Cars.com Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. Cars.com operates an automotive marketplace and digital-solutions platform serving dealers, automakers and shoppers.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $158.2 million | $153.3 million | Up 3% |
| Operating income | $10.9 million | $16.5 million | Down 34% |
| Net income | $4.3 million | $5.3 million | Down 18% |
| Diluted EPS | $0.06 | $0.08 | Down $0.02 |
| Cash from operations | $30.4 million | $50.4 million | Down $20.0 million |
- Dealer revenue rose 6% to $140.4 million, supported by a 4% year-over-year increase in dealer customers and 1% growth in average revenue per dealer. Dealer customers totaled 19,500 at quarter-end.
- OEM and National revenue fell 16% to $15.2 million, reflecting reduced OEM spending amid fewer new-model releases and production shortages. Other revenue increased 15% to $2.6 million.
- Operating expenses rose 8% to $147.3 million, faster than revenue. Product and technology costs increased 27%, marketing and sales 7%, and general and administrative 25%. Operating margin, calculated from reported figures, was approximately 6.9%, versus 10.8% a year earlier.
- Interest expense declined to $9.3 million from $10.0 million. A $2.5 million income tax benefit contributed to reported net income; the effective tax rate was negative 138.6%, reflecting stock-based compensation, uncertain tax positions and tax benefits from a partial valuation-allowance release.
- Cash and cash equivalents were $30.5 million at March 31, down from $39.1 million at year-end. Operating cash flow was $30.4 million; investing cash flow was negative $68.8 million, including $64.8 million paid for Accu-Trade. Financing cash flow was positive $29.8 million, including $45.0 million of revolver borrowings.
- Gross debt principal was $520.0 million: $75.0 million term loan, $45.0 million revolver and $400.0 million senior notes. The company reported a 5.5% effective interest rate, excluding the swap impact. It had $185.0 million available under its revolver and stated total liquidity of $215.5 million. Debt covenants were met; senior secured leverage and interest coverage ratios were 0.7x and 5.0x.
Material changes and notable items
- In March, Cars.com acquired Accu-Trade for $64.8 million cash plus $5.3 million of other consideration. Preliminary total consideration was $92.6 million, including $22.5 million of contingent consideration tied to performance targets. The acquisition added $75.5 million of goodwill; purchase accounting remains preliminary.
- Cars.com authorized a three-year share repurchase program of up to $200 million and repurchased 338,243 shares for $5.0 million during the quarter, averaging $14.78 per share.
- Traffic declined 5% year over year to 148.5 million visits, while average monthly unique visitors increased 2% to 26.6 million. Management attributed the traffic decline partly to elevated prior-year activity associated with consumer confidence and federal stimulus; it also cited lower vehicle inventory and shorter shopping cycles.
- Cash from operations fell partly because of timing of operating assets and liabilities and because the prior-year period included a $9.1 million tax refund. Investing outflow increased principally because of Accu-Trade.
- The company corrected a prior-period deferred-tax valuation-allowance overstatement of $30.8 million, concluding the correction was not material to previously issued statements. It increased year-end 2021 stockholders’ equity by $31.1 million and had no impact on the 2021 income statement, EPS or cash flows.
- The company recorded a valuation allowance against deferred tax assets at March 31, citing recent losses, primarily associated with goodwill and indefinite-lived intangible-asset impairments. It also disclosed that the interest-rate swap fixing $300 million of notional exposure at 2.96% plus margin runs through May 31, 2022.
Outlook, risks and contingencies
- The filing provides no specific financial guidance or quantified forecast. Management emphasized continued development of digital solutions and described its marketplace and products as tools for dealers facing an evolving, increasingly online car-buying environment.
- Management cited semiconductor shortages, constrained vehicle inventory, supply-chain disruption, vehicle demand and broader macroeconomic conditions as factors that could affect customer spending and revenue. COVID-19 impacts remain uncertain.
- Other disclosed risks include competition, dependence on search engines and third-party data or service providers, cybersecurity and technology reliability, privacy regulation, customer concentration, acquisition integration and leverage, interest-rate exposure, and litigation. The company reported no material changes to the risk factors in its 2021 Form 10-K and no material off-balance-sheet arrangements.
- Accu-Trade and CreditIQ each include contingent consideration dependent on future performance. The filing describes ordinary-course legal and administrative proceedings but does not identify a specific material case or provide a clear quantified loss exposure.
Important facts for investors to verify
- Whether dealer-customer growth and digital-solutions sales can offset weaker OEM spending and ongoing vehicle-inventory constraints.
- How operating expenses, cash generation and margins trend after the quarter’s faster expense growth and lower operating cash flow.
- Accu-Trade integration, preliminary purchase-price allocation and potential contingent cash or stock payments; also monitor CreditIQ’s earn-out obligations.
- Debt levels, revolver capacity, covenant headroom, floating-rate exposure and the effect of the swap’s May 2022 expiration.
- The sustainability of the tax benefit, recoverability of deferred tax assets and any developments related to the disclosed prior-period tax correction.
- Future repurchases under the $200 million authorization and their funding relative to acquisition needs and debt.