Cars.com Inc. — Q2 2017 Form 10-Q
Business context and period: Unaudited results cover the three and six months ended June 30, 2017. Cars.com operates an online automotive marketplace supported by dealer subscriptions, national advertising and affiliate sales; it reported approximately 35 million monthly visits, five million vehicle listings and 21,000 dealer customers. The May 31, 2017 spin-off from TEGNA makes the historical financial statements combined carve-out results rather than a full comparison of an independent public company.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $156.6 million | $156.7 million | $309.8 million | $309.1 million |
| Operating income | $28.9 million | $41.9 million | $56.1 million | $75.7 million |
| Net income | $24.8 million | $42.0 million | $51.7 million | $75.7 million |
| Diluted EPS | $0.35 | $0.59 | $0.72 | $1.06 |
| Operating margin | 18.4% | 26.7% | 18.1% | 24.5% |
- Q2 retail revenue increased 2% to $115.7 million, while wholesale revenue fell 5% to $40.9 million. For the first half, retail revenue rose 2% and wholesale revenue declined 5%.
- Q2 operating expenses rose 11% to $127.8 million. General and administrative expense increased $12.3 million, or 153%, to $20.4 million; management attributed $10.3 million of Q2 expense to non-recurring items, including separation, headquarters relocation, employee separation and asset write-offs.
- Cash from operations for the first half was $96.7 million, versus $72.3 million a year earlier. Investing used $18.9 million, including office build-out costs; financing used $50.1 million. Cash ended June at $36.6 million.
- At June 30, total debt was approximately $668.9 million, including $21.2 million current and $647.8 million long-term. The company had $1.48 billion in stockholders’ equity. Current assets were $151.6 million versus current liabilities of $100.6 million.
Material changes and separation
- TEGNA completed the spin-off on May 31, 2017. Cars.com paid TEGNA $650 million and began NYSE trading on June 1. It borrowed $675 million under a new credit agreement to fund the payment, separation costs and working capital.
- The agreement matures May 31, 2022 and provides a $450 million term loan and up to $450 million in revolving commitments. Quarterly term-loan amortization was scheduled to begin September 30, 2017. Cars.com reported a voluntary $20 million revolver paydown on July 31, 2017.
- Q2 traffic declined 1% to 104.1 million visits, while dealer customers increased 5% to 21,465 and average listings grew 6% to 5.04 million.
- Results now include standalone corporate income tax treatment following separation; the prior-year comparison had no income-tax provision. The filing cautions that historical allocated TEGNA costs may not reflect future standalone expenses.
Outlook, risks and unusual items
- No numerical financial guidance is provided. Management anticipated near-term margin pressure from building standalone infrastructure and ongoing public-company costs, while stating that operating efficiency and growth would be priorities. It believed operating cash flow and available credit would provide adequate liquidity.
- Management noted that separation-related debt could reduce free cash flow and limit strategic acquisitions. Floating-rate exposure is material: a 100-basis-point rate increase was estimated to raise annual interest expense by $6.8 million based on debt outstanding at June 30.
- A tax matters agreement restricts certain acquisitions, mergers, equity issuances and other corporate actions for two years after the distribution, subject to exceptions.
- The company disclosed a Chicago office lease through June 2031, with minimum payments of $57.7 million. It described litigation as incidental to the business and did not identify a specific material proceeding in this filing.
- Other cited risks include competition, dealer consolidation, automotive and advertising market weakness, technology and cybersecurity disruption, reliance on affiliates and service providers, and potential impairment of goodwill or other assets. The filing reported no material changes to the risk factors in its Form 10 registration statement.
Key facts for investors to verify
- Whether retail growth and higher dealer/listing counts can offset declining wholesale revenue and lower traffic.
- Whether standalone costs normalize after the disclosed separation, relocation, employee-transition and asset-disposal expenses—and how margins evolve.
- Debt balances, revolver utilization, covenant headroom, floating-rate exposure and the effect of scheduled amortization and the July 2017 paydown.
- Cash conversion and the level of ongoing capital spending after the office build-out.
- Effects of the tax matters agreement on strategic flexibility and the costs of operating independently from TEGNA.