Cars.com Inc. - Quarter Report: 2022 March (Form 10-Q)

Acquisition-Date
Fair Value
(in thousands)

Weighted-Average
Amortization Period
(in years)

Acquired software

Trade name

Customer relationships

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37869

Cars.com Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	81-3693660
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

300 S. Riverside Plaza, Suite 1000

Chicago, Illinois 60606

(Address of principal executive offices)

(312) 601-5000

Registrant’s telephone number, including area code


Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	CARS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 28, 2022, the registrant had 69,492,015 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (unaudited):	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to the Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
Signatures		26

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited).

Cars.com Inc.

Consolidated Balance Sheets

(In thousands, except per share data)


	March 31, 2022			December 31, 2021
	(unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	30,453		$	39,069
Accounts receivable, net		96,013			98,893
Prepaid expenses		8,509			7,810
Other current assets		3,428			1,665
Total current assets		138,403			147,437
Property and equipment, net		42,949			43,005
Goodwill		101,763			26,227
Intangible assets, net		764,564			769,424
Investments and other assets, net		21,538			21,112
Total assets	$	1,069,217		$	1,007,205
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable	$	16,810		$	15,420
Accrued compensation		10,124			23,612
Current portion of long-term debt, net		10,226			8,941
Other accrued liabilities		58,642			46,317
Total current liabilities		95,802			94,290
Noncurrent liabilities:
Long-term debt, net		499,182			457,383
Other noncurrent liabilities		78,146			57,512
Total noncurrent liabilities		577,328			514,895
Total liabilities		673,130			609,185
Commitments and contingencies
Stockholders' equity:
Preferred Stock at par, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		—			—
Common Stock at par, $0.01 par value; 300,000 shares authorized; 69,803 and 69,170 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		698			692
Additional paid-in capital		1,537,231			1,544,712
Accumulated deficit		(1,141,042	)		(1,145,382	)
Accumulated other comprehensive loss		(800	)		(2,002	)
Total stockholders' equity		396,087			398,020
Total liabilities and stockholders' equity	$	1,069,217		$	1,007,205

The accompanying notes are an integral part of the Consolidated Financial Statements.

Cars.com Inc.

Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
	2022			2021
Revenue:
Dealer	$	140,416		$	132,958
OEM and National		15,174			18,069
Other		2,617			2,268
Total revenue		158,207			153,295
Operating expenses:
Cost of revenue and operations		27,752			27,831
Product and technology		21,307			16,760
Marketing and sales		57,094			53,211
General and administrative		16,560			13,266
Depreciation and amortization		24,553			25,680
Total operating expenses		147,266			136,748
Operating income		10,941			16,547
Nonoperating expense:
Interest expense, net		(9,330	)		(10,001	)
Other income, net		208			38
Total nonoperating expense, net		(9,122	)		(9,963	)
Income before income taxes		1,819			6,584
Income tax (benefit) expense		(2,521	)		1,306
Net income	$	4,340		$	5,278
Weighted-average common shares outstanding:
Basic		69,463			67,787
Diluted		70,899			70,254
Earnings per share:
Basic	$	0.06		$	0.08
Diluted		0.06			0.08

The accompanying notes are an integral part of the Consolidated Financial Statements.

Cars.com Inc.

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Net income	$	4,340	$	5,278
Other comprehensive income, net of tax:
Reclassification of accumulated other comprehensive loss on interest rate swap into Net income		1,202		1,200
Total other comprehensive income		1,202		1,200
Comprehensive income	$	5,542	$	6,478

The accompanying notes are an integral part of the Consolidated Financial Statements.

Cars.com Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)


	Preferred Stock				Common Stock						Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Stockholders'
	Shares		Amount		Shares			Amount			Capital			Deficit			Loss			Equity
Balance at December 31, 2021		—	$	—		69,170		$	692		$	1,544,712		$	(1,145,382	)	$	(2,002	)	$	398,020
Net income		—		—		—			—			—			4,340			—			4,340
Other comprehensive income, net of tax		—		—		—			—			—			—			1,202			1,202
Repurchases of common stock		—		—		(338	)		(3	)		(4,997	)		—			—			(5,000	)
Shares issued in connection with stock-based compensation plans, net		—		—		971			9			(7,705	)		—			—			(7,696	)
Stock-based compensation		—		—		—			—			5,221			—			—			5,221
Balance at March 31, 2022		—		—		69,803			698			1,537,231			(1,141,042	)		(800	)		396,087

	Preferred Stock				Common Stock						Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Stockholders'
	Shares		Amount		Shares			Amount			Capital			Deficit			Loss			Equity
Balance at December 31, 2020		—	$	—		67,387		$	674		$	1,530,493		$	(1,156,173	)	$	(6,804	)	$	368,190
Net income		—		—		—			—			—			5,278			—			5,278
Other comprehensive income, net of tax		—		—		—			—			—			—			1,200			1,200
Shares issued in connection with stock-based compensation plans, net		—		—		1,144			11			(5,641	)		—			—			(5,630	)
Stock-based compensation		—		—		—			—			4,978			—			—			4,978
Balance at March 31, 2021		—		—		68,531			685			1,529,830			(1,150,895	)		(5,604	)		374,016

The accompanying notes are an integral part of the Consolidated Financial Statements.

Cars.com Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2022			2021
Cash flows from operating activities:
Net income	$	4,340		$	5,278
Adjustments to reconcile Net income to Net cash provided by operating activities:
Depreciation		4,014			4,021
Amortization of intangible assets		20,539			21,659
Amortization of accumulated other comprehensive loss on interest rate swap		1,417			1,417
Stock-based compensation		5,221			4,978
Deferred income taxes		(374	)		(226	)
Provision for doubtful accounts		27			129
Amortization of debt issuance costs		816			834
Amortization of deferred revenue related to Accu-Trade Acquisition		(442	)		—
Other, net		87			(34	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		4,442			282
Prepaid expenses and other assets		(3,073	)		5,782
Accounts payable		1,081			6,438
Accrued compensation		(13,488	)		(9,141	)
Other liabilities		5,751			8,945
Net cash provided by operating activities		30,358			50,362
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired		(64,770	)		—
Purchase of property and equipment		(4,008	)		(6,219	)
Net cash used in investing activities		(68,778	)		(6,219	)
Cash flows from financing activities:
Proceeds from revolving loan borrowings		45,000			—
Payments of long-term debt		(2,500	)		(52,500	)
Payments for stock-based compensation plans, net		(7,696	)		(5,630	)
Repurchases of common stock		(5,000	)		—
Payments of debt issuance costs and other fees		—			(8	)
Net cash provided by (used in) financing activities		29,804			(58,138	)
Net decrease in cash and cash equivalents		(8,616	)		(13,995	)
Cash and cash equivalents at beginning of period		39,069			67,719
Cash and cash equivalents at end of period	$	30,453		$	53,724
Supplemental cash flow information:
Cash paid (received) for income taxes	$	17		$	(9,045	)
Cash paid for interest and swap		2,743			3,503

The accompanying notes are an integral part of the Consolidated Financial Statements.

Cars.com Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

NOTE 1. Description of Business and Summary of Significant Accounting Policies

Description of Business. Cars.com Inc. (the “Company” or “CARS”) is a leading automotive marketplace platform that provides a robust set of industry specific digital solutions. Through the marketplace, dealer websites and other digital products, the Company showcases dealer inventory, elevates and amplifies dealers’ and automotive manufacturers’ (“OEMs”) brands, connects sellers with the Company’s ready-to-buy audience and empowers shoppers with the resources and information needed to make confident car buying decisions. The Company’s digital solutions strategy builds on the rich data and audience of its digital marketplace to offer media and solutions that drive growth and efficiency for the automotive industry. The Company's portfolio of brands now includes Cars.com™, Dealer Inspire®, DealerRater®, FUEL™, Auto.com™, PickupTrucks.com™, CreditIQ™, Accu-Trade™ and NewCars.com®.

Basis of Presentation. These accompanying unaudited interim Consolidated Financial Statements (“Consolidated Financial Statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, which are included in the Company's Annual Report on Form 10-K dated February 25, 2022 (the “December 31, 2021 Financial Statements”).

The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in the December 31, 2021 Financial Statements. In the opinion of management, the Consolidated Financial Statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, cash flows and changes in stockholders' equity as of the dates and for the periods indicated. The unaudited results of operations for the three months ended March 31, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022.

Use of Estimates. The preparation of the accompanying Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.

Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of Cars.com Inc. and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation.

Correction of Certain Amounts Relating to Previously Issued Financial Statements. During the three months ended March 31, 2022, the Company identified a $30.8 million overstatement of the valuation allowance recorded against deferred tax assets that originated in 2020. In addition, the Company adjusted 2020 to reflect an immaterial income tax adjustment related to this prior period. The Company has concluded that these items are not material to the previously issued Consolidated Financial Statements and has therefore corrected these prior period amounts as presented in the current period Consolidated Financial Statements. The impact of correcting the items on the related financial statement line items is as follows (in thousands):

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)


Consolidated Balance Sheet
	As of December 31, 2021
Financial statement line item	As reported			Adjustment			As adjusted
Deferred tax liability	$	31,086		$	(31,086	)	$	—
Total noncurrent liabilities		545,981			(31,086	)		514,895
Total liabilities		640,271			(31,086	)		609,185

Consolidated Balance Sheet and Statement of Stockholders' Equity
	As of December 31, 2021
Financial statement line item	As reported			Adjustment			As adjusted
Accumulated deficit	$	(1,176,468	)	$	31,086		$	(1,145,382	)
Total stockholders' equity		366,934			31,086			398,020

Consolidated Statement of Stockholders' Equity
	Three Months Ended March 31, 2021
Financial statement line item	As reported			Adjustment			As adjusted
Accumulated deficit balance at December 31, 2020	$	(1,184,187	)	$	28,014		$	(1,156,173	)
Total stockholders' equity balance at December 31, 2020		340,176			28,014			368,190
Accumulated deficit balance at March 31, 2021		(1,178,909	)		28,014			(1,150,895	)
Total stockholders' equity balance at March 31, 2021		346,002			28,014			374,016

These adjustments had no impact to Net cash provided by operating activities, Net cash used in investing activities or Net cash provided by (used in) financing activities on the Consolidated Statements of Cash Flows. In addition, these adjustments had no impact to the Consolidated Statements of Income and Earnings per share for the three months ended March 31, 2021.

NOTE 2. Revenue

Revenue Summary. In the table below (in thousands), revenue is disaggregated by major products and services. The Company only has one reportable segment; therefore, further disaggregation is not applicable at this time.


	Three Months Ended March 31,
Major products and services	2022		2021
Subscription advertising and digital solutions	$	132,247	$	125,446
Display advertising		21,049		21,957
Pay per lead		2,417		3,760
Other		2,494		2,132
Total revenue	$	158,207	$	153,295

NOTE 3. Goodwill, Indefinite-lived Intangible Asset and Business Combination

The changes in the carrying amount of goodwill and indefinite-lived intangible asset are as follows (in thousands):


	December 31, 2021		Additions		Impairment		March 31, 2022
Goodwill	$	26,227	$	75,536	$	—	$	101,763
Indefinite-lived intangible asset		390,020		—		—		390,020

Business Combinations. The below transactions were accounted for as business combinations.

Accu-Trade Acquisition. On March 1, 2022, the Company acquired certain of the assets and assumed certain liabilities of Accu-Trade, LLC; Accu-Trade Canada, LLC; Galves Market Data; and Headstart Logistics, LLC d/b/a/ MADE Logistics (collectively, “Accu-Trade”), which provides dealers with vehicle VIN-specific valuation and appraisal data, instant guaranteed offer capabilities and logistics technology (the “Accu-Trade Acquisition”).

The Company expensed as incurred total acquisition costs of $1.9 million, of which $0.9 million were recorded during the three months ended March 31, 2022. These costs were recorded in General and administrative in the Consolidated Statements of Income.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

Preliminary Purchase Price Allocation. The preliminary fair values assigned to the tangible and intangible assets acquired and liabilities assumed were determined based on management’s estimates and assumptions, as well as other information compiled by management, including third-party valuations that utilize customary valuation procedures and techniques, such as the multi-period excess earnings and the relief of royalty methods. These preliminary fair values are subject to change within the one-year measurement period. The Accu-Trade Acquisition purchase price allocation is as follows (in thousands):


	Preliminary Acquisition-date Fair Value
Cash consideration	$	64,770
Other consideration (1)		5,300
Contingent consideration (2)		22,505
Total purchase consideration	$	92,575

Assets acquired (3)	$	1,595
Identified intangible assets (4)		15,679
Total assets acquired		17,274
Total liabilities assumed (5)		(235	)
Net identifiable assets		17,039
Goodwill		75,536
Total purchase consideration	$	92,575

(1)

In connection with the Accu-Trade Acquisition, the Company entered into an agreement to provide one of the former owners with a one-year license to a certain product. The preliminary fair value of the license was determined to be $6.5 million, of which the Company received $1.2 million in cash upon the close of the Accu-Trade Acquisition. The $5.3 million difference between the fair value of $6.5 million and the $1.2 million in cash was recorded as non-cash consideration and the $6.5 million license fee was recorded in Other accrued liabilities as a contract liability on the Consolidated Balance Sheets and will be amortized into Other revenue on the Consolidated Statements of Income over the one-year contract term. The current period revenue related to the non-cash consideration of $5.3 million is a non-cash reconciling item titled Amortization of deferred revenue related to Accu-Trade Acquisition on the Consolidated Statements of Cash Flows.

(2)

As part of the Accu-Trade Acquisition, the Company may be required to pay additional cash and stock consideration to the former owners based on achievement of certain financial targets, which would result in a variable number of shares being issued. The Company has the option to pay consideration in cash or stock. The actual amount to be paid will be based on the acquired business’ future performance to be attained over a three-year performance period. The contingent consideration is classified as Level 3 in the fair value hierarchy. The fair value is measured based on a Monte Carlo simulation based on the following significant inputs: volatility, discount rate and projected financial information.

(3)

Assets acquired primarily consists of accounts receivable.

(4)

Preliminary information regarding the identifiable intangible assets acquired is as follows:

(5)

Total liabilities assumed primarily consists of accounts payable.

Goodwill. In connection with the Accu-Trade Acquisition, the Company recorded goodwill in the amount of $75.5 million, which is primarily attributable to sales growth from existing and future technology, product offerings, customers and the value of the acquired assembled workforce. All of the goodwill is considered deductible for income tax purposes.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

CreditIQ Acquisition. On November 5, 2021, the Company acquired all of the outstanding stock of CreditIQ, Inc. (the “CIQ Acquisition”) a cutting-edge automotive fintech platform that provides instant online loan screening and approvals to facilitate online car buying. Through the CIQ Acquisition, the Company now provides dealers with access to advanced digital financing technology across the CARS platform.

The Company expensed as incurred total acquisition costs of $1.4 million, of which $0.1 million were recorded during the three months ended March 31, 2022. These costs were recorded in General and administrative in the Consolidated Statements of Income. In connection with the CIQ Acquisition, CreditIQ’s unvested equity awards were cash-settled for a total of $9.6 million. The fair value of these awards was based on the price paid per common share to the owners of the acquired business and recognized immediately after the CIQ Acquisition in November 2021 as compensation expense in the Company’s Consolidated Statements of Income.

Preliminary Purchase Price Allocation. The fair values assigned to the tangible and intangible assets acquired and liabilities assumed were determined based on management’s estimates and assumptions, as well as other information compiled by management, including third-party valuations that utilize customary valuation procedures and techniques, such as the multi-period excess earnings and the relief of royalty methods. The preliminary fair values of all assets acquired and liabilities assumed are subject to change within the one-year measurement period. The CIQ Acquisition purchase price allocation is as follows (in thousands):


	Preliminary Acquisition-date Fair Value
Cash consideration (1)	$	29,965
Contingent consideration (2)		23,805
Cash settlement of CIQ Acquisition's unvested equity awards (3)		(9,626	)
Total purchase consideration	$	44,144

Assets acquired (4)	$	193
Identified intangible assets (5)		19,900
Total assets acquired		20,093
Total liabilities assumed (6)		(2,176	)
Net identifiable assets		17,917
Goodwill		26,227
Total purchase consideration	$	44,144

(1)

A reconciliation of cash consideration to Payments for the CIQ Acquisition, net of cash acquired is as follows (in thousands):


Cash consideration	$	29,965
Less: Cash settlement of CIQ Acquisition's unvested equity awards (3)		(9,626	)
Less: Cash acquired		(81	)
Payments for CIQ Acquisition, net of cash acquired	$	20,258

(2)

As part of the CIQ Acquisition, the Company may be required to pay up to an additional $50.0 million in cash consideration to the former owners based on two earn-out achievement objectives, including an earnings-related metric and lender market share. The actual amount to be paid will be based on the acquired business’ future performance to be attained over a three-year performance period with a mutually agreed-upon option for a fourth year. The contingent consideration is classified as Level 3 in the fair value hierarchy. The fair value is measured based on a Monte Carlo simulation or a scenario-based method based on the following significant inputs: volatility, discount rate and projected financial information. No significant changes in fair value of the contingent consideration have occurred since the CIQ Acquisition.

(3)

In connection with the CIQ Acquisition, CreditIQ’s unvested equity awards were cash-settled. The fair value of these awards was $9.6 million and was based on the price paid per common share to the owners of the acquired business and recognized immediately after the CIQ Acquisition in November 2021 as compensation expense in General and administrative expense on the Company’s Consolidated Statements of Income.

(4)

Assets acquired primarily consists of cash and cash equivalents and accounts receivable.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(5)

Preliminary information regarding the identifiable intangible assets acquired is as follows:

(6)

Total liabilities assumed includes accounts payable, deferred income tax liabilities, net and other liabilities.

Goodwill. In connection with the CIQ Acquisition, the Company recorded goodwill in the amount of $26.2 million, which is primarily attributable to sales growth from existing and future technology, product offerings, customers and the value of the acquired assembled workforce. None of the goodwill is considered deductible for income tax purposes.

NOTE 4. Debt

As of March 31, 2022, the Company was in compliance with the covenants under its debt agreements.

Term Loan. As of March 31, 2022, the outstanding principal amount under the Term Loan was $75.0 million and the interest rate in effect was 2.5%, not including the impact of the interest rate swap. During the three months ended March 31, 2022, the Company made $2.5 million in Term Loan payments.

Revolving Loan. As of March 31, 2022, the outstanding borrowings under the Revolving Loan were $45.0 million and the interest rate in effect was 2.5%. As of March 31, 2022, $185.0 million was available to borrow under the Revolving Loan. The Company’s borrowings are limited by its Senior Secured Leverage Ratio and Consolidated Interest Coverage Ratio, which are calculated in accordance with our Credit Agreement, and were 0.7x and 5.0x as of March 31, 2022, respectively.

Senior Unsecured Notes. In October 2020, the Company issued $400.0 million aggregate principal amount of 6.375% senior unsecured notes due 2028. Interest on the notes is due semi-annually on May 1 and November 1.

Fair Value. The Company's debt is classified as Level 2 in the fair value hierarchy and the fair value is measured based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments. As of March 31, 2022, the fair value of the outstanding indebtedness was approximately $513.3 million, compared to the carrying value $520.0 million. As of December 31, 2021, the fair value of the outstanding indebtedness was approximately $502.7 million, compared to the carrying value of $477.5 million.

NOTE 5. Interest Rate Swap

The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on its borrowing under the Term Loan prior to the October 2020 refinancing, the Company entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, the Company is locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in the Company’s Credit Agreement, on a notional amount of $300 million until May 31, 2022. Although the Swap was initially designated as a cash flow hedge of interest rate risk, hedge accounting was discontinued in June 2020. The loss on the hedge that was in Accumulated other comprehensive income at that time would be amortized into the Consolidated Statements of Income over the remaining term of the Swap.

As of March 31, 2022, the fair value of the Swap was an unrealized loss of $1.2 million, which is recorded in Other accrued liabilities on the Consolidated Balance Sheets. As of December 31, 2021, the fair value of the Swap was an unrealized loss of $3.5 million, which was recorded in Other accrued liabilities on the Consolidated Balance Sheets. During the three months ended March 31, 2022 and 2021, $1.4 million was reclassified from Accumulated other comprehensive loss and recorded in Interest expense, net. During the three months ended March 31, 2022, the Company made payments of $2.1 million related to the Swap and $0.2 million was reclassified as a tax benefit from Accumulated other comprehensive loss into Income tax (benefit) expense on the Consolidated Statements of Income.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

NOTE 6. Commitments and Contingencies

The Company and its subsidiaries are parties from time to time in legal and administrative proceedings involving matters incidental to its business. These matters, whether pending, threatened or unasserted, if decided adversely to the Company or settled, may result in liabilities material to its financial position, results of operations or cash flows. The Company records a liability when it believes that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both the probability and the estimated amount.

NOTE 7. Stockholders' Equity

In February 2022, the Company's Board of Directors authorized a three-year share repurchase program to acquire up to $200 million of the Company's common stock. The Company may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws and other applicable legal requirements, and subject to the Company's blackout periods. The timing and amounts of any purchases under the share repurchase program will be based on market conditions and other factors including price. The repurchase program may be suspended or discontinued at any time and does not obligate the Company to repurchase any dollar amount or particular amount of shares. The Company funds the share repurchase program principally with cash from operations. During the three months ended March 31, 2022, the Company repurchased and subsequently retired 0.3 million shares for $5.0 million at an average price per share of $14.78.

NOTE 8. Stock-Based Compensation

Restricted Share Units (“RSUs”). RSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. RSUs are subject to graded vesting, generally ranging between one and four years and the fair value of the RSUs is equal to the Company’s common stock price on the date of grant. RSU activity for the three months ended March 31, 2022 is as follows (in thousands, except for weighted-average grant date fair value):


	Number of RSUs			Weighted-Average Grant Date Fair Value
Outstanding as of December 31, 2021		3,683		$	10.95
Granted		1,814			15.07
Vested and delivered		(1,433	)		10.28
Forfeited		(61	)		12.69
Outstanding as of March 31, 2022 (1)		4,003			13.03

(1)

Included in “Outstanding as of March 31, 2022” are 63 RSUs that were vested, but not yet delivered.

Performance Share Units (“PSUs”). PSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting. The fair value of the PSUs is equal to the Company’s common stock price on the date of grant. Expense related to PSUs is recognized when the performance conditions are probable of being achieved. The percentage of PSUs that shall vest will range from 0% to 200% of the number of PSUs granted based on the Company’s future performance related to certain revenue and adjusted earnings before interest, income taxes, depreciation and amortization targets over a three-year performance period. These PSUs are subject to cliff vesting at the end of the respective performance period. PSU activity for the three months ended March 31, 2022 is as follows (in thousands, except for weighted-average grant date fair value):


	Number of PSUs			Weighted-Average Grant Date Fair Value
Outstanding as of December 31, 2021		142		$	23.98
Granted		275			15.07
Vested and delivered		(142	)		23.98
Forfeited		—			—
Outstanding as of March 31, 2022		275			15.07

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

Stock Options. Stock options represent the right to purchase shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. Stock options are subject to three-year cliff vesting and expire 10 years from the grant date. Stock option activity for the three months ended March 31, 2022 is as follows (in thousands, except for weighted-average grant date fair value and weighted-average remaining contractual term):


	Number of Options		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2021		804	$	5.27		8.58	$	5,754
Granted		263		9.39		—		—
Vested and delivered		—		—		—		—
Forfeited		—		—		—		—
Outstanding as of March 31, 2022		1,067		6.28		8.73		4,634
Exercisable as of March 31, 2022		—		—		—		—

The fair value of the stock options granted during the three months ended March 31, 2022 and March 31, 2021 are estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions:


	2022			2021
Risk-free interest rate		2.21	%		1.15	%
Weighted-average volatility		65.22	%		69.00	%
Dividend yield		0	%		0	%
Expected years until exercise		6.5			6.5

NOTE 9. Earnings Per Share

Basic earnings per share is calculated by dividing Net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans, unless the inclusion of such shares would have an anti-dilutive effect. The computation of Earnings per share is as follows (in thousands, except per share data):


	Three Months Ended March 31,
	2022		2021
Net income	$	4,340	$	5,278
Basic weighted-average common shares outstanding		69,463		67,787
Effect of dilutive stock-based compensation awards (1)		1,436		2,467
Diluted weighted-average common shares outstanding		70,899		70,254
Earnings per share, basic	$	0.06	$	0.08
Earnings per share, diluted		0.06		0.08

(1)

There were 1,738 and 1,815 potential common shares excluded from diluted weighted-average common shares outstanding for the three months ended March 31, 2022 and March 31, 2021, respectively, as their inclusion would have had an anti-dilutive effect.

NOTE 10. Income Taxes

Deferred Tax Asset and Valuation Allowance. The Company has concluded a valuation allowance is required against its deferred tax assets as of March 31, 2022. In reaching this conclusion, in accordance with U.S. GAAP, the Company has evaluated all available evidence, both positive and negative, and determined that the Company’s history of recent losses, primarily due to the goodwill and indefinite-lived intangible asset impairments, was sufficient significant negative evidence to require a valuation allowance. Therefore, the Company has recorded a valuation allowance to reduce its deferred tax assets as of March 31, 2022 to the amount that is more likely than not to be realized in future periods. At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

Effective Tax Rate. The effective income tax rate, expressed by calculating the income tax (benefit) expense as a percentage of Income before income tax, was (138.6)% for the three months ended March 31, 2022, which varied from the statutory federal income tax rate

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

of 21%, primarily due to the benefit realized on stock-based compensation, the impact of uncertain tax positions and the tax benefits realized on a partial release of the valuation allowance.


(In thousands, except percentages)	Three Months Ended March 31, 2022
Income tax provision at statutory rate	$	382		21.0	%
State income taxes, net of federal income tax benefit		204		11.2
Stock-based compensation		(1,425	)	(78.3	)
Uncertain tax positions		(1,015	)	(55.8	)
Valuation allowance		(917	)	(50.4	)
Other, net		250		13.7
Income tax benefit	$	(2,521	)	(138.6	)%

Note About Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts are forward-looking statements. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “outlook,” “intend,” “strategy,” “plan,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” “mission,” “strive,” “more,” “goal” or similar expressions. As a result, our actual financial results, performance, achievements, strategic actions, or prospects may differ materially from those expressed or implied by these forward-looking statements. Forward-looking statements are based on our current expectations, beliefs, strategies, estimates, projections, and assumptions, based on our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, current developments regarding the COVID-19 pandemic, global supply chain shortages, rising fuel prices and other factors we think are appropriate. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us and our management based on our knowledge and understanding of the business and industry, including the supply chain, are inherently uncertain. These statements are expressed in good faith and we believe these judgments are reasonable; however, you should understand that these statements are not guarantees of strategic action, performance or results. Our actual results and strategic actions could differ materially from those expressed in the forward-looking statements. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Whether or not any such forward-looking statement is in fact achieved will depend on future events, some of which are beyond our control.

Important factors that could cause actual results or events to differ materially from those anticipated include, among others:

•

The COVID-19 pandemic and related restrictions have materially and adversely affected, and could continue to materially and adversely affect, our business, financial condition, liquidity and results of operations.

•

Market acceptance of and influence over certain of our products and services is concentrated with a limited number of automobile OEMs and dealership associations, and we may not be able to maintain or grow these relationships.

•

Dealer closures or consolidation among dealers or OEMs could reduce demand for, and negatively affect the pricing of, our marketing and solutions offerings, thereby leading to decreased earnings.

•

Our business is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic issues.

•

Our business depends on our strong brand recognition, and any failure to maintain, protect and enhance our brands could hurt our ability to retain or expand our base of consumers, dealers and advertisers, and our ability to increase the frequency with which consumers, dealers and advertisers use our services.

•

We rely in part on Internet search engines and mobile application stores to drive traffic to the CARS sites and increase downloads of our mobile applications. If the CARS sites and mobile applications fail to appear prominently in these search results, traffic to the CARS sites and mobile applications would decline and our business, results of operations or financial condition may be materially and adversely affected.

•

We rely on in-house content creation and development to drive organic traffic to the CARS sites and mobile applications.

•

We participate in a highly competitive market, and pressure from existing and new competitors may materially and adversely affect our business, results of operations or financial condition.

•

We compete with other consumer automotive websites and mobile applications and other digital content providers for share of automotive-related digital display advertising spending and may be unable to maintain or grow our base of advertising customers or increase our revenue from existing advertisers.

•

If we do not adapt to automated buying strategies quickly, our display advertising revenue could be adversely affected.

•

We may face difficulties in developing and launching new solution offerings or growing our complementary offerings that help automotive brands and dealers create enduring customer relationships.

•

Strategic acquisitions, investments and partnerships could pose various risks, including integration risks, increase our leverage, dilute existing stockholders and significantly impact our ability to expand our overall profitability.

•

The value of our assets or operations may be diminished if our information technology systems fail to perform adequately.

•

Our business is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenue may decrease.

•

We rely on third-party service providers for many aspects of our business, including inventory information and sales of our product through social media, and interruptions in the services or data they provide or any failure to maintain these relationships could harm our business.

•

We rely on third-party services to track and calculate certain of our key metrics, including unique visitors and traffic and any errors or interruptions in the services or data they provide or any failure to maintain these relationships could harm our business.

•

We rely on technology systems’ availability and ability to prevent unauthorized access. If our security and resiliency measures fail to prevent incidents, it could result in damage to our reputation, incur costs and create liabilities.

•

Our ability to attract and retain customers depends on our ability to collect and use data and develop tools to enable us to effectively deliver and accurately measure advertisements on our platform.

•

Uncertainty exists in the application and interpretation of various laws and regulations related to our business, including privacy laws such as the California Consumer Privacy Act and the upcoming California Privacy Rights Act. New privacy concerns or laws or regulations applicable to our business, or the expansion or interpretation of existing laws and regulations that apply to our business, could reduce the effectiveness of our offerings or subject us to use restrictions, licensing requirements, claims, judgments and remedies including sales and use taxes, other monetary liabilities and limitations on our business practices, and could increase administrative costs.

•

Misappropriation or infringement of our intellectual property and proprietary rights, enforcement actions to protect our intellectual property and claims from third parties relating to intellectual property could materially and adversely affect our business, results of operations or financial condition.

•

Our ability to operate effectively could be impaired if we fail to attract and retain our key employees.

•

Adverse results from litigation or governmental investigations could impact our business practices and operating results.

•

The value of our existing intangible assets may become impaired depending upon future operating results.

•

We do not expect to pay any cash dividends for the foreseeable future.

•

Your percentage of ownership in the Company may be diluted in the future.

•

Certain provisions of our Amended and Restated Certificate of Incorporation, By-laws, and Delaware law may discourage takeovers and limit our ability to use, acquire, or develop certain competing businesses.

•

Our Amended and Restated Certificate of Incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers.

•

Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our common stock.

•

Our debt agreements contain restrictions that may limit our flexibility in operating our business.

•

Increases in interest rates could increase interest payable under our variable rate indebtedness.

For a detailed discussion of many of these risks and uncertainties, see “Part I, Item 1A., Risk Factors” and “Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on February 25, 2022, our Current Reports on Form 8-K and our other filings filed with the SEC and available on our website at investor.cars.com or via EDGAR at www.sec.gov. All forward-looking statements contained in this report are qualified by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. The forward-looking statements contained in this report are based only on information currently available to us and speak only as of the date of this report. We undertake no obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise. The forward-looking statements in this report are intended to be subject to the safe harbor protection provided by the federal securities laws.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our business, financial condition, results of operations and quantitative and qualitative disclosures should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in “Note About Forward-Looking Statements” in this Quarterly Report on Form 10-Q. The financial information discussed below and included elsewhere in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations and cash flows may be in the future.

References in this discussion and analysis to “we,” “us,” “our” and similar terms refer to Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise.

Business Overview

We are a leading automotive marketplace platform that provides a robust set of industry-specific digital solutions. Through our marketplace, dealer websites and other digital products, we showcase dealer inventory, elevate and amplify dealers’ and automotive manufacturers’ (“OEMs”) brands, connect sellers with our ready-to-buy audience and empower shoppers with the resources and information needed to make confident car-buying decisions. Our digital solutions strategy builds on the rich data and audience of our digital marketplace to offer media and solutions that drive growth and efficiency for the automotive industry. Our portfolio of brands now includes Cars.com™, Dealer Inspire®, DealerRater®, FUEL™, Auto.com™, PickupTrucks.com™, CreditIQ™, Accu-Trade™ and NewCars.com®.

Overview of Results


	Three Months Ended March 31,
(in thousands)	2022		2021
Revenue	$	158,207	$	153,295
Net income		4,340		5,278

2022 Highlights and Trends

Dealer Customers. In the first quarter of 2022, Dealer Customers increased by 2%, to 19,500 Dealer Customers, as compared with December 31, 2021, continuing seven consecutive quarters of growth in Dealer Customers. Year over year, Dealer Customers increased by 677. These increases were driven by sustained high retention rates and strong new sales to Dealer Customers.

Accu-Trade Acquisition. In March 2022, we acquired certain assets and assumed certain liabilities of Accu-Trade, LLC; Accu-Trade Canada, LLC; Galves Market Data; and Headstart Logistics, LLC d/b/a MADE Logistics (collectively, “Accu-Trade”), which includes real-time, VIN-specific appraisal and valuation data, instant guaranteed offer capabilities and logistics technology (the “Accu-Trade Acquisition”). Consideration for the transaction was composed of $64.8 million of cash and $5.3 million in other consideration. As part of the transaction, upon achievement of certain financial targets, we may be required to pay additional cash and stock consideration to the former owners.

CreditIQ Acquisition. In November 2021, we acquired all the outstanding stock of CreditIQ, Inc. (the "CIQ Acquisition"), a cutting edge automotive fintech platform that provides instant online loan screening and approvals to facilitate online car buying. Through the CIQ Acquisition, we are now able to make advanced digital financing technology available to dealers across the CARS platform. Using cash on hand, we paid $30.0 million at the closing excluding transaction fees and expenses. As part of the transaction, we may be required to pay additional cash consideration of up to $50.0 million based on future performance over a three-year period with a mutually agreed upon option for a fourth year.

Share Repurchase Program. In February 2022, our Board of Directors authorized a three-year share repurchase program to acquire up to $200 million of the Company's common stock. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws and other applicable legal requirements, and subject to our blackout periods. We will fund the share repurchase program principally with cash from operations. During the three months ended March 31, 2022, the Company repurchased and subsequently retired 0.3 million shares for $5.0 million at an average price per share of $14.78.

Key Operating Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make operating and strategic decisions. Information regarding Traffic and Average Monthly Unique Visitors is as follows:


	Three Months Ended March 31,
(in thousands)	2022		2021		% Change
Traffic		148,491		156,604		(5	)%
Average Monthly Unique Visitors		26,562		25,957		2	%

Information regarding Dealer Customers and Monthly Average Revenue Per Dealer is as follows:



	March 31, 2022		March 31, 2021		% Change			December 31, 2021		% Change
Dealer Customers		19,500		18,823		4	%		19,179		2	%
Monthly Average Revenue Per Dealer	$	2,291	$	2,268		1	%	$	2,333		(2	)%

Traffic ("Visits"). Traffic is fundamental to our business. Traffic to the CARS network of websites and mobile apps provides value to our advertisers in terms of audience, awareness, consideration and conversion. In addition to tracking traffic volume and sources, we monitor activity on our properties, allowing us to innovate and refine our consumer-facing offerings. Traffic is defined as the number of visits to CARS desktop and mobile properties (responsive sites and mobile apps), measured using Adobe Analytics. Traffic does not include traffic to Dealer Inspire websites. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealer customers and national advertisers.

Traffic for the three months ended March 31, 2022 declined primarily due to elevated traffic in the prior year period related to an increase in consumer confidence and heightened consumer demand from the Federal economic stimulus program that ran during the three months ended March 31, 2021.

Average Monthly Unique Visitors (“UVs”). Growth in unique visitors and consumer traffic to our network of websites and mobile apps increases the number of impressions, clicks, leads and other events we can monetize to generate revenue. We define UVs in a given month as the number of distinct visitors that engage with our platform during that month. Visitors are identified when a user first visits an individual CARS property on an individual device/browser combination or installs one of our mobile apps on an individual device. If a visitor accesses more than one of our web properties or apps or uses more than one device or browser, each of those unique property/browser/app/device combinations counts toward the number of UVs. UVs do not include Dealer Inspire UVs. We measure UVs using Adobe Analytics.

The growth in UVs for the three months ended March 31, 2022 as compared to the decline in Traffic was primarily related to changes in our traffic mix. In addition, due to the continued lower vehicle inventory levels, we believe our users now have a shorter shopping lifecycle and are purchasing cars with fewer visits.

Average Revenue Per Dealer (“ARPD”). We believe that our ability to grow ARPD is an indicator of the value proposition of our platform. We define ARPD as Dealer revenue, excluding digital advertising services, during the period divided by the monthly average number of Dealer Customers during the same period. ARPD does not include Accu-Trade as it would be impracticable to do so.

ARPD increased 1% from the quarter ended March 31, 2021 primarily driven by growth in digital solutions, as well as growth in FUEL revenue.

ARPD decreased 2% from the quarter ended December 31, 2021 primarily due to lower FUEL sales and changes in customer mix.

Dealer Customers. Dealer Customers represent dealerships using our products as of the end of each reporting period. Each physical or virtual dealership location is counted separately, whether it is a single-location proprietorship or part of a large, consolidated dealer group. Multi-franchise dealerships at a single location are counted as one dealer. All Dealer Customer metrics do not include Accu-Trade as it would be impracticable to do so.

Dealer Customers increased 2% from December 31, 2021, and 4% from March 31, 2021 driven by sustained high retention rates and strong new sales to Dealer Customers.

Factors Affecting Our Performance. Our business is impacted by the changes in the larger automotive ecosystem, including inventory supply and supply-chain disruptions, which are currently under pressure due to semiconductor shortages, and changes related to automotive advertising as well as other macroeconomic factors. Changes in vehicle sales volumes in the United States also influence OEMs’ and dealerships’ willingness to increase investments in technology solutions and automotive marketplaces like Cars.com and could impact our pricing strategies and/or revenue mix.

Our long-term success will depend in part on our ability to continue to evolve our business toward a multi-faceted suite of digital solutions that complement our online marketplace offerings. We believe our core strategic strengths, including our strong brand portfolio, growing high-quality audience and suite of digital solutions for advertisers, will assist us as we navigate a rapidly changing automotive environment. Additionally, we are focused on equipping our dealer customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying customers are shopping online. These solutions include virtual showrooms, home delivery, online chat and our FUEL product that allows dealers to target in-market buyers on streaming platforms. The foundation of our continued success is the value we deliver to customers, and we believe that our large audience of in-market car shoppers and innovative solutions deliver significant value to our customers.

The future effects of the COVID-19 pandemic are unknown and depend on numerous factors outside of our control. However, we believe our marketplace, advertising and digital solutions remain critical in helping our customers navigate certain challenges of the pandemic. We also believe our solutions will continue to be important tools for our customers in the future and, in particular, may help mitigate potential future impacts of the pandemic.

Results of Operations

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021


	Three Months Ended March 31,
(In thousands, except percentages)	2022			2021			$ Change			% Change
Revenue:
Dealer	$	140,416		$	132,958		$	7,458			6	%
OEM and National		15,174			18,069			(2,895	)		(16	)%
Other		2,617			2,268			349			15	%
Total revenue		158,207			153,295			4,912			3	%
Operating expenses:
Cost of revenue and operations		27,752			27,831			(79	)		(0	)%
Product and technology		21,307			16,760			4,547			27	%
Marketing and sales		57,094			53,211			3,883			7	%
General and administrative		16,560			13,266			3,294			25	%
Depreciation and amortization		24,553			25,680			(1,127	)		(4	)%
Total operating expenses		147,266			136,748			10,518			8	%
Operating income		10,941			16,547			(5,606	)		(34	)%
Nonoperating expense:
Interest expense, net		(9,330	)		(10,001	)		671			(7	)%
Other income, net		208			38			170		***
Total nonoperating expense, net		(9,122	)		(9,963	)		841			(8	)%
Income before income taxes		1,819			6,584			(4,765	)		(72	)%
Income tax (benefit) expense		(2,521	)		1,306			(3,827	)	***
Net income	$	4,340		$	5,278		$	(938	)		(18	)%

*** Not meaningful

Dealer revenue. Dealer revenue consists of marketplace and digital solutions sold to dealer customers. Dealer revenue is our largest revenue stream, representing 89% and 87% of total revenue for the three months ended March 31, 2022 and 2021, respectively. Dealer revenue increased $7.5 million or 6% compared to the three months ended March 31, 2021, driven by a 4% increase in Dealer Customers as a result of sustained high retention rates and new sales to Dealer Customers, as well as a 1% increase in ARPD from March 31, 2021.

OEM and National revenue. OEM and National revenue consists of display advertising and other solutions sold to OEMs, certain advertising agencies, automotive dealer associations and auto adjacent businesses. OEM and National revenue represents 10% and 12% of total revenue for the three months ended March 31, 2022 and 2021, respectively. OEM and National revenue declined 16%, primarily

due to pullbacks in OEM spending associated with fewer new model releases and continued production shortages, both driven by supply-chain disruptions.

Cost of revenue and operations. Cost of revenue and operations expense primarily consists of costs related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment and compensation costs for the product fulfillment and customer service teams. Cost of revenue and operations expense represents 18% of total revenue for the three months ended March 31, 2022 and 2021. Cost of revenue and operations expense was essentially flat compared to the prior year.

Product and technology. The product team creates and manages consumer and dealer-facing innovation and user experience. The technology team develops and supports our products and websites. Product and technology expense includes compensation costs, consulting costs, hardware and software maintenance, software licenses, data center and other infrastructure costs. Product and technology expense represents 13% and 11% of total revenue for the three months ended March 31, 2022 and 2021, respectively. Product and technology expense increased, primarily due to higher compensation, consulting and licensing costs.

Marketing and sales. Marketing and sales expense primarily consists of traffic and lead acquisition costs (including search engine and other online marketing), TV and digital display/video advertising and creative production, market research, trade events and compensation costs and travel for the marketing, sales and sales support teams, as well as bad debt expense related to the allowance for doubtful accounts. Marketing and sales expense represents 36% and 35% of total revenue for the three months ended March 31, 2022 and 2021, respectively. Marketing and sales expense increased, primarily due continued investment in marketing in 2022, including a return to in-person industry events that had been curtailed due to the pandemic.

General and administrative. General and administrative expense primarily consists of compensation costs for certain of the executive, finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative expense includes office space rent, legal, accounting and other professional services, transaction-related costs, severance, transformation and other exit costs and costs related to the write-off and loss on assets. General and administrative expense represents 10% and 9% of total revenue for the three months ended March 31, 2022 and 2021, respectively. General and administrative expense increased, primarily due to higher compensation costs, including stock-based compensation, as well as transaction-related costs related to the Accu-Trade Acquisition.

Depreciation and amortization. Depreciation and amortization expense decreased, primarily due to certain assets being fully depreciated and amortized as compared to the prior-year period, partially offset by depreciation and amortization on additional assets acquired.

Interest expense, net. Interest expense, net decreased by $0.7 million compared to the prior year period due to a reduction in total indebtedness. For information related to our debt, see Note 4 (Debt) and Note 5 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.

Income tax (benefit) expense. The effective income tax rate, expressed by calculating the Income tax (benefit) expense as a percentage of Income before income taxes, was (138.6)% for the three months ended March 31, 2022, and the Income tax benefit was $2.5 million. The effective income tax rate was lower than the statutory federal income tax rate of 21%, primarily due to the benefit realized on stock-based compensation, the impact of uncertain tax positions and the tax benefits realized on a partial release of the valuation allowance.

Liquidity and Capital Resources

Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under our credit facilities. Our positive operating cash flow, along with our Revolving Loan described below, provide adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. However, our ability to maintain adequate liquidity for our operations in the future is dependent upon a number of factors, including our revenue, macroeconomic conditions, our ability to contain costs, including capital expenditures, and to collect accounts receivable, and various other factors, many of which are beyond our direct control.

As discussed below, we are subject to certain financial and other covenants contained in our debt agreements, as amended, including by the Third Amendment to the Credit Agreement. For information related to the Credit Amendment, as amended, see Note 7 (Debt) in Part II, Item 8., “Financial Statements and Supplementary Data”, of our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on February 25, 2022.

We may also seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. As of March 31, 2022, Cash and cash equivalents were $30.5 million and including our undrawn Revolving Loan, our total liquidity was $215.5 million.

Indebtedness. As of March 31, 2022, the outstanding aggregate principal amount of our debt was $520.0 million, at an effective interest rate of 5.5%, including $75.0 million of outstanding principal under our Term Loan, with an interest rate of 2.5%, $45.0 million of outstanding borrowings on our Revolving Loan, with an interest rate of 2.5% and outstanding Senior Unsecured Notes of $400.0 million, at an interest rate of 6.375%. These rates do not include the impact of the interest rate swap. During the three months ended March 31, 2022, we made a $2.5 million mandatory Term Loan payment. As of March 31, 2022, we had $185.0 million available to borrow under our Revolving Loan. Our borrowings are limited by our Senior Secured Leverage Ratio and Consolidated Interest Coverage Ratio, which are calculated in accordance with our Credit Agreement, and were 0.7x and 5.0x as of March 31, 2022, respectively.

Interest Rate Swap. The interest rate on borrowings under our Term Loan and Revolving Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing under the Term Loan prior to the October 2020 refinancing, we entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, on a notional amount of $300 million until May 31, 2022. Although the Swap was initially designated as a cash flow hedge of interest rate risk, hedge accounting was discontinued in June 2020. The loss on the hedge that was in Accumulated other comprehensive income at that time would be amortized into the Consolidated Statements of Income over the remaining term of the Swap.

As of March 31, 2022, the fair value of the Swap was an unrealized loss of $1.2 million, which is recorded in Other accrued liabilities on the Consolidated Balance Sheets. As of December 31, 2021, the fair value of the Swap was an unrealized loss of $3.5 million, which was recorded in Other accrued liabilities on the Consolidated Balance Sheets. During the three months ended March 31, 2022 and 2021, $1.4 million was reclassified from Accumulated other comprehensive loss and recorded in Interest expense, net. During the three months ended March 31, 2022, we made payments of $2.1 million related to the Swap and $0.2 million was reclassified as a tax benefit from Accumulated other comprehensive loss into Income tax (benefit) expense on the Consolidated Statements of Income.

Cash Flows. Details of our cash flows are as follows (in thousands):


	Three Months Ended March 31,
	2022			2021			Change
Net cash provided by (used in):
Operating activities	$	30,358		$	50,362		$	(20,004	)
Investing activities		(68,778	)		(6,219	)		(62,559	)
Financing activities		29,804			(58,138	)		87,942
Net change in cash and cash equivalents	$	(8,616	)	$	(13,995	)	$	5,379

Operating Activities. The decrease in cash provided by operating activities was primarily related to changes in operating assets and liabilities related primarily due to timing of certain payables and in addition, during the three months ended March 31, 2021, we received a $9.1 million tax refund related to the carryback of federal and state income tax net operating loss as a result of the CARES Act.

Investing Activities. The increase in cash used in investing activities was primarily related to the Accu-Trade Acquisition.

Financing Activities. During the three months ended March 31, 2022, cash provided by financing activities was primarily related to $45.0 million of proceeds from Revolving Loan borrowings related to the Accu-Trade Acquisition, partially offset by tax payments made in connection with equity award vestings and repurchases of common stock. During the three months ended March 31, 2021, cash used in financing activities is primarily related to $52.5 million of debt repayments, of which $50.0 million were voluntary, and tax payments made in connection with equity award vestings. For information related to our debt, see Note 4 (Debt) and Note 7 (Stockholders' Equity) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.

Commitments and Contingencies. For information related to commitments and contingencies, see Note 6 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements. We do not have any material off-balance sheet arrangements.

Critical Accounting Policies. For information related to critical accounting policies, see “Critical Accounting Policies and Estimates” in Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on February 25, 2022 and see Note 1 (Description of Business) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q. During the three months ended March 31, 2022, there have been no changes to our critical accounting policies.

Recent Accounting Pronouncements. There were no significant new accounting pronouncements applicable to us in the period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see “Quantitative and Qualitative Disclosures About Market Risk,” in Part II, Item 7A., of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on February 25, 2022. Our exposures to market risk have not changed materially since December 31, 2021.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control Over Financial Reporting. During the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For information relating to legal proceedings, see Note 6 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

Our business and the ownership of our common stock are subject to a number of risks and uncertainties, including those described in Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission (“SEC”) on February 25, 2022, which could materially affect our business, financial condition, results of operations and future results. There have been no material changes from the risk factors described in our Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities by Issuer

None.

Purchases of Equity Securities by Issuer

Our stock repurchase activity for the three months ended March 31, 2022 is as follows:


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (3)
January 1 through January 31, 2022		—	$	—		—	$	—
February 1 through February 28, 2022		—		—		—		200,000
March 1 through March 31, 2022		338,243		14.78		338,243		195,000
		338,243				338,243

(1)

The total number of shares purchased and subsequently retired and the average price paid per share reflects shares purchased pursuant to the share repurchase program. Our stock repurchases may occur through open market purchases or pursuant to a Rule 10b5-1 trading plan.

(2)

(3)

The amounts presented represent the remaining Board of Directors’ authorized value to be spent after each month's repurchases.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Index


Exhibit Number		Description
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		The cover page from this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted with Inline XBRL (included with Exhibit 101 attachments)

* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Cars.com Inc.

Date: May 6, 2022	By:	/s/ T. Alex Vetter
		T. Alex Vetter
		President and Chief Executive Officer

Date: May 6, 2022	By:	/s/ Jeanette Tomy
		Jeanette Tomy
		Chief Financial Officer