Cars.com Inc. — 2019 Form 10-K Summary
Business context and reporting period. Cars.com operates a digital automotive marketplace and provides dealer websites, advertising, marketing, and other technology solutions. This 10-K covers the fiscal year ended December 31, 2019; fourth-quarter results are also reported. The company completed its affiliate conversions by October 2019 and now serves all dealer customers directly.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $606.7 million | $662.1 million |
| Operating income (loss) | $(446.1) million | $83.9 million |
| Net income (loss) | $(445.3) million | $38.8 million |
| Diluted earnings (loss) per share | $(6.65) | $0.55 |
| Operating cash flow | $101.5 million | $163.5 million |
| Cash and cash equivalents at year-end | $13.5 million | $25.5 million |
- Revenue fell 8%. Direct revenue increased 4% to $477.1 million, while national advertising declined 23% to $80.8 million. Wholesale revenue fell 59% to $34.4 million, primarily reflecting conversions to direct sales.
- The 2019 operating loss included a $461.5 million goodwill and intangible-asset impairment charge ($427.3 million net of tax benefit). Excluding this charge, the filing does not present a company-defined adjusted operating result or margin.
- Operating cash flow declined $62.1 million year over year. Capital expenditures were $21.3 million, implying free cash flow of approximately $80.2 million using the company’s stated definition. Cash declined $11.9 million during the year.
- At year-end, outstanding debt principal was $648.1 million: $388.1 million under the term loan and $260.0 million under the revolver. The company reported a 3.8x net leverage ratio, $190 million of revolver availability, and compliance with debt covenants. Debt matures May 31, 2022; $575 million of scheduled principal payments fall in 2022.
- Interest expense, net was $30.8 million. The filing reports a $300 million interest-rate swap and estimates that a 100-basis-point increase in rates would add $6.5 million of annual interest expense on unhedged debt.
Material changes and fourth-quarter results
- Fourth-quarter revenue was $152.2 million, down from $164.3 million in Q4 2018. Operating income was $4.7 million versus $23.9 million; net loss was $4.1 million versus net income of $9.4 million.
- For full-year 2019, traffic rose 24% to 553.7 million visits and average monthly unique visitors increased 21% to 22.6 million. Dealer customers decreased 5% year over year to 18,834; the company cited earlier marketplace cancellations, partly offset by digital-solutions growth.
- Direct monthly average revenue per dealer rose 4% to $2,179, but the comparison includes dealer websites and related solutions in 2019 that were not included in the 2018 metric. Excluding those items, the company reported $2,070, down 1% year over year.
- The strategic alternatives review concluded in August 2019 without an actionable sale proposal; the board elected to continue as an independent public company. The company also restructured product and technology teams and continued its technology transformation.
Outlook, commentary, and risks
- Management identified softer U.S. new-car sales and lower dealer profitability as factors affecting customer spending. It is pursuing growth through digital solutions alongside its marketplace, operational efficiencies, product innovation, and cloud migration.
- Cars.com was selected as a preferred website provider to GM dealers, with a pilot underway and website launches expected in 2020. The opportunity could expand its website customer base, but adoption and financial contribution are not quantified.
- Management expected incremental free cash flow beginning July 2020 after affiliate agreements expire and affiliate payments end; no amount was provided. The filing gives no numerical 2020 revenue, earnings, or cash-flow guidance.
- Key risks include competition for dealer and OEM budgets, dealer churn and consolidation, macroeconomic or automotive-market weakness, dependence on search-engine traffic and third-party data, technology outages and cybersecurity, privacy regulation, and execution of the digital-solutions strategy.
- Goodwill and other intangible assets totaled about $1.8 billion, approximately 91% of total assets. Following the 2019 impairment, fourth-quarter impairment tests found estimated fair values above carrying values; valuations remain sensitive to assumptions about future cash flows, growth, and discount rates.
- The credit agreement limits additional debt and other actions and has a maximum leverage covenant of 4.5x, with step-downs through maturity. Separately, the filing’s debt-risk discussion says 53.7% of indebtedness was variable rate, while its market-risk section says 53.7% of interest rates were fixed; verify the intended exposure.
- The company reported no pending litigation believed likely to have a material adverse effect. It disclosed ordinary-course legal and administrative proceedings, for which adverse outcomes could nevertheless be material.
Important facts for investors to verify
- Reconcile impairment-adjusted operating performance and cash generation with the reported $445.3 million net loss and $101.5 million operating cash flow.
- Assess whether direct-revenue growth and higher traffic can offset declining national advertising, dealer cancellations, and lower marketplace subscription revenue.
- Verify debt covenant headroom, scheduled 2022 refinancing or repayment needs, revolver availability, and the filing’s inconsistent description of fixed versus variable-rate exposure.
- Monitor the GM website-provider pilot, dealer adoption, digital-solutions growth, and the effect of affiliate-payment expirations on free cash flow.
- Review the assumptions and sensitivity of goodwill and trade-name valuations, given the size of intangible assets relative to total assets.