 million shares for $20.0 million during the three months ended March 31, 2019.

 

NOTE 10. Stock-Based Compensation

 

Restricted Stock Units (“RSUs”). RSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. RSUs are subject to graded vesting, generally ranging between one and four years and the fair value of the RSUs is equal to the Company’s common stock price on the date of grant. RSU activity for the three months ended March 31, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

 

 

 

Number

of RSUs

 

 

Weighted-Average

Grant Date

Fair Value

 

Outstanding as of December 31, 2019

 

 

943

 

 

$

24.68

 

Granted

 

 

3,167

 

 

 

5.40

 

Vested and delivered

 

 

(220

)

 

 

24.80

 

Forfeited

 

 

(87

)

 

 

22.82

 

Outstanding as of March 31, 2020 (1)

 

 

3,803

 

 

 

8.66

 

 

 

(1)

The outstanding balance as of March 31, 2020 includes 80 RSUs that were vested, but not yet delivered.

 

11


Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

 

Performance Stock Units (“PSUs”). PSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting. The fair value of the PSUs is equal to the Company’s common stock price on the date of grant. The percentage of 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 targets; adjusted earnings before interest, income taxes, depreciation and amortization targets; margin targets; and/or share price over a one to three-year performance period. These PSUs are subject to cliff vesting at the end of the respective performance period. PSU activity for the three months ended March 31, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

 

 

 

Number

of PSUs

 

 

Weighted-Average

Grant Date

Fair Value

 

Outstanding as of December 31, 2019

 

 

953

 

 

$

26.60

 

Granted (1)

 

 

715

 

 

 

5.40

 

Vested and delivered

 

 

 

 

 

 

Forfeited or cancelled (1)

 

 

(775

)

 

 

27.13

 

Outstanding as of March 31, 2020

 

 

893

 

 

 

8.78

 

 

 

(1)

Included in "Forfeited or cancelled" are 558 shares that were cancelled and replaced by new grants during the three months ended March 31, 2020.

 

Stock Options. Stock options represent the right to purchase shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. Stock options are subject to three-year cliff vesting and expire 10 years from the grant date. Stock option activity for the three months ended March 31, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

 

 

 

Number of Options

 

 

Weighted-Average

Grant Date

Fair Value

 

Outstanding as of December 31, 2019

 

 

 

 

$

 

Granted

 

 

513

 

 

 

2.80

 

Vested and delivered

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Outstanding as of March 31, 2020

 

 

513

 

 

 

2.80