Cars.com(CARS) - 2022 Q4 - Annual Report

PART I This section provides an overview of Cars.com Inc.'s business operations, strategic focus, and key risk factors impacting its performance and outlook Business Overview Cars.com Inc. (CARS) is a leading automotive marketplace platform connecting car shoppers with sellers, offering digital solutions through various brands - The company operates as a leading automotive marketplace and digital solutions provider, with a portfolio of brands including Cars.com, Dealer Inspire, FUEL, DealerRater, CreditIQ, and Accu-Trade[283][284][312] - In 2022, the company attracted an average of 26 million monthly unique visitors, with approximately 85% of visitors intending to purchase a vehicle within six months[285] - The primary customers are car dealers and OEMs; as of December 31, 2022, the company served 19,506 dealer customers and nearly all OEMs in the United States[287][315] - The company's growth strategy focuses on expanding its dealer network, increasing revenue per dealer by cross-selling solutions like Accu-Trade, enhancing shopper engagement, and innovating on its platform[304] - As of December 31, 2022, CARS had approximately 1,700 full-time employees, none of whom are represented by a labor union[338] Risk Factors The company faces significant risks related to the automotive ecosystem, including economic downturns, supply chain disruptions, and changes in consumer demand - Business is subject to macroeconomic risks, including recession, inflation, and interest rate hikes, which can reduce consumer demand for automobiles and affect dealer spending on advertising[340][370][371] - The company faces intense competition from internet search engines, other online marketplaces (e.g., AutoTrader, CarGurus), and website solution providers; consolidation among dealers or OEMs could reduce demand for services[360][374][384] - Reliance on internet search engines (like Google) for traffic and the potential for algorithm changes pose a significant risk; a failure to appear prominently in search results could adversely affect traffic[348][379] - Technology and data security are critical; the business is vulnerable to system failures, cyber-attacks, and data breaches, which could damage its reputation and result in financial liabilities; changes in data privacy laws (e.g., related to cookies) could also impact advertising effectiveness[419][433][435] - As of December 31, 2022, goodwill and other intangible assets were approximately $809.9 million (79% of total assets), which are subject to impairment risk[425] - Debt agreements contain restrictive covenants that limit operational flexibility, including restrictions on incurring additional debt, making distributions, and other corporate transactions[457][487] PART II This section provides a detailed discussion and analysis of the company's financial condition, results of operations, market risks, and financial statements Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2022, Cars.com Inc. saw a 5% increase in total revenue to $653.9 million, driven by a 5% growth in Dealer revenue, with operating income rising 37% to $66.0 million Overview of Results The company's performance in 2022 was marked by strategic acquisitions and steady growth in key metrics, including a 5% increase in average monthly unique visitors - In March 2022, the company acquired Accu-Trade for $64.7 million in cash and $5.3 million in other consideration to add vehicle appraisal, valuation, and logistics technology to its product suite[3] - In November 2021, the company acquired CreditIQ, an automotive fintech platform, for $30.0 million in cash at closing, with potential additional consideration based on future performance[469] - A three-year, $200 million share repurchase program was authorized in February 2022; during 2022, 4.2 million shares were repurchased for $49.0 million[532][544] Key Operating Metrics (2022 vs. 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Traffic (in thousands) | 587,388 | 591,499 | (1)% | | Average Monthly Unique Visitors (in thousands) | 26,400 | 25,064 | 5% | | Annual ARPD | $2,329 | $2,309 | 1% | Dealer Customer and Quarterly ARPD Trends | Metric | Dec 31, 2022 | Dec 31, 2021 | YoY % Change | Sep 30, 2022 | QoQ % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Dealer Customers | 19,506 | 19,179 | 2% | 19,585 | 0% | | Quarterly ARPD | $2,361 | $2,333 | 1% | $2,334 | 1% | Results of Operations (2022 vs 2021) For the year ended December 31, 2022, total revenue increased by 5% to $653.9 million, primarily due to a 5% rise in Dealer revenue, leading to a 37% increase in operating income Consolidated Results of Operations (in thousands) | Line Item | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $653,876 | $623,683 | $30,193 | 5% | | Dealer | $579,222 | $549,923 | $29,299 | 5% | | OEM and National | $58,557 | $65,085 | ($6,528) | (10)% | | Other | $16,097 | $8,675 | $7,422 | 86% | | Total operating expenses | $587,840 | $575,345 | $12,495 | 2% | | Operating income | $66,036 | $48,338 | $17,698 | 37% | | Income before income taxes | $22,576 | $9,483 | $13,093 | *** | | Net income | $17,206 | $10,791 | $6,415 | 59% | - Dealer revenue, representing 88.6% of total revenue, grew by 5% due to an increase in dealer customers and growth in digital solutions and advertising[505] - OEM and National revenue decreased by 10% primarily due to pullbacks in OEM spending associated with production delays and supply-chain disruptions[9] - Product and technology expenses increased by 15% due to investments related to recent acquisitions, talent acquisition, and other fees[539] - General and administrative expenses decreased by 8%, mainly because 2021 included $9.6 million in compensation expense related to the CreditIQ Acquisition[11] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and its credit facilities, with total liquidity of $246.7 million as of December 31, 2022 - As of December 31, 2022, the company had $31.7 million in cash and cash equivalents and $215.0 million available under its Revolving Loan, for a total liquidity of $246.7 million[15][16] Cash Flow Summary (in thousands) | Activity | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $128,511 | $138,003 | ($9,492) | | Net cash used in investing activities | ($84,377) | ($39,450) | ($44,927) | | Net cash used in financing activities | ($51,488) | ($127,203) | $75,715 | - The decrease in operating cash flow was mainly due to changes in working capital and the non-recurrence of a $9.1 million tax refund received in 2021[19] - The company has potential future contingent consideration payments related to the CIQ and Accu-Trade acquisitions, with a maximum of $50.0 million for CIQ (cash) and $63.0 million for Accu-Trade (cash or stock)[17][18][517] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant management judgment and estimates, particularly in revenue recognition and business combinations - Revenue from marketplace subscription packages and add-on products is typically combined as a single performance obligation and recognized ratably over the contract term[22][519] - Pay-per-lead revenue is recognized at the point in time the lead is delivered to the customer[23][119] - Contingent consideration from acquisitions is measured at fair value using Level 3 inputs (e.g., Monte Carlo simulation) and is re-assessed at each reporting period, with changes recognized in earnings[54][143][553] - Intangible assets from acquisitions are recorded at fair value, determined using methods like multi-period excess earnings and relief-from-royalty, and are amortized over their useful lives (typically 5-10 years)[53] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are related to changes in interest rates on its variable-rate debt and immaterial foreign currency exchange exposure - The company is exposed to interest rate risk on its variable-rate Term Loan and Revolving Loan; as of Dec 31, 2022, the Term Loan had an outstanding principal of $66.3 million at 6.7% and the Revolving Loan had $15.0 million outstanding at 6.4%[554] - Foreign currency exchange risk is currently immaterial, arising from a limited number of Canadian customers acquired through DealerRater, Dealer Inspire, and Accu-Trade[55] Financial Statements and Supplementary Data The consolidated financial statements, audited by Ernst & Young LLP, present the company's financial position, results of operations, and cash flows for the three years ended December 31, 2022 - The independent auditor, Ernst & Young LLP, issued an unqualified opinion, stating that the financial statements are presented fairly in conformity with U.S. GAAP[56] - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022, based on the COSO 2013 framework[67][525] Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $31,715 | $39,069 | | Goodwill | $102,856 | $26,227 | | Intangible assets, net | $707,088 | $769,424 | | Total assets | $1,024,870 | $1,007,205 | | Long-term debt, net | $458,249 | $457,383 | | Total liabilities | $640,440 | $609,185 | | Total stockholders' equity | $384,430 | $398,020 | Consolidated Income Statement Data (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $653,876 | $623,683 | $547,503 | | Operating income (loss) | $66,036 | $48,338 | ($887,327) | | Net income (loss) | $17,206 | $10,791 | ($789,106) | | Diluted EPS | $0.25 | $0.15 | ($11.74) | Consolidated Cash Flow Data (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $128,511 | $138,003 | $138,616 | | Net cash used in investing activities | ($84,377) | ($39,450) | ($16,712) | | Net cash used in financing activities | ($51,488) | ($127,203) | ($67,734) | | Net (decrease) increase in cash | ($7,354) | ($28,650) | $54,170 | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[246] - Based on the COSO 2013 framework, management concluded that internal control over financial reporting was effective as of December 31, 2022[247] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting[219][249] - There were no changes in internal control over financial reporting during the period that materially affected, or are reasonably likely to materially affect, these controls[248] PART III This section incorporates by reference information regarding directors, executive compensation, security ownership, and related party transactions from the company's proxy statement Director and Executive Information, Compensation, and Corporate Governance Information for Items 10 through 14 of the Form 10-K is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's definitive proxy statement, to be filed within 120 days of the fiscal year-end[40][229][255] PART IV This section details the financial statements, schedules, and exhibits filed as part of the Form 10-K, including the Credit Agreement and compensation plans Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, with required statements in Item 8 - The financial statements required by this item are listed in Part II, Item 8 of the report[265] - The report includes Schedule II - Valuation and Qualifying Accounts, which details the allowance for doubtful accounts for 2020, 2021, and 2022[69][613] - The Exhibit Index lists numerous documents filed with the report, including the Credit Agreement and its amendments, indentures, and various executive and employee compensation plans[266][566]