Cars.com Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Cars.com became an independent public company in a May 31, 2017 spin-off from TEGNA. The statements include historical combined results before separation; the 2016 comparison also includes only two months of DealerRater, versus three months in Q3 2017 and nine months in the 2017 year-to-date period. This limits comparability, particularly for taxes and public-company costs.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $159.9m | $162.3m | $469.7m | $471.4m |
| Operating income | $39.4m | $52.2m | $95.4m | $127.8m |
| Net income | $21.0m | $51.8m | $72.7m | $127.6m |
| Diluted EPS | $0.29 | $0.72 | $1.01 | $1.78 |
| Operating margin | 24.6% | 32.1% | 20.3% | 27.1% |
- Revenue mix: Q3 retail revenue was $118.8m (down 1%); wholesale revenue was $41.1m (down 3%). Direct revenue declined 3%, while national advertising grew 3% and other revenue grew 9%. For nine months, retail revenue rose 1% and wholesale revenue fell 4%.
- Cash flow: Nine-month operating cash flow was $147.2m, compared with $140.4m. Investing cash outflow was $27.6m, primarily capital expenditures, including $19.8m for the headquarters relocation. Financing cash outflow was $101.0m, including the separation-related payment to TEGNA and debt repayments. Cash increased $18.5m to $27.4m.
- Liquidity and debt: At September 30, cash was $27.4m and total debt outstanding was $624.4m; $270m remained available under the revolving facility. The credit agreement matures May 2022 and is secured by substantially all assets of the Company and guarantors. A further $25m revolver repayment was made October 31, 2017.
- Balance sheet: Total assets were $2.53bn and total liabilities $1.02bn; stockholders’ equity was $1.51bn. Goodwill was $788.1m and net intangible assets were $1.55bn.
Material changes and drivers
- Q3 revenue declined 1%, while operating expenses increased 9% to $120.5m. Product support, technology and operations costs rose 13%, and marketing and sales costs rose 4%. General and administrative expense increased 50% to $11.6m, reflecting transition and public-company costs, compensation, and added depreciation.
- Q3 interest expense was $5.4m versus slight interest income in the prior-year quarter, following the new debt raised at separation. Income tax expense increased to $13.0m from $0.5m; the company became subject to corporate income taxes after separation. Consequently, net income fell 60% in Q3 and 43% for the nine-month period.
- Operating metrics showed Q3 visits down about 1% to 101.7m and dealer customers down about 2% to 21,307; average vehicle listings increased about 6% to 4.87m.
- The $650m cash transfer to TEGNA was funded principally by $675m of borrowings. The 2017 cash-flow comparison is also affected by separation financing and the prior-year $114.9m DealerRater acquisition.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said independence may compress margins as the Company builds internal support functions and incurs ongoing public-company costs. It expects to address incremental costs through operating efficiency and business growth.
- Management said operations have historically generated strong cash flow and believes cash generation and credit facilities provide adequate liquidity for requirements, investments and strategic acquisitions. Debt may reduce free cash flow and constrain acquisitions.
- In October 2017, Cars.com LLC changed its tax structure to a C corporation. The filing says this will produce a $69m noncash write-off of deferred tax liability and a credit to income tax expense in Q4 2017.
- The tax matters agreement generally restricts certain acquisitions, mergers, equity issuances, repurchases and cessation of business for two years after the distribution, subject to exceptions.
- Floating-rate debt creates interest-rate exposure: a 100-basis-point rate increase would raise annual interest expense by an estimated $6.2m. The filing cites competition, dealer consolidation, economic and auto-market weakness, technology and cybersecurity disruption, acquisition execution, and credit-market access among key risks.
- The Company disclosed ordinary-course legal and administrative proceedings but provided no clear quantified loss exposure. It reported no material off-balance-sheet arrangements and no material change in risk factors.
Important facts for investors to verify
- Underlying dealer economics and revenue trends, including falling dealer counts and visits versus growth in listings.
- Whether standalone operating costs and transition expenses stabilize, and the resulting effect on margins and cash generation.
- Debt repayment pace, floating-rate exposure, revolver availability, and compliance with credit covenants.
- The timing and accounting impact of the expected $69m Q4 tax benefit and the comparability of post-separation tax results.
- Effects of the two-year tax agreement restrictions on strategic transactions and capital allocation.