Cars.com(CARS) - 2021 Q4 - Annual Report

Part I Business Cars.com Inc. operates a leading digital automotive marketplace, connecting car shoppers with sellers through digital solutions and generating primary revenue from dealer subscriptions - The company's vision is to become the largest digital automotive marketplace platform, focusing on frictionless omni-channel transactions[9] - As of December 31, 2021, the company served 19,179 dealer customers across all 50 states and nearly all OEMs selling vehicles in the U.S.[15][16] FY2021 Revenue Breakdown | Revenue Source | Percentage of Total Revenue | | :--- | :--- | | Car Dealerships | 88.2% | | OEMs and National Advertisers | 10.4% | | Other Customers | 1.4% | - The company has expanded its offerings through key acquisitions, including DealerRater (2016), Dealer Inspire (2018), and CreditIQ (2021), to enhance its digital solutions and media offerings[13][21] - As of December 31, 2021, CARS had approximately 1,600 full-time employees, with 45% identifying as female and 25% as having a racial and ethnic background other than white[70] Risk Factors The company faces significant risks from the COVID-19 pandemic, intense competition, reliance on OEMs, and evolving data privacy regulations - The COVID-19 pandemic has materially and adversely affected, and could continue to affect, the company's business, financial condition, and results of operations[73][76] - The company faces significant competition from internet search engines (Google, Facebook), online automotive sites (AutoTrader, CarGurus), and website solution providers (Dealer.com, Sincro)[97] - The business depends on strong brand recognition and traffic from internet search engines like Google, where changes in algorithms could harm traffic[87][89][90] - Evolving data privacy laws, such as the California Consumer Privacy Act (CCPA), create uncertainty and could increase compliance costs or restrict business practices[141] - The company's debt agreements contain restrictive covenants that may limit operational flexibility, including restrictions on incurring additional debt and making certain payments[165] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[167] Properties The company leases its principal executive office in Chicago, Illinois, and another office in Naperville, Illinois - The company maintains leased administrative offices in Chicago, Illinois and Naperville, Illinois[167] Legal Proceedings The company is occasionally involved in legal actions but does not believe any pending litigation will have a material adverse effect - The company does not have any pending litigation that is expected to have a material adverse effect on its results of operations, financial condition, or cash flows[168] Mine Safety Disclosures This item is not applicable to the company - None[169] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is traded on the NYSE under "CARS", and it does not intend to pay cash dividends in the foreseeable future - Common stock is listed on the NYSE under the symbol "CARS"[172] - The company has never declared or paid cash dividends and does not currently intend to, as future earnings will be retained for business financing and growth[174] Selected Financial Data This item is reserved and contains no information - This item is marked as [Reserved][177] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Cars.com saw revenue grow 14% to $623.7 million, returned to profitability with $7.7 million net income, and strengthened its financial position Overview of Results and Recent Trends The company highlights key achievements in 2021, including consistent dealer customer growth, the CreditIQ acquisition, and significant debt reduction Financial Highlights (2019-2021) | (In thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenue | $623,683 | $547,503 | $606,682 | | Net income (loss) | $7,719 | $(817,120) | $(445,324) | - Dealer Customers increased by 807, or 4%, to 19,179 as of December 31, 2021, marking six consecutive quarters of growth[182][183] - Acquired CreditIQ, an automotive fintech platform, for $30.0 million in cash upfront, with potential for up to $50.0 million in additional performance-based payments[184] - The company made $120.0 million of debt repayments during 2021, of which $110.0 million were voluntary prepayments[186] Key Operating Metrics In 2021, key operating metrics showed strong performance, with average monthly unique visitors growing 5% and annual average revenue per dealer increasing 16% Key Operating Metrics (Annual) | Metric | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | % Change | | :--- | :--- | :--- | :--- | | Traffic (Visits, in thousands) | 591,499 | 599,807 | (1%) | | Average Monthly Unique Visitors (thousands) | 25,064 | 23,822 | 5% | | Monthly Average Revenue Per Dealer (ARPD) | $2,309 | $1,995 | 16% | Dealer Customer and Quarterly ARPD Trends | Metric | Dec 31, 2021 | Dec 31, 2020 | % Change (YoY) | Sep 30, 2021 | % Change (QoQ) | | :--- | :--- | :--- | :--- | :--- | :--- | | Dealer Customers | 19,179 | 18,372 | 4% | 19,029 | 1% | | Quarterly ARPD | $2,333 | $2,264 | 3% | $2,332 | 0% | Results of Operations Total revenue increased 14% to $623.7 million in 2021, driven by a 19% increase in Dealer revenue, leading to a significant improvement in operating income Consolidated Results of Operations (2021 vs. 2020) | (In thousands) | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $623,683 | $547,503 | $76,180 | 14% | | Dealer revenue | $549,923 | $463,018 | $86,905 | 19% | | OEM and National revenue | $65,085 | $73,176 | $(8,091) | (11%) | | Total operating expenses | $575,345 | $1,434,830 | $(859,485) | (60%) | | Goodwill and intangible asset impairment | $— | $905,885 | $(905,885) | (100%) | | Operating income (loss) | $48,338 | $(887,327) | $935,665 | N/A | | Net income (loss) | $7,719 | $(817,120) | $824,839 | N/A | - The 19% increase in Dealer revenue was driven by growth in FUEL and digital solutions, a 4% increase in Dealer Customers, and the absence of approximately $38.2 million in invoice credits provided in 2020 due to the COVID-19 pandemic[205][206] Liquidity and Capital Resources The company maintained strong liquidity of $269.1 million at year-end 2021, supported by consistent operating cash flow and significant debt repayments - As of December 31, 2021, total liquidity was $269.1 million, including $39.1 million in cash and cash equivalents and $230.0 million available under the Revolving Loan[224] - Total outstanding debt principal was $477.5 million as of December 31, 2021, consisting of a $77.5 million Term Loan and $400.0 million in senior unsecured notes[225] Cash Flow Summary (2021 vs. 2020) | (In thousands) | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $138,003 | $138,616 | $(613) | | Net cash used in investing activities | $(39,450) | $(16,712) | $(22,738) | | Net cash used in financing activities | $(127,203) | $(67,734) | $(59,469) | - In February 2022, the Board authorized a new three-year, $200 million share repurchase program[242] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including revenue recognition, goodwill impairment, and business combination accounting - Revenue Recognition: The primary revenue source, marketplace subscription advertising, is recognized ratably over the contract term, with add-on products typically combined as a single performance obligation[245][247] - Goodwill Impairment: Goodwill is tested annually at the single reporting unit level, involving subjective estimates for future cash flows, growth rates, and discount rates in a DCF analysis, supplemented by market-based valuations[253][257] - Business Combinations: For acquisitions like CreditIQ, the company estimates the fair value of intangible assets and contingent consideration, with the latter valued using a Monte Carlo simulation or scenario-based method[262][265] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk, managed by a swap, and immaterial foreign currency exchange risk - The company manages interest rate risk on its variable-rate Term Loan with an interest rate swap, locking in a fixed rate of 2.96% on a notional amount of $300 million[269] - Hedge accounting for the interest rate swap was lost in 2020; subsequent changes in the swap's fair value are recorded in Other (expense) income, net[270] - Foreign currency exchange risk is not significant due to operations being primarily based in the United States[272] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the three years ended December 31, 2021, along with detailed notes Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements, highlighting Revenue Recognition and the CreditIQ acquisition as critical audit matters - The auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements[275] - Critical Audit Matters identified were Revenue Recognition, due to judgment in identifying performance obligations, and the acquisition of CreditIQ, Inc., due to complex estimations for the fair value of contingent consideration and intangible assets[279][280][283] Consolidated Financial Statements The consolidated financial statements detail the company's financial position and performance, including $1.01 billion in total assets and $7.7 million net income in 2021 Consolidated Balance Sheet Highlights (As of Dec 31) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total current assets | $147,437 | $178,081 | | Goodwill | $26,227 | $— | | Intangible assets, net | $769,424 | $835,166 | | Total assets | $1,007,205 | $1,075,712 | | Total current liabilities | $94,290 | $90,368 | | Long-term debt, net | $457,383 | $576,143 | | Total liabilities | $640,271 | $735,536 | | Total stockholders' equity | $366,934 | $340,176 | Consolidated Statement of Income (Loss) Highlights | (In thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenue | $623,683 | $547,503 | $606,682 | | Operating income (loss) | $48,338 | $(887,327) | $(446,060) | | Net income (loss) | $7,719 | $(817,120) | $(445,324) | | Diluted EPS | $0.11 | $(12.15) | $(6.65) | Notes to Consolidated Financial Statements The notes provide critical context, detailing the CreditIQ acquisition, goodwill impairment, debt structure, and subsequent events like the Accu-Trade acquisition - Note 3: The company acquired CreditIQ, Inc. on November 5, 2021, with total purchase consideration of $44.1 million, including $29.97 million in cash and $23.8 million in contingent consideration[357][359] - Note 5: Goodwill was $26.2 million as of Dec 31, 2021, entirely from the CreditIQ acquisition, following a $505.9 million goodwill impairment and $400.0 million indefinite-lived intangible asset impairment recorded in 2020[367][375] - Note 7: As of Dec 31, 2021, total debt outstanding was $477.5 million, comprising a $77.5 million Term Loan and $400.0 million in 6.375% senior unsecured notes due 2028[392][393][400] - Note 16: In February 2022, the company signed an agreement to acquire Accu-Trade for $65 million in cash and authorized a new three-year, $200 million share repurchase program[439][440] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[442] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with an unqualified auditor opinion - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[443] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework (2013)[446] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[451] Other Information The company reports no other information - None[458] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[460] Part III Directors, Executive Officers and Corporate Governance Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the 2022 Proxy Statement[462] Executive Compensation Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the 2022 Proxy Statement[462] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the 2022 Proxy Statement[463] Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the 2022 Proxy Statement[464] Principal Accounting Fees and Services Information regarding aggregate fees billed by the principal accountant, Ernst & Young LLP, is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the 2022 Proxy Statement[465] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and schedules filed with the report, along with an index of all exhibits - Lists the financial statements included in Item 8 and Financial Statement Schedule II-Valuation and Qualifying Accounts[467][468] - An exhibit index is provided, listing key corporate and financial documents filed with the report[468][470] Form 10-K Summary The company provides no summary for its Form 10-K - None[475]