Cars.com Inc. 10-K

Item 7. 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 Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Note About Forward-Looking Statements” and “Risk Factors” in this Annual Report on Form 10-K. References in this discussion and analysis to “Cars Commerce”, the "Company," “we,” “us,” “our” and similar terms refer to Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise. Business Overview. Cars Commerce is an audience-driven technology company empowering the automotive industry. We simplify everything about car buying and selling with powerful products, solutions and AI-driven technologies that span pretail, retail and post-sale activities – enabling more efficient and profitable retail operations. The Cars Commerce platform is organized around four industry-leading brands: our flagship automotive marketplace and dealer reputation site Cars.com, award-winning digital retail technology and marketing services from Dealer Inspire, essential trade-in and appraisal technology from AccuTrade, and exclusive in-market media solutions from the Cars Commerce Media Network. Overview of Results. Year Ended December 31, (In thousands) 2023 2022 2021 Revenue $ 689,183 $ 653,876 $ 623,683 Net income (1) 118,442 17,206 10,791 (1) Net income for the year ended December 31, 2023 is primarily related to the release of a significant portion of our valuation allowance for deferred tax assets that had been recorded as a result of the 2020 goodwill and indefinite-lived intangible asset impairments. For more information, see Note 14 (Income Taxes) to the Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. 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. Annual information regarding Traffic, Average Monthly Unique Visitors ("UVs") and Monthly Average Revenue Per Dealer ("ARPD") is as follows (in thousands, except for ARPD and percentages): Year Ended December 31, 2023 2022 % Change Average Monthly Unique Visitors 26,421 26,400 0 % Traffic 614,798 587,388 5 % ARPD - Annual $ 2,486 $ 2,329 7 % Quarterly information regarding our Dealer Customers and ARPD is as follows: December 31, 2023 December 31, 2022 YoY % Change September 30, 2023 QoQ % Change Dealer Customers 19,504 19,506 (0 )% 18,715 4 % ARPD - Quarterly $ 2,523 $ 2,361 7 % $ 2,548 (1 )% UVs and Traffic. UVs and Traffic are fundamental to our business. They are indicative of our consumer reach and the level of engagement consumers have with our platform. Although our consumer engagement does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealers, OEMs and national customers and a primary reason they do business with us. We believe we have achieved audience scale as measured by UVs and Traffic, and we drive increased Traffic through a combination of continued growth in UVs and higher repeat visitation and engagement. Traffic increases can result in increased impressions, clicks and other connections that we can ultimately monetize through our products and services. 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.com 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. Traffic is defined as the number of visits to Cars.com desktop and mobile properties (responsive sites and mobile apps). We measure UVs and Traffic via Adobe Analytics. These metrics do not include traffic to Dealer Inspire or D2C Media websites. 25 Consumer demand remains strong as indicated by both UVs and traffic. While UVs for the year ended December 31, 2023 were largely flat compared to the year ended December 31, 2022, traffic for the period was the highest level recorded, reflecting a combination of increased consumer interest from rising inventory levels, product investment in mobile app, and increased consumer engagement following the consolidation of Auto.com and Pickuptrucks.com into the Cars.com experience. 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. Beginning with the three months ended June 30, 2022, AccuTrade is included in our ARPD metric. No prior period has been recast as it would be impracticable to do so and the inclusion of AccuTrade would have had an immaterial impact on ARPD for prior periods. Additionally, beginning December 31, 2023, this key operating metric includes D2C Media. ARPD for the fourth quarter of 2023 increased 7% as compared to the fourth quarter 2022, primarily driven by the marketplace repackaging initiative, including the adoption of higher tier packages, and growth in digital solutions. ARPD for the annual period of 2023 increased 7% as compared to the annual period 2022 primarily driven by the marketplace repackaging initiative, including the adoption of higher tier packages, and growth in digital solutions. 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. Beginning June 30, 2022, this key operating metric includes AccuTrade; however, no prior period has been recast as it would be impracticable to do so. Additionally, beginning December 31, 2023, this key operating metric includes D2C Media. Dealer Customers increased 4% as compared to September 30, 2023, primarily driven by the inclusion of 950 customers through the acquisition of D2C Media. Dealer Customers remained flat from December 31, 2022, primarily driven by the inclusion of 950 D2C Media customers, offset by the anticipated churn from our 2023 marketplace repackaging initiative and a pull back by digital dealers in previous quarters. Factors Affecting Our Performance. Our business is impacted by changes in the larger automotive ecosystem, including supply and demand for new and used vehicle inventory, supply chain disruptions, semiconductor shortages, vehicle acquisition cost, vehicle retail prices, electric vehicle adoption, employee retention and changes related to automotive advertising, among other macroeconomic factors. Changes in vehicle sales volumes in the United States and Canada 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 execute our platform strategy including continuing to create the most engaged in-market audience, growing our dealer customers, unlocking the cross sell, transforming our OEM relationships and creating platform advantages. We believe our core strategic strengths, including our powerful family of brands, growing high-quality audience and suite of digital solutions for advertisers, including AI-based tools, will assist us as we navigate a rapidly changing automotive environment. Additionally, we are focused on equipping our 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 online chat, vehicle financing, appraisal and valuation, instant guaranteed offer capabilities and logistics technology. 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. 26 Results of Operations. Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 (In thousands, except percentages) 2023 2022 $ Change % Change Revenue: Dealer $ 621,661 $ 579,222 $ 42,439 7 % OEM and National 55,904 58,557 (2,653 ) (5 )% Other 11,618 16,097 (4,479 ) (28 )% Total revenue 689,183 653,876 35,307 5 % Operating expenses: Cost of revenue and operations 122,205 114,959 7,246 6 % Product and technology 99,584 89,015 10,569 12 % Marketing and sales 235,471 221,879 13,592 6 % General and administrative 76,807 67,593 9,214 14 % Depreciation and amortization 101,000 94,394 6,606 7 % Total operating expenses 635,067 587,840 47,227 8 % Operating income 54,116 66,036 (11,920 ) (18 )% Nonoperating expense: Interest expense, net (32,425 ) (35,320 ) 2,895 (8 )% Other expense, net (3,586 ) (8,140 ) 4,554 (56 )% Total nonoperating expense, net (36,011 ) (43,460 ) 7,449 (17 )% Income before income taxes 18,105 22,576 (4,471 ) (20 )% Income tax (benefit) expense (100,337 ) 5,370 (105,707 ) *** Net income $ 118,442 $ 17,206 $ 101,236 *** *** Not meaningful Dealer revenue . Dealer revenue is typically subscription oriented and consists of marketplace, digital solutions, including website solutions and AccuTrade and media solutions sold to dealer customers. Dealer revenue is our largest revenue stream, representing 90.2% and 88.6% of total revenue for the years ended December 31, 2023 and 2022, respectively. Dealer revenue increased by $42.4 million, or 7.3%, compared to the prior year, driven primarily by growth in solutions revenue, growth in marketplace led by the 2023 marketplace repackaging initiative and growth in media products, partially offset by a reduction in revenue from digital only dealers. OEM and National revenue . OEM and National revenue largely consists of Cars Commerce Media Network products, including display advertising and other solutions sold to OEMs, advertising agencies, automotive dealer associations and auto adjacent businesses, including insurance companies. OEM and National revenue represents 8.1% and 9.0% of total revenue for the years ended December 31, 2023 and 2022, respectively. OEM and National revenue decreased 4.5%, primarily due to pullbacks in spending from some of our insurance customers in response to certain macroeconomic factors, partially offset by growth in OEM revenue. Other revenue. Other revenue primarily consists of revenue related to vehicle listing data sold to third parties and a lead product, as well as the AccuTrade license agreement. Other revenue represents 1.7% and 2.4% of total revenue for the years ended December 31, 2023 and 2022, respectively. Other revenue decreased $4.5 million or 27.8%, primarily due to the planned expiration in the first quarter of 2023 of the AccuTrade license agreement entered into as part of the acquisition. For more information, see Note 3 (Business Combinations) to the accompanying Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Cost of revenue and operations . Cost of revenue and operations expense primarily consists of costs related to processing dealer vehicle inventory, product fulfillment, pay per lead products and compensation costs for the product fulfillment and customer service teams. Cost of revenue and operations expense represents 17.7% and 17.6% of total revenue for the years ended December 31, 2023 and 2022, respectively. Cost of revenue and operations expense increased, primarily due to higher compensation costs. Product and technology. The product team creates and manages consumer and customer-facing innovation and consumer and customer experience. The technology team develops and supports our products, websites and mobile apps. Product and technology expense includes compensation costs, consulting and contractor costs, hardware and software maintenance, software licenses and other infrastructure costs. Product and technology expense represents 14.4% and 13.6% of total revenue for the years ended December 31, 2023 and 2022, respectively. Product and technology expense increased, primarily due to higher compensation, including stock-based compensation, as well as third-party costs and licenses. 27 Marketing and sales . Marketing and sales expense primarily consists of traffic and lead acquisition costs, performance and brand marketing, trade events, 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 34.2% and 33.9% of total revenue for the years ended December 31, 2023 and 2022, respectively. Marketing and sales expense increased, primarily due to higher compensation, including stock-based compensation, marketing and advertising costs related to our new Cars.com Possibilities campaign, Cars Commerce branding and third party costs and an increase in our provision for doubtful accounts. This was partially offset by lower performance media spend due to strong traffic generation in the year. 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 of assets. General and administrative expense represents 11.1% and 10.3% of total revenue for the years ended December 31, 2023 and 2022, respectively. General and administrative expense increased, primarily due to compensation, including stock-based compensation and earnout compensation related to the D2C Media acquisition. This was partially offset by a decrease in professional fees and other transaction costs. For more information related to the D2C Media acquisition, see Note 3 (Business Combinations) to the accompanying Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Depreciation and amortization . Depreciation and amortization expense increased, primarily due to additional internally developed technology asset depreciation and amortization on acquisition-related intangibles. Interest expense, net . Interest expense, net decreased by $2.9 million compared to the prior year period due to the maturity of the interest rate swap and increased interest income, partially offset by higher interest rates in 2023. For information related to our Term and Revolving Loans, senior unsecured notes and interest rate swap, see Note 7 (Debt) and Note 8 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Other expense, net. Other expense, net decreased primarily due to the change in the fair value of contingent consideration associated with the CreditIQ and AccuTrade acquisitions, partially offset by foreign exchange gains. For more information related to contingent consideration, see Note 3 (Business Combinations) and Note 4 (Fair Value Measurements) to the accompanying Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Income tax (benefit) expense . The effective income tax rate, expressed by calculating the income tax (benefit) expense as a percentage of Income before income tax, was (554.2)% for the year ended December 31, 2023, primarily due to the release of a significant portion of our valuation allowance for deferred tax assets that had been recorded as a result of the 2020 goodwill and indefinite-lived intangible asset impairments. The effective income tax rate was 23.8% for the year ended December 31, 2022 and differed from the U.S. federal statutory rate of 21%, primarily due to the impact of the return to provision adjustments and nondeductible executive compensation, partially offset by the tax benefits realized from a partial release of our uncertain tax positions and the impact of nondeductible transaction expenses. For information related to income taxes, see Note 14 (Income Taxes) to the Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The comparison of the 2022 results with 2021 can be found under the heading “Year Ended December 31, 2022 Compared to Year Ended December 31, 2021” in “Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2022 Form 10-K, which comparison is incorporated by reference herein. Liquidity and Capital Resources Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and borrowing capacity available under our credit facilities. We believe that our positive operating cash flow, along with our Revolving Loan described below, provide adequate liquidity to meet our business needs for the next 12 months and beyond, including those for investments, debt service, share repurchases and strategic acquisitions. However, our ability to maintain adequate liquidity in the future is dependent upon a number of factors, including our revenue, our ability to contain costs, including capital expenditures, and to collect accounts receivable, and various other macroeconomic factors, many of which are beyond our direct control. 28 As discussed below, we are subject to certain financial and other covenants contained in our debt agreements, as amended, including by the fourth amendment to the Credit Agreement (the "Fourth Amendment"). For information related to the Credit Amendment, as amended, see Note 7 (Debt) in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. 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 December 31, 2023, Cash and cash equivalents were $39.2 million and including our undrawn Revolving Loan, our total liquidity was $234.2 million. Indebtedness. As of December 31, 2023, the outstanding aggregate principal amount of our indebtedness was $490.0 million, at a weighted average interest rate of 6.6%, including $400.0 million of outstanding principal under the bonds, which carries an interest rate of 6.375%, $55.0 million of outstanding principal under the Term Loan which had an interest rate of 7.5% at December 31, 2023, and $35.0 million of outstanding principal under the Revolving Loan which had an interest rate of 7.5% at December 31, 2023. During the year ended December 31, 2023, we made $11.3 million in mandatory Term Loan payments, we borrowed $45.0 million on our Revolving Loan and we repaid $25.0 million on our Revolving Loan. As of December 31, 2023, $195.0 million was available to borrow under the Revolving Loan. Our borrowings are limited by our Senior Secured Leverage Ratio and Interest Coverage Ratio, calculated in accordance with our Credit Agreement, which were 0.5x and 6.0x as of December 31, 2023, respectively. For further information, see Note 7 (Debt) to the accompanying Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Share Repurchase Program . In February 2022, our Board of Directors authorized a three-year share repurchase program to acquire up to $200.0 million of our 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 intend to fund the share repurchase program with cash from operations. During the year ended December 31, 2023, we repurchased and subsequently retired 1.7 million shares for $31.3 million at an average price per share of $18.43. As of December 31, 2023, $119.7 million of the program remains available. Contingent Consideration and Earnout. The fair value as of December 31, 2023 for the contingent consideration related to the CIQ and AccuTrade Acquisitions was $61.4 million. Within the next twelve months, we expect to pay a total of $32.5 million of potential contingent consideration and earnout based on the most recent projected financial information as of December 31, 2023. Further information related to the contingent consideration and earnouts is as follows. The contingent consideration associated with the CIQ Acquisition is based on two 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 through December 2024. The contingent consideration associated with the AccuTrade Acquisition is based on achievement of an earnings-related metric. For the AccuTrade contingent consideration, we have the option to pay consideration in cash or certain amounts in stock, which may result in a variable number of shares being issued in accordance with a calculation based on future share prices. The actual amount to be paid will be based on the acquired business’ future performance to be attained over a three-year performance period through February 2025. As part of the D2C Media Acquisition, we may be required to pay additional cash consideration to certain former owners who are now employees of Cars Commerce based on the achievement of a revenue performance metric. The actual amount to be paid will be based on the acquired business' future performance to be attained through December 31, 2025 with a total maximum amount of CAD$35.0 million. For information related to the contingent consideration and earnout, see Note 3 (Business Combinations) and Note 4 (Fair Value Measurements) in Part II, Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K. 29 Cash Flows. Details of our cash flows are as follows (in thousands): Year Ended December 31, 2023 2022 Change Net cash provided by (used in): Operating activities $ 136,720 $ 128,511 $ 8,209 Investing activities (97,050 ) (84,377 ) (12,673 ) Financing activities (31,748 ) (51,488 ) 19,740 Effect of exchange rate changes on Cash and cash equivalents (439 ) — (439 ) Net change in Cash and cash equivalents $ 7,483 $ (7,354 ) $ 14,837 Operating Activities. The increase in cash provided by operating activities was primarily related to changes in operating assets and liabilities, including fluctuations in working capital during the year ended December 31, 2023. Investing Activities. The cash used in investing activities in 2023 was primarily related to the D2C Acquisition and capitalization of internally developed technology. The cash used in investing activities in 2022 was primarily related to the AccuTrade Acquisition and capitalization of internally developed technology. Financing Activities. During the year ended December 31, 2023, cash used in financing activities was primarily related to $36.3 million of payments on our long-term debt and $31.3 million repurchases of common stock, offset by $45.0 million of proceeds from Revolving Loan borrowings related to the D2C Acquisition. During the year ended December 31, 2022, cash used in financing activities was primarily related to repurchases of common stock and payments on our long-term debt, partially offset by $45.0 million of proceeds from Revolving Loan borrowings related to the AccuTrade Acquisition. For information related to our debt and repurchases of our common stock, see Note 7 (Debt) and Note 11 (Stockholders' Equity) to the accompanying Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Contractual Obligations. As of December 31, 2023, we had the following obligations and commitments to make future payments under contracts, contractual obligations and commercial commitments (in thousands): Payments due by Period Contractual Obligations Total 2024 2025 2026 2027 2028 Thereafter Long-term debt (1) $ 490,000 $ 25,000 $ 65,000 $ — $ — $ 400,000 $ — Interest on debt (2) 137,095 32,433 28,162 25,500 25,500 25,500 — Operating leases 36,550 4,707 4,722 4,842 4,151 5,087 13,041 Other obligations (3) 30,588 23,332 6,874 382 — — — Total $ 694,233 $ 85,472 $ 104,758 $ 30,724 $ 29,651 $ 430,587 $ 13,041 (1) Long-term debt includes future principal payments on long-term borrowings through scheduled maturity dates. Excluded from these amounts are the non-cash amortization of debt issuance and other costs related to indebtedness. (2) Interest payments for variable rate debt were calculated using interest rates as of December 31, 2023 and factor in scheduled amortization payments on the Term Loan. (3) Other obligations represent commitments under certain vendors and other contracts. Excluded from the above table is the contingent consideration related to the CIQ and AccuTrade acquisitions and the earnout related to the D2C Media acquisition as the amounts and timing are uncertain with the exception of the portion for D2C Media that was earned as of December 31, 2023. As part of the CIQ acquisition, we 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’s future performance to be attained over a three-year performance period. As part of the AccuTrade acquisition, we may be required to pay an additional $63.0 million, of which $15.0 million could be in stock, based on certain tiered performance metrics with additional upside for performance that exceeds the tiered performance metrics. The actual amount to be paid will be based on the acquired business’s future performance to be attained over a three-year performance period. Additionally, as part of the D2C Media Inc. acquisition, we may pay up to an additional CAD$35.0 million over the total period (CAD$30.0 million remaining as of December 31, 2023). Commitments and Contingencies. For further information, see Note 10 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Critical Accounting Policies and Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We 30 believe the following discussion addresses our most critical accounting policies, which are those that are important to the presentation of our financial condition and results of operations and require management’s most subjective and complex judgments. Revenue Recognition. We account for a customer arrangement when we and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and we believe it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the services that will be provided to the customer. We periodically enter into arrangements that include multiple promises that we evaluate to determine whether the promises are separate performance obligations. We identify performance obligations based on services to be transferred to a customer that are distinct within the context of the contractual terms. We allocate the contractual transaction price to each distinct performance obligation and recognize revenue when a performance obligation is satisfied by providing a service to a customer. Revenue is primarily generated through our direct sales force. Dealer. Dealer revenue consists of marketplace, digital solutions, including website solutions and AccuTrade and media products sold to dealer customers, and is typically subscription-oriented in nature. Further information related to Dealer revenue in the Consolidated Statements of Income is as follows: • Marketplace . Our primary source of revenue is through the sale of marketplace subscription advertising packages to dealer customers. Our subscription packages allow dealer customers and OEMs to showcase their new and used vehicle inventory to in-market shoppers on the Cars.com website. The subscription packages are generally a fixed price arrangement with varying contract terms, typically ranging from three to six months, that are automatically renewed, typically on a month-to-month basis. We recognize subscription package revenue ratably as the service is provided over the contract term. • Digital Experience. We provide services, including hosting flexible, custom-designed website platforms supporting digital retailing and messaging platform products. We recognize this subscription revenue ratably as the service is provided over the contract term. • Trade & Appraisal. Leveraging wholesale and retail data sources, AccuTrade provides dealers with vehicle valuation and appraisal technology to efficiently identify, source and procure the exact vehicles they require. We recognize AccuTrade subscription revenue ratably as the service is provided over the contract term. • Cars Commerce Media Network. The Cars Commerce Media Network unifies our media products, including display advertising, social selling, such as Cars Social, and In-Market Video. o Add-on Marketplace and Digital Experience products include premium advertising products that can be uniquely tailored to an individual dealer customer’s current needs. Substantially all of our add-on products are not sold separately from the subscription packages as the customer cannot benefit from add-on products on their own. Therefore, the subscription packages and add-on products are combined as a single performance obligation, and we recognize the related revenue ratably as the services are provided over the contract term. o We also provide certain non-subscription digital advertising services to dealer customers. We recognize revenue related to these services at the point in time the service is provided. OEM and National revenue. OEM and National revenue largely consists of Cars Commerce Media Network products, including display advertising and other solutions sold to OEMs, advertising agencies, automotive dealer associations and auto adjacent businesses, including insurance companies. Revenue related to OEM and National customers are primarily transaction-based contracts, which are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. We recognize revenue as the impressions or click-throughs are delivered. If the impressions or click-throughs delivered are less than the amount invoiced to the customer, the difference is recorded as deferred revenue and recognized as revenue when earned. We recognize revenue related to these services at the point in time the service is provided. Display advertising products revenue sold to OEMs and national customers is recorded in OEM and National revenue in the Consolidated Statements of Income. Other Revenue. Other revenue primarily includes revenue related to vehicle listing data sold to third parties. We recognize other revenue either ratably as the services are provided or at the point in time the services have been performed. In connection with the AccuTrade Acquisition, we entered into an agreement to provide one of the former owners with a one-year license to a certain product. The recognition of revenue associated with the license fee is recorded in Other revenue. Other revenue is recorded in Other revenue in the Consolidated Statements of Income. Business Combinations. Intangible Assets. Intangible assets are recorded at their estimated fair value at the date of acquisition. The fair values assigned to the intangible assets acquired 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 31 excess earnings and the relief of royalty methods. These preliminary fair values are subject to change within the one-year measurement period. We amortize intangible assets over their estimated useful lives on a straight-line basis. Amortization is recorded over the relevant estimated useful lives ranging from five to 14 years. We evaluate the useful lives of these assets on at least an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. If the estimate of an intangible asset’s remaining useful life is changed, we amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. If an impairment is identified, the asset is written down to fair value as required. CreditIQ Contingent Consideration. As part of the CIQ Acquisition, we may be required to pay up to an additional $50.0 million in cash consideration to the former owners based on two different 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’s future performance to be attained over a three-year performance period. The contingent consideration is classified as Level 3 in the fair value hierarchy and the fair value is measured based on a Monte Carlo simulation or a scenario-based method, depending on the earn-out achievement objective, utilizing projections about future performance. Significant inputs include volatility and projected financial information. AccuTrade Contingent Consideration. As part of the AccuTrade Acquisition, we may be required to pay additional consideration to the former owners based on achievement of an earnings-related metric. We have the option to pay consideration in cash or certain amounts in stock, which would result in a variable number of shares being issued. The amount to be paid will be determined by AccuTrade's performance over a three-year performance period; based on certain tiered performance metrics, the maximum amount to be paid is $63.0 million, with additional upside for performance that exceeds the tiered performance metrics. The contingent consideration fair value is measured based on a Monte Carlo simulation and is classified as Level 3 in the fair value hierarchy. Significant inputs include volatility and projected financial information. Contingent Consideration. Our contingent consideration obligations are from arrangements resulting from acquisitions that involve potential future payment of consideration that is contingent upon the achievement of certain financial metrics or lender market share. Contingent consideration is recognized at its estimated fair value at the date of acquisition based on our expected future payment, discounted using accepted valuation methodologies. We review and re-assess the estimated fair value of contingent consideration liabilities at each reporting period and the updated fair value could differ materially from the initial estimates. We measure contingent consideration recognized in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified as Level 3 inputs. The fair value is measured based on a Monte Carlo simulation or a scenario-based method, depending on the earnout objective. The fair value measurement includes the following significant inputs: volatility and projected financial information. Significant increases or decreases to any of these inputs in isolation could result in a significantly higher or lower liability. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and each reporting period and the amount paid will be recognized in earnings within Other expense, net on the Consolidated Statements of Income. Income Taxes. We account for income taxes according to the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on the estimated future tax effects of temporary differences between the financial statement carrying value and tax basis of assets and liabilities, as measured by current enacted tax rates. The effect of a tax rate change on deferred tax assets and liabilities is recognized in the Consolidated Statements of Income in the period that includes the enactment date of the change. We assess the recoverability of our deferred tax assets on a quarterly basis, considering all positive and negative evidence. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be realized. Uncertain tax positions that relate to deferred tax assets are recorded against deferred tax assets; otherwise, uncertain tax positions are recorded as either a current or noncurrent liability in the Consolidated Balance Sheets. See Note 14 (Income Taxes) to the Consolidated Financial Statements included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Recent Accounting Pronouncements. There are no recent accounting pronouncements that materially impact our financial statements as of December 31, 2023. 32 Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk. Market risk represents the risk of loss that may affect our financial position due to adverse changes in financial market prices and rates. We are exposed to market risks related to changes in interest rates and foreign currency exchange risk. Interest Rate Risk. The interest rate on borrowings under our Term Loan and Revolving Credit Facility is floating and, therefore, subject to fluctuations. As of December 31, 2023, the outstanding aggregate principal amount of our indebtedness was $490.0 million, at a weighted average interest rate of 6.6%, including $400.0 million of outstanding principal under the bonds, which carries a fixed interest rate of 6.375%, $55.0 million of outstanding principal under the Term Loan which carried an interest rate of 7.5% at December 31, 2023, and $35.0 million of outstanding principal under the Revolving Loan which carried an interest rate of 7.5% at December 31, 2023. Foreign Currency Exchange Risk. Historically, we have not faced any significant foreign currency risk as our operations and sales have been primarily in the United States. However, with the acquisition of D2C Media Inc. in November 2023, we have expanded our presence in Canada and therefore our risk related to changes in exchange rates between the U.S. dollar and Canadian dollar. D2C Media primarily bills its customers and incurs expenses in Canadian dollars. We also have intercompany debt between U.S. and Canadian entities that is subject to exchange rate fluctuations and will result in foreign exchange gains or losses depending on the currency movement during the respective time period. The effect of foreign currency exchange rate fluctuations during 2023 is immaterial. As we continue to grow our Canadian operations, we expect to continue to be exposed to foreign exchange rate risk. We may determine to take certain foreign exchange rate risk management measures. Item 8. Financial Statement s and Supplementary Data. 33 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Cars.com Inc. Opinion on the Financial Statements We have audited the accompanying Consolidated Balance Sheets of Cars.com Inc. (the Company) as of December 31, 2023 and 2022, the related Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2024 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the Consolidated Financial Statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition Description of the Matter As described in Note 2 to the Consolidated Financial Statements, the Company recognizes revenue in accordance with Accounting Standard Codification Topic 606, Revenue from Contracts with Customers , upon transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. The Company enters into contracts with customers that may include multiple service offerings. The assessment of terms and conditions for the identification of performance obligations may involve judgment. Auditing the Company’s accounting for revenue recognition was challenging given the significant audit effort to identify and determine the distinct performance obligations in customer contracts through the inspection of terms and conditions in the customer contracts. 34 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s revenue recognition process, including management’s review of terms and conditions and the identification of distinct performance obligations in customer contracts. To test the Company’s accounting for revenue recognition, we performed audit procedures that included, among others, an evaluation of management’s assessment of the distinct performance obligations within the arrangement based on its terms and conditions for a sample of customer contracts. We tested the application of the revenue recognition accounting requirements for each of the significant service offerings to determine whether the performance obligations identified by the Company were distinct. We also assessed the appropriateness of the related disclosures in the Consolidated Financial Statements. Acquisition of D2C Media, Inc. Description of the Matter As described in Note 3 to the Consolidated Financial Statements, in November 2023 the Company completed its acquisition of all of the outstanding stock of D2C Media, Inc. for total purchase consideration of $79.8 million. The transaction was accounted for as a business combination. Auditing the Company's accounting for its acquisition of D2C Media, Inc. was complex due to the significant estimation required by management to determine the fair value of the customer relationship intangible asset of $29.2 million. The significant estimation was primarily due to the complexity of the valuation model used by management to measure the fair value of the customer relationship intangible asset and the sensitivity of the fair value to the significant underlying assumptions. The Company used a multi-period excess earnings method to measure the fair value of the customer relationship intangible asset. The significant assumptions used to estimate the value of the customer relationship intangible asset included the forecasted revenue projections, EBITDA margin projections and the attrition rate. These significant assumptions are forward looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for its acquisition. For example, we tested controls over the recognition and measurement of net assets acquired and total consideration transferred, including the valuation models and underlying assumptions used to develop such estimates. To test the estimated fair value of the customer relationship intangible asset, we performed audit procedures that included, among others, evaluating the Company's use of the multi-period excess earnings method and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, to the historical results of the acquired business and to other guidelines used by companies within the same industry. We involved our valuation specialists to assist in our evaluation of the Company’s use of a multi-period excess earnings valuation model, as well as certain significant assumptions used in the model and to perform corroborative fair value calculations. Valuation of Contingent Consideration Description of the Matter As described in Note 2 and Note 4 to the Consolidated Financial Statements, the Company recognized contingent consideration liabilities at the estimated fair value on the acquisition date in connection with applying the acquisition method of accounting for business combinations. Subsequent changes to the fair value of the contingent consideration liabilities were recorded within the Consolidated Financial Statements in the period of change. At December 31, 2023, the Company had $61.4 million in contingent consideration liabilities, which represented a ‘Level 3’ fair value measurement in the fair value hierarchy due to the significant unobservable inputs used in determining the fair value and the use of management judgment about the assumptions market participants would use in pricing the liabilities. Auditing the Company's valuation of contingent consideration liabilities was complex and required significant auditor judgment due to the use of a Monte Carlo simulation model and the subjectivity in evaluating certain assumptions required to estimate the fair value of contingent consideration payments. The significant assumptions used in the Monte Carlo simulation included volatility and projected financial information. These significant assumptions are forward looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s valuation of contingent consideration liabilities. For example, we tested controls over 35 management’s review of the significant assumptions and other inputs used in the determination of fair value. To test the estimated fair value of contingent consideration liabilities, we performed audit procedures that included, among others, assessing the terms of the arrangement, including the conditions that must be met for the contingent consideration to become payable. We evaluated the assumptions and judgments considering observable industry and economic trends. We assessed the reasonableness of projected financial information in relation to the Company’s budgets and forecasts. Our procedures included evaluating the data sources used by management in determining its assumptions and, where necessary, included an evaluation of available information that either corroborated or contradicted management’s conclusions. We involved our valuation specialists to assist in our evaluation of the Company’s use of a Monte Carlo simulation model, the volatility assumption used in the model and to perform corroborative fair value calculations. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2016. Chicago, Illinois February 22, 2024 36 Cars.com Inc. Consolidated Balance Sheets (In thousands, except per share data) December 31, 2023 2022 Assets: Current assets: Cash and cash equivalents $ 39,198 $ 31,715 Accounts receivable, net 125,373 107,930 Prepaid expenses 12,553 8,377 Other current assets 1,314 605 Total current assets 178,438 148,627 Property and equipment, net 43,853 45,218 Goodwill 147,058 102,856 Intangible assets, net 669,167 707,088 Deferred tax assets, net 112,953 48 Investments and other assets, net 20,980 21,033 Total assets $ 1,172,449 $ 1,024,870 Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 22,259 $ 18,230 Accrued compensation 31,669 19,316 Current portion of long-term debt, net 23,129 14,134 Other accrued liabilities 68,691 54,332 Total current liabilities 145,748 106,012 Noncurrent liabilities: Long-term debt, net 460,119 458,249 Deferred tax liabilities 8,757 1,401 Other noncurrent liabilities 65,717 74,778 Total noncurrent liabilities 534,593 534,428 Total liabilities 680,341 640,440 Commitments and contingencies Stockholders' equity: Preferred Stock at par, $ 0.01 par value; 5,000 shares authorized; no shares issued and outstanding as of December 31, 2023 and 2022, respectively — — Common Stock at par, $ 0.01 par value; 300,000 shares authorized; 65,929 and 66,287 shares issued and outstanding as of December 31, 2023 and 2022, respectively 659 662 Additional paid-in capital 1,500,232 1,511,944 Accumulated deficit ( 1,009,734 ) ( 1,128,176 ) Accumulated other comprehensive income 951 — Total stockholders' equity 492,108 384,430 Total liabilities and stockholders' equity $ 1,172,449 $ 1,024,870 The accompanying notes are an integral part of these Consolidated Financial Statements. 37 Cars.com Inc. Consolidated Statem ents of Income (In thousands, except per share data) Year Ended December 31, 2023 2022 2021 Revenue: Dealer $ 621,661 $ 579,222 $ 549,923 OEM and National 55,904 58,557 65,085 Other 11,618 16,097 8,675 Total revenue 689,183 653,876 623,683 Operating expenses: Cost of revenue and operations 122,205 114,959 114,200 Product and technology 99,584 89,015 77,316 Marketing and sales 235,471 221,879 208,335 General and administrative 76,807 67,593 73,562 Depreciation and amortization 101,000 94,394 101,932 Total operating expenses 635,067 587,840 575,345 Operating income 54,116 66,036 48,338 Nonoperating expenses: Interest expense, net ( 32,425 ) ( 35,320 ) ( 38,729 ) Other expense, net ( 3,586 ) ( 8,140 ) ( 126 ) Total nonoperating expenses, net ( 36,011 ) ( 43,460 ) ( 38,855 ) Income before income taxes 18,105 22,576 9,483 Income tax (benefit) expense ( 100,337 ) 5,370 ( 1,308 ) Net income $ 118,442 $ 17,206 $ 10,791 Weighted-average common shares outstanding: Basic 66,742 68,215 68,727 Diluted 68,227 69,649 71,337 Earnings per share: Basic $ 1.77 $ 0.25 $ 0.16 Diluted 1.74 0.25 0.15 The accompanying notes are an integral part of these Consolidated Financial Statements. 38 Cars.com Inc. Consolidated Statements of Comprehensive Income (In thousands) Year Ended December 31, 2023 2022 2021 Net income $ 118,442 $ 17,206 $ 10,791 Other comprehensive income, net of tax: Foreign currency translation adjustment 951 — — Reclassification of Accumulated other comprehensive loss on interest rate swap into Net income — 2,002 4,802 Total other comprehensive income, net of tax 951 2,002 4,802 Comprehensive income $ 119,393 $ 19,208 $ 15,593 The accompanying notes are an integral part of these Consolidated Financial Statements. 39 Cars.com Inc. Consolidated Statements o f Stockholders’ Equity (In thousands) Preferred Stock Common Stock Additional Accumulated Other Shares Amount Shares Amount Paid-In Capital Accumulated Deficit Comprehensive (Loss) Income Stockholders' Equity Balance at December 31, 2020 — $ — 67,387 $ 674 $ 1,530,493 $ ( 1,156,173 ) $ ( 6,804 ) $ 368,190 Net income — — — — — 10,791 — 10,791 Other comprehensive income, net of tax — — — — — — 4,802 4,802 Shares issued in connection with stock-based compensation plans, net — — 1,783 18 ( 7,212 ) — — ( 7,194 ) Stock-based compensation — — — — 21,431 — — 21,431 Balance at December 31, 2021 — $ — 69,170 $ 692 $ 1,544,712 $ ( 1,145,382 ) $ ( 2,002 ) $ 398,020 Net income — — — — — 17,206 — 17,206 Other comprehensive income, net of tax — — — — — — 2,002 2,002 Repurchases of common stock — — ( 4,168 ) ( 41 ) ( 48,941 ) — — ( 48,982 ) Shares issued in connection with stock-based compensation plans, net — — 1,285 11 ( 6,267 ) — — ( 6,256 ) Stock-based compensation — — — — 22,440 — — 22,440 Balance at December 31, 2022 — $ — 66,287 $ 662 $ 1,511,944 $ ( 1,128,176 ) $ — $ 384,430 Net income — — — — — 118,442 — 118,442 Other comprehensive income, net of tax — — — — — — 951 951 Repurchases of common stock — — ( 1,698 ) ( 17 ) ( 31,276 ) — — ( 31,293 ) Shares issued in connection with stock-based compensation plans, net — — 1,340 14 ( 9,219 ) — — ( 9,205 ) Stock-based compensation — — — — 28,783 — — 28,783 Balance at December 31, 2023 — $ — 65,929 $ 659 $ 1,500,232 $ ( 1,009,734 ) $ 951 $ 492,108 The accompanying notes are an integral part of these Consolidated Financial Statements. 40 Cars.com Inc. Consolidated Stateme nts of Cash Flows (In thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income $ 118,442 $ 17,206 $ 10,791 Adjustments to reconcile Net income to Net cash provided by operating activities: Depreciation 22,331 16,380 16,290 Amortization of intangible assets 78,669 78,014 85,642 Amortization of Accumulated other comprehensive loss on interest rate swap — 2,362 5,670 Changes in fair value of contingent consideration 5,537 8,130 — Stock-based compensation 28,491 22,342 21,431 Deferred income taxes ( 114,498 ) 1,283 ( 2,927 ) Provision for doubtful accounts 2,986 1,888 164 Amortization of debt issuance costs 3,042 3,235 3,360 Unrealized gain on foreign currency denominated transactions ( 2,072 ) — — Amortization of deferred revenue related to AccuTrade Acquisition ( 883 ) ( 4,417 ) — Other, net 1,026 1,202 1,416 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 15,567 ) ( 9,337 ) ( 5,352 ) Prepaid expenses and other assets ( 5,101 ) ( 423 ) 6,141 Accounts payable 3,722 2,611 ( 1,099 ) Accrued compensation 11,638 ( 4,296 ) 5,293 Other liabilities ( 1,043 ) ( 7,669 ) ( 8,817 ) Net cash provided by operating activities 136,720 128,511 138,003 Cash flows from investing activities: Payments for acquisitions, net of cash acquired ( 76,168 ) ( 64,663 ) ( 20,258 ) Capitalization of internally developed technology ( 19,602 ) ( 17,886 ) ( 17,741 ) Purchase of property and equipment ( 1,280 ) ( 1,828 ) ( 1,451 ) Net cash used in investing activities ( 97,050 ) ( 84,377 ) ( 39,450 ) Cash flows from financing activities: Proceeds from Revolving Loan borrowings 45,000 45,000 — Payments of Revolving Loan borrowings and long-term debt ( 36,250 ) ( 41,250 ) ( 120,000 ) Payments for stock-based compensation plans, net ( 9,205 ) ( 6,256 ) ( 7,194 ) Repurchases of common stock ( 31,293 ) ( 48,982 ) — Payments of debt issuance costs and other fees — — ( 9 ) Net cash used in financing activities ( 31,748 ) ( 51,488 ) ( 127,203 ) Effect of exchange rate changes on Cash and cash equivalents ( 439 ) — — Net increase (decrease) in Cash and cash equivalents 7,483 ( 7,354 ) ( 28,650 ) Cash and cash equivalents at beginning of period 31,715 39,069 67,719 Cash and cash equivalents at end of period $ 39,198 $ 31,715 $ 39,069 Supplemental cash flow information: Cash paid (received) for income taxes $ 17,636 $ 545 $ ( 7,992 ) Cash paid for interest and swap 30,416 33,370 38,342 The accompanying notes are an integral part of these Consolidated Financial Statements. 41 Cars.com Inc. Notes to Consolidated Financial Statements Note 1. Description of Business Description of Business. Cars.com Inc., d/b/a Cars Commerce (the "Company" or "Cars Commerce") is an audience-driven technology company empowering the automotive industry. The Company simplifies everything about car buying and selling with powerful products, solutions and AI-driven technologies that span pretail, retail and post-sale activities – enabling more efficient and profitable retail operations. The Cars Commerce platform is organized around four industry-leading brands: the flagship automotive marketplace and dealer reputation site Cars.com, award-winning digital retail technology and marketing services from Dealer Inspire, essential trade-in and appraisal technology from AccuTrade, and exclusive in-market media solutions from the Cars Commerce Media Network. Note 2. Significant Accounting Policies Basis of Presentation . These accompanying 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 SEC. The Consolidated Financial Statements include the accounts of Cars Commerce and its 100 % owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. 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. Reclassifications . Certain prior year balances have been reclassified to conform to the current year presentation. Revenue. The Company accounts for a customer arrangement when the Company and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and the Company believes it is probable that the Company will collect substantially all of the consideration to which the Company will be entitled in exchange for the services that will be provided to the customer. The Company periodically enters into arrangements that include multiple promises that the Company evaluates to determine whether the promises are separate performance obligations. The Company identifies performance obligations based on services to be transferred to a customer that are distinct within the context of the contractual terms. The Company allocates the contractual transaction price to each distinct performance obligation and recognizes revenue when a performance obligation is satisfied by providing a service to a customer. Revenue is primarily generated through the Company’s direct sales force. Dealer. Dealer revenue consists of marketplace, digital solutions, including website solutions and AccuTrade and media products sold to dealer customers, and is typically subscription-oriented in nature. Further information related to Dealer revenue in the Consolidated Statements of Income is as follows: • Marketplace . The Company's primary source of revenue is through the sale of marketplace subscription advertising packages to dealer customers. The Company's subscription packages allow dealer customers and OEMs to showcase their new and used vehicle inventory to in-market shoppers on the Cars.com website. The subscription packages are generally a fixed price arrangement with varying contract terms, typically ranging from three to six months, that are automatically renewed, typically on a month-to-month basis. The Company recognizes subscription package revenue ratably as the service is provided over the contract term. • Digital Experience. The Company provides services, including hosting flexible, custom-designed website platforms supporting digital retailing and messaging platform products. The Company recognizes this subscription revenue ratably as the service is provided over the contract term. • Trade & Appraisal. Leveraging wholesale and retail data sources, AccuTrade provides dealers with vehicle valuation and appraisal technology to efficiently identify, source and procure the exact vehicles they require. The Company recognizes AccuTrade subscription revenue ratably as the service is provided over the contract term. • Cars Commerce Media Network. The Cars Commerce Media Network unifies our media products, including display advertising, social selling, such as Cars Social, and In-Market Video. o Add-on Marketplace and Digital Experience products include premium advertising products that can be uniquely tailored to an individual dealer customer’s current needs. Substantially all of the Company's add-on products are not sold separately from the subscription packages as the customer cannot benefit from add-on products on their own. Therefore, the subscription packages and add-on products are combined as a single performance obligation, and the Company recognizes the related revenue ratably as the services are provided over the contract term. 42 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) o The Company also provides certain non-subscription digital advertising services to dealer customers. The Company recognizes revenue related to these services at the point in time the service is provided. OEM and National revenue. OEM and National revenue largely consists of Cars Commerce Media Network products, including display advertising and other solutions sold to OEMs, advertising agencies, automotive dealer associations and auto adjacent businesses, including insurance companies. Revenue related to OEM and National customers are primarily transaction-based contracts, which are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. The Company recognizes revenue as the impressions or click-throughs are delivered. If the impressions or click-throughs delivered are less than the amount invoiced to the customer, the difference is recorded as deferred revenue and recognized as revenue when earned. The Company recognizes revenue related to these services at the point in time the service is provided. Display advertising products revenue sold to OEMs and national customers is recorded in OEM and National revenue in the Consolidated Statements of Income. Other Revenue. Other revenue primarily includes revenue related to vehicle listing data sold to third parties. The Company recognizes other revenue either ratably as the services are provided or at the point in time the services have been performed. In connection with the AccuTrade Acquisition, the Company entered into an agreement to provide one of the former owners with a one-year license to a certain product. The recognition of revenue associated with the license fee is recorded in Other revenue. Other revenue is recorded in Other revenue in the Consolidated Statements of Income. Cash and Cash Equivalents. All cash balances and liquid investments with original maturities of three months or less on their acquisition date are classified as cash and cash equivalents. Accounts Receivable and Allowance for Doubtful Accounts . Accounts receivable are primarily derived from sales to customers and recorded at invoiced amounts. The allowance for doubtful accounts reflects the Company’s estimate of credit exposure, determined principally on the basis of its collection experience, aging of its receivables, expected losses and any specific reserves needed for certain customers based on their credit risk. Bad debt expense is included in Marketing and sales in the Consolidated Statements of Income. As of December 31, 2023, the Company's rollforward of the allowance for doubtful accounts is as follows (in thousands): Description Balance at Beginning of Period Additions Charged to Costs and Expenses Write-offs Recoveries Balance at End of Period Allowance for doubtful accounts: 2023 $ 1,890 $ 2,986 $ ( 3,056 ) $ 653 $ 2,473 2022 1,665 1,888 ( 2,314 ) 651 1,890 Concentrations of Credit Risk. The Company’s financial instruments, consisting primarily of cash and cash equivalents and customer receivables, are exposed to concentrations of credit risk. The Company invests its cash and cash equivalents with highly rated financial institutions. Investments . Investments in non-marketable equity securities are measured at fair value with changes in fair value recognized in Net income. The Company utilizes the measurement alternative for equity investments without readily determinable fair values and revalues these investments upon the occurrence of an observable price change for similar investments. On at least an annual basis, the Company assesses its investments to determine whether any events have occurred, or circumstances have changed, which might have a significant adverse effect on their fair value and as applicable, may be indicative of impairment. The non-marketable investments recorded within Investments and other assets, net on the Consolidated Balance Sheets were zero as of December 31, 2023 and 2022. 43 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Property and Equipment . Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives as follows (in thousands): December 31, Asset 2023 2022 Estimated Useful Life Computer software $ 98,139 $ 79,682 18 months - 5 years Computer hardware 12,050 12,550 3 - 5 years Leasehold improvements 17,568 18,581 Lesser of useful life or lease term Furniture and fixtures 3,857 4,140 10 years Property and equipment, gross 131,614 114,953 Less: Accumulated depreciation ( 87,761 ) ( 69,735 ) Property and equipment, net $ 43,853 $ 45,218 Normal repairs and maintenance are expensed as incurred. Any resulting gain or loss from the disposition of fixed assets is included in General and administrative expense on the Consolidated Statements of Income. Internally Developed Technology . The Company capitalizes costs associated with customized internal-use software systems and website development that have reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related expenses for employees who are directly associated with the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and ready for its intended purpose. The Company reviews the carrying amount of internally developed technology for impairment and useful lives whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Capitalized software costs, excluding cloud computing arrangements, for the years ended December 31, 2023, 2022 and 2021 were $ 20.0 million, $ 18.1 million and $ 17.9 million, respectively. Capitalized costs, excluding those for cloud computing arrangements, are included in Property and equipment, net on the Consolidated Balance Sheets. Research and development costs are expensed as incurred. Cloud Computing Arrangements. The Company capitalizes costs associated with the development of cloud computing arrangements in a manner consistent with internally developed technology. Any amortization is recorded in the same manner on the Consolidated Statements of Income as the expense associated with the underlying host arrangement. These capitalized costs as of December 31, 2023 were $ 1.3 million and $ 6.5 million in Prepaid expenses and Investments and other assets, net on the Consolidated Balance Sheets, respectively. These capitalized costs as of December 31, 2022 were $ 1.0 million and $ 4.7 million in Prepaid expenses and Investments and other assets, net on the Consolidated Balance Sheets, respectively. Research and development costs are expensed as incurred. Goodwill and Other Intangible Assets . Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed. Goodwill is tested for impairment on an annual basis or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s goodwill is tested for impairment at a level referred to as the reporting unit. The level at which the Company tested goodwill for impairment requires the Company to determine whether the operations below the business segment level constitute a business for which discrete financial information is available and segment management regularly reviews the operating results. The Company determined that it operated as a single reporting unit. The process of estimating the fair value of goodwill is subjective and required the Company to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, the Company concluded it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company will perform the quantitative test. Under the quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill. If a quantitative test is performed, the Company estimates the fair value of the reporting unit with an income approach using a discounted cash flow (“DCF”) analysis and the Company also considers a market-based valuation methodology using comparable public company trading values and the Company’s market capitalization. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, the discount rate and relevant comparable public company 44 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) earnings multiples. The cash flows employed in the DCF analysis are based on the Company’s best estimate of future sales, earnings and cash flows after considering factors such as general market conditions and recent operating performance. The discount rate utilized in the DCF analysis is based on the reporting unit’s weighted-average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the Company’s reporting unit. Impairment assessment inherently involves management judgments regarding a number of assumptions described above. The reporting unit fair value also depends on the future strength of the economies the Company operates in. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the Company’s recorded goodwill, differences in assumptions could have a material effect on the estimated fair values. For further information, see Note 6 (Goodwill and Other Intangible Assets, net). The Company’s indefinite-lived intangible asset relates to the Cars.com trade name. Intangible assets with indefinite lives are tested for impairment annually, or more often if circumstances dictate, and written down to fair value as required. Similar factors to goodwill are considered in this evaluation. The estimates of fair value are determined using the “relief from royalty” methodology, which is a variation of the income approach. The discount rate assumption is based on an assessment of the risk inherent in the projected future cash flows generated by the trade name intangible asset. Amortizable intangible assets are amortized on a straight-line basis over the estimated useful lives as follows: Intangible Asset Estimated Useful Life Acquired software 2 - 7 years Customer relationships 3 - 14 years Other trade names 5 - 12 years Valuation of Long-Lived Assets . The Company reviews the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Once an indicator of potential impairment has occurred, the impairment test is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first requires a comparison of projected undiscounted future cash flows against the carrying amount of the asset group. If the carrying value of the asset group exceeds the estimated undiscounted future cash flows, the asset group would be deemed to be potentially impaired. The impairment, if any, would be measured based on the amount by which the carrying amount exceeds the fair value. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. No material impairment losses for long-lived assets were recognized for the periods presented in the Consolidated Statements of Income. Fair Value of Financial Instruments . Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels: • Level 1—Quoted prices for identical instruments in active markets; • Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and • Level 3—Valuations derived from valuation techniques in which one or more significant inputs are unobservable The Company’s financial instruments include the contingent consideration related to the Company's acquisitions and, before the year ended December 31, 2022, the interest rate swap (the “Swap”), both recorded at fair value. See Note 4 (Fair Value Measurements) and Note 8 (Interest Rate Swap) for additional information on the contingent consideration and the interest rate swap, respectively. Financial instruments also include accounts receivable, accounts payable and other liabilities. The carrying values of these instruments approximate their fair values. 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. Level 2 assets and liabilities are based on observable inputs other than quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets 45 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. The approximate fair value and related carrying value of the Company's outstanding indebtedness, as of December 31, 2023 and December 31, 2022 were as follows (in millions): December 31, 2023 December 31, 2022 Fair Value $ 470.9 $ 435.4 Carrying Value 490.0 481.3 The contingent consideration is classified as Level 3 in the fair value hierarchy and the fair value is measured based on a Monte Carlo simulation or a scenario-based method, depending on the earn-out achievement objective, utilizing projections about future performance. Significant inputs include volatility and projected financial information. Contingent Consideration. The Company's contingent consideration obligations are from arrangements resulting from acquisitions that involve potential future payment of consideration that is contingent upon the achievement of certain financial or performance metrics. Contingent consideration was recognized at its estimated fair value at the date of acquisition based on expected future payment, discounted using a weighted average cost of capital in accordance with accepted valuation methodologies. The Company reviews and reassesses the estimated fair value of contingent consideration liabilities at each reporting period and the updated fair value could differ materially from the initial estimates. The Company measures contingent consideration recognized in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified as Level 3 inputs. The fair value is measured based on a Monte Carlo simulation or a scenario-based method, depending on the earnout objective. The fair value measurement includes the following significant inputs: volatility and projected financial information. Significant increases or decreases to any of these inputs in isolation could result in a significantly higher or lower liability. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and each reporting period and the amount paid will be recognized in earnings within Other expense, net on the Consolidated Statements of Income. Foreign Currency Translation. The reporting currency of the Company is the U.S. dollar. The functional currency of the Company’s foreign subsidiaries is the local currency of each subsidiary. All balances of entities whose functional currency is a currency other than the U.S. dollar are translated into U.S. dollar equivalents at exchange rates as follows: (i) asset and liability accounts at period‑end rates; (ii) income statement accounts at average exchange rates for the period; and (iii) stockholders’ equity accounts at historical exchange rates. The resulting translation adjustments are excluded from consolidated Net income and are recognized within Accumulated other comprehensive income in the Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in Other expense, net within consolidated Net income for the period. Monetary assets and liabilities that are in a currency other than the Company's functional currency are translated to the functional currency at period-end, with changes in such amounts being reported as a component of Other expense, net in the Consolidated Statements of Income. Income Taxes . Income taxes are presented on the Consolidated Financial Statements using the asset and liability method, under which deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying amount of assets and liabilities and their respective tax basis, as well as from operating loss and tax credit carryforwards. Deferred income taxes reflect expected future tax benefits (i.e. assets) and future tax costs (i.e. liabilities). The Company measures deferred tax assets and liabilities using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. The Company recognizes the effect on deferred taxes of a change in tax rates in income in the period that includes the enactment date. Valuation allowances are established if, based upon the weight of available evidence, management determines it is “more likely than not” that some portion or all of the deferred tax asset will not be realized. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate resolution. The Company’s uncertain tax position reserves are reviewed periodically and are adjusted as events occur that affect its estimates, such as the availability of new information, the lapsing of applicable statutes of limitation, the conclusion of tax audits, the measurement of additional estimated liability, the identification of new tax matters, the release of administrative tax guidance affecting its estimates of tax liabilities or the rendering of relevant court decisions. The Company records penalties and interest relating to uncertain tax positions in Income tax (benefit) expense in the Consolidated Statements of Income. For further information, see Note 14 (Income Taxes). 46 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Stock-Based Compensation. Stock-based compensation expense is recognized on a straight-line basis over the vesting period. Forfeitures are recorded at the time the forfeiture event occurs. For further information, see Note 12 (Stock-Based Compensation) . Advertising Costs . Advertising costs are expensed as they are incurred and included in Marketing and sales in the Consolidated Statements of Income. Advertising expense for the years ended December 31, 2023, 2022 and 2021 was $ 107.8 million, $ 107.1 million and $ 104.4 million, respectively. Cost of Revenue and Operations. Cost of revenue and operations expense primarily consists of costs related to processing dealer vehicle inventory, product fulfillment, compensation costs for the product fulfillment and customer service teams and pay per lead products. Defined Contribution Plans. The Company’s employees are eligible to participate in a defined contribution plan. Participants are eligible on their date of hire and are allowed to make tax-deferred contributions up to 90 % of annual compensation, subject to limitations specified by the Internal Revenue Code of 1986, as amended. Employer contributions consist of matching contributions and/or non-elective employer contributions. The Company provides a maximum match for 4 % of the employee’s salary and contributions are immediately fully vested. The Company’s contributions to its defined contribution plans for the years ended December 31, 2023, 2022 and 2021 were $ 6.3 million, $ 5.5 million and $ 5.0 million, respectively . Note 3. Business Combinations D2C Acquisition. On November 1, 2023, the Company acquired all of the outstanding stock of D2C Media Inc. and EZResults Inc. (collectively, the “D2C Acquisition”), a leading provider of website and digital advertising solutions in Canada for $ 79.8 million total purchase considera tion. The Company expensed as incurred total acquisition costs of $ 1.4 million during the year ended December 31, 2023. These costs were recorded in General and administrative expenses in the Consolidated Statements of Income. As part of the D2C Acquisition, the Company may be required to pay a cash earnout of up to an additional CAD$ 35.0 million (approximately US $ 26.4 million as of December 31, 2023). The payment is classified as compensation expense and is not included in the total purchase consideration, as the potential cash compensation is to former equity holders who became employees and is forfeited if employment is terminated prior to the end of the earnout period. The amount to be paid will be determined by the acquired business’ future achievement of certain revenue-related financial targets through December 31, 2025 and expensed over each performance period of up to CAD$ 5.0 million, CAD$ 15.0 million and CAD$ 15.0 million, for the years ending December 31, 2023, 2024 and 2025, respectively. 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. The preliminary fair values of all assets acquired and liabilities assumed are subject to change within the one-year measurement period. The preliminary D2C Acquisition purchase price allocation is as follows (in thousands): Preliminary Acquisition-date Fair Value Cash consideration $ 79,841 Cash and cash equivalents $ 3,673 Accounts receivable 4,640 Other assets acquired (1) 1,378 Identified intangible assets (2) 38,967 Total assets acquired 48,658 Accounts payable and accrued liabilities ( 1,698 ) Other liabilities assumed (3) ( 815 ) Deferred tax liabilities, net ( 8,558 ) Total liabilities assumed ( 11,071 ) Net identifiable assets 37,587 Goodwill 42,254 Total purchase consideration $ 79,841 47 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) (1) Other assets acquired primarily consists of property and equipment, operating lease right of use assets and other prepaid expenses. (2) Preliminary information regarding the identifiable intangible assets acquired is as follows: Preliminary Acquisition-Date Fair Value (in thousands) Amortization Period (in years) Customer relationships $ 29,153 14 Acquired software 9,092 5 Trade name 722 5 Total $ 38,967 (3) Other liabilities assumed primarily consists of operating lease right of use liabilities and income taxes payable. A reconciliation of cash consideration to Payment for D2C Media, net in the Consolidated Statements of Cash Flows is as follows (in thousands): Cash consideration $ 79,841 Less: Cash acquired ( 3,673 ) Total payment for D2C Media, net $ 76,168 Goodwill. In connection with the D2C Acquisition, the Company recorded goodwill in the amount of $ 42.3 million, which is primarily attributable to expected sales growth from existing and future customers, product offerings, technology and the value of the acquired assembled workforce. All of the goodwill is considered non-deductible for income tax purposes. The D2C Acquisition would have had an immaterial impact on the Company’s Consolidated financial statements for the years ended December 31, 2022 and 2021. AccuTrade 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, “AccuTrade”), which provides dealers with VIN-specific vehicle valuation and appraisal data, instant offer capabilities and logistics technology (the “AccuTrade Acquisition”). The Company expensed as incurred total acquisition costs of $ 2.0 million, of which $ 1.0 million were recorded during the year ended December 31, 2022. These costs were recorded in General and administrative expenses in the Consolidated Statements of Income. Purchase Price Allocation. The fair values assigned to the tangible and intangible assets acquired and liabilities assumed were determined based on management’s final 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 AccuTrade Acquisition purchase price allocation is as follows (in thousands): Acquisition-date Fair Value Cash consideration $ 64,663 Other consideration (1) 5,300 Contingent consideration (2) 23,936 Total purchase consideration $ 93,899 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 76,860 Total purchase consideration $ 93,899 48 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) (1) In connection with the AccuTrade Acquisition, the Company entered into an agreement to provide one of the former owners with a one-year license to a certain product. The 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 AccuTrade 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 is being 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 $ 0.9 million is a non-cash reconciling item titled Amortization of deferred revenue related to AccuTrade Acquisition on the Consolidated Statements of Cash Flows. (2) As part of the AccuTrade Acquisition, the Company may be required to pay additional consideration to the former owners based on the achievement of certain financial targets. The Company has the option to pay consideration in cash or certain amounts in stock, which would result in a variable number of shares being issued in accordance with a calculation based on future share prices. The amount to be paid will be determined by the acquired business’ future performance to be attained over a three-year performance period; based on certain tiered performance metrics the maximum amount to be paid is $ 63.0 million, of which a maximum of $ 15.0 million could be in stock, with additional upside for performance that exceeds the tiered performance metrics. The contingent consideration is classified as Level 3 in the fair value hierarchy. The fair value is measured based on a Monte Carlo simulation. This amount represents the estimated fair value at the time of the acquisition. For more information on the fair value of the AccuTrade contingent consideration, see Note 4 (Fair Value Measurements). (3) Assets acquired primarily consist of accounts receivable. (4) I nformation regarding the identifiable intangible assets acquired is as follows: Acquisition-Date Fair Value (in thousands) Amortization Period (in years) Acquired software $ 12,926 5 Trade name 1,446 10 Customer relationships 1,307 7 Total $ 15,679 (5) Total liabilities assumed primarily consist of accounts payable. In connection with the AccuTrade Acquisition, the Company recorded goodwill in the amount of $ 76.9 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. The AccuTrade Acquisition would have had an immaterial impact on the Company’s Consolidated financial statements for the year ended December 31, 2021. CreditIQ Acquisition. On November 5, 2021, the Company acquired all of the outstanding stock of CreditIQ, Inc. (the “CIQ Acquisition”) an 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 Commerce platform. The Company expensed as incurred total acquisition costs of $ 1.3 million during the year ended December 31, 2021. 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 as compensation expense in the Company’s Consolidated Statements of Income. Purchase Price Allocation. The fair values assigned to the tangible and intangible assets acquired and liabilities assumed were determined based on management’s final 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 CIQ Acquisition purchase price allocation is as follows (in thousands): 49 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) 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) (7) ( 1,945 ) Net identifiable assets 18,148 Goodwill (7) 25,996 Total purchase consideration $ 44,144 (1) A reconciliation of cash consideration to Payments for the CIQ Acquisition, net of cash acquired in the Consolidated Statements of Cash Flows 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’s future performance to be attained over a three-year performance period. The fair value was estimated utilizing a Monte Carlo simulation or a scenario-based method, depending on the achievement objective. For more information on the fair value of the CreditIQ contingent consideration, see Note 4 (Fair Value Measurements). (3) In connection with the 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 Acquisition as compensation expense in General and administrative expense on the Company’s Consolidated Statements of Income. (4) Assets acquired includes cash and cash equivalents, accounts receivable and other identifiable assets. (5) Information regarding the identifiable intangible assets acquired is as follows: Acquisition-Date Fair Value (in thousands) Weighted-Average Amortization Period (in years) Trade name $ 900 10 Acquired software 19,000 5 Total $ 19,900 (6) Total liabilities assumed includes accounts payable, deferred income tax liabilities, net and other liabilities. (7) During the year ended December 31, 2022, the Company recorded a $ 0.2 million purchase accounting adjustment. In connection with the CIQ Acquisition, the Company recorded goodwill in the amount of $ 26.0 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 non-deductible for income tax purposes. The CIQ Acquisition would have had an immaterial impact on the Company’s Consolidated financial statements for the year ended December 31, 2021. 50 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Note 4. Fair Value Measurements The Company's contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands): Fair value measurement at reporting date As of December 31, 2023 Level 1 Level 2 Level 3 Contingent consideration $ 61,408 $ — $ — $ 61,408 Total $ 61,408 $ — $ — $ 61,408 Fair value measurement at reporting date As of December 31, 2022 Level 1 Level 2 Level 3 Contingent consideration $ 55,871 $ — $ — $ 55,871 Total $ 55,871 $ — $ — $ 55,871 The rollforward of the Level 3 contingent consideration from December 31, 2022 is as follows (in thousands): As of December 31, 2022 Fair Value Adjustment (1) As of December 31, 2023 Contingent consideration $ 55,871 $ 5,537 $ 61,408 (1) Fair value adjustments on contingent considerations are reflected within Other expense, net in the Consolidated Statements of Income. The contingent consideration related to CreditIQ and AccuTrade is classified on the Consolidated Balance Sheets based on expected payment dates. As of December 31, 2023, $ 25.8 million and $ 35.6 million were included within Other accrued liabilities and Other noncurrent liabilities on the Consolidated Balance Sheets. As of December 31, 2022, $ 9.4 million and $ 46.5 million were included within Other accrued liabilities and Other noncurrent liabilities on the Consolidated Balance Sheets. The significant inputs and assumptions that were used in the contingent consideration valuations as of December 31, 2023 related to volatility ranged from 27 % to 41 %. We expect to make payments on the contingent consideration in 2024 and 2025. For more information relating to contingent consideration, see Note 3 (Business Combinations). Note 5. Revenue The Company's Consolidated Statements of Income provide disaggregated revenue information that reflects the nature, timing, amount and uncertainty of cash flows related to the Company's revenue. Substantially all revenue was generated and located within the U.S. The Company's disaggregated revenue information is as follows (in thousands): Year Ended December 31, 2023 2022 2021 Dealer $ 621,661 $ 579,222 $ 549,923 OEM and National 55,904 58,557 65,085 Other 11,618 16,097 8,675 Total revenue $ 689,183 $ 653,876 $ 623,683 Note 6. Goodwill and Other Intangible Assets, net 51 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Goodwill and Indefinite-Lived Intangible Asset Summary. The changes in the carrying amount of goodwill and indefinite-lived intangible asset are as follows (in thousands): Goodwill Cars.com Trade name December 31, 2021 $ 26,227 $ 390,020 Additions (1) 76,860 — Adjustments (2) ( 231 ) — December 31, 2022 $ 102,856 $ 390,020 Additions (1) 42,254 — Foreign currency translation adjustment 1,948 — December 31, 2023 $ 147,058 $ 390,020 (1) In connection with the D2C Acquisition and AccuTrade Acquisition, the Company recorded goodwill in the amount of $ 42.3 million and $ 76.9 million, respectively. The D2C Acquisition related goodwill is preliminary as of December 31, 2023. For more information on the acquisitions, see Note 3 (Business Combinations). (2) During the year ended December 31, 2022, the Company recorded a purchase accounting adjustment related to the CreditIQ Acquisition. Goodwill and Indefinite-Lived Intangible Asset Impairment Test. The Company performed impairment tests for goodwill and the indefinite-lived intangible asset. The Company performed a qualitative assessment that considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specific facts and circumstances. After performing this assessment, the Company concluded there were no indicators of impairment and therefore, the Company did not perform a quantitative test and did not record an impairment to goodwill or the indefinite-lived intangible asset during any of the three years ending December 31, 2023, 2022 and 2021. Definite Lived Intangible Assets . The Company’s definite-lived intangible assets by major asset class are as follows (in thousands): December 31, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships $ 864,344 $ ( 624,204 ) $ 240,140 $ 833,847 $ ( 556,053 ) $ 277,794 Acquired software 83,138 ( 54,990 ) 28,148 73,626 ( 48,288 ) 25,338 Other trade names 27,001 ( 16,142 ) 10,859 26,246 ( 12,310 ) 13,936 Content library 2,100 ( 2,100 ) — 2,100 ( 2,100 ) — Total $ 976,583 $ ( 697,436 ) $ 279,147 $ 935,819 $ ( 618,751 ) $ 317,068 As of December 31, 2023, projected annual amortization expense for amortizable intangible assets is as follows (in thousands): 2024 $ 80,456 2025 62,610 2026 41,201 2027 34,944 2028 28,688 Thereafter 31,248 Total $ 279,147 Note 7. Debt Credit Agreement. On May 31, 2017, the Company and certain of its domestic wholly-owned subsidiaries (collectively, the “Guarantors”) entered into what was originally a $900.0 million Credit Agreement (the “Credit Agreement”) with the lenders named therein. Subsequent to the initial Credit Agreement, the Company has entered into four amendments. The Credit Agreement’s initial maturity was May 31, 2022 and originally included (a) revolving loan commitments in an aggregate principal amount of up to $ 450.0 million (of which up to $ 25.0 million may be in the form of letters of credit at its request) and (b) term 52 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) loans in an aggregate principal amount of $ 450.0 million. Interest on the borrowings under the Credit Agreement is payable based on either (i) the London Interbank Offered Rate (“LIBOR”) or (ii) the Alternate Base Rate (“ABR”), as defined in the Credit Agreement, in either case plus an applicable margin and fees which, after the second full fiscal quarter following the closing date, was based upon its Total Net Leverage Ratio. The Credit Agreement required a maximum Total Net Leverage Ratio of 4.25 x with an incremental step down to 3.75 x on or after May 31, 2019 and a minimum Interest Coverage Ratio of 3.0 x (each as defined in the Credit Agreement). The Credit Agreement allowed for with a temporary step up to the maximum Total Net Leverage Ratio for material permitted acquisitions. Third Amendment. On October 30, 2020, the Company entered into the Third Amendment to its Credit Agreement in connection with a broader refinancing, in which the Company reduced the size of the outstanding borrowings under the Credit Agreement to an aggregate principal amount of $ 430.0 million, comprised of a $ 230.0 million Revolving Credit Facility and a $ 200.0 million Term Loan, and extended the maturity date to May 31, 2025 . The Third Amendment also included the following, among others: • A maximum Senior Secured Leverage Ratio of 3.50 x (as defined within the Credit Agreement, as amended), with a temporary step up for material permitted acquisitions; • A minimum Interest Coverage Ratio of 2.75 x and 3.00 x beginning June 30, 2023; • A revised interest rate grid updated to reflect a maximum ABR margin of 1.75 % and a maximum Eurodollar margin of 2.75 %; • Reduction of the LIBOR floor to 0.50 %; Fourth Amendment. In the second quarter of 2023, the Company entered into an amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment, among other things, memorializes certain terms of the Credit Agreement to replace the relevant benchmark provisions from LIBOR to the Secured Overnight Financing Rate (“SOFR”) and makes certain other conforming and mechanical changes. This amendment also included a more favorable credit spread adjustment. Except as modified by the Fourth Amendment, the existing terms of the Credit Agreement remain in effect. Term Loan. As of December 31, 2023, the outstanding principal amount under the Term Loan was $ 55.0 million and the interest rate in effect was 7.5 %. During the year ended December 31, 2023, the Company made $ 11.3 million in Term Loan payments. Revolving Loan. As of December 31, 2023, the outstanding borrowings under the Revolving Loan were $ 35.0 million and the interest rate in effect was 7.5 %. During the year ended December 31, 2023, the Company borrowed $ 45.0 million and made $ 25.0 million in Revolving Loan payments. As of December 31, 2023, $ 195.0 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 were 0 .5 x and 6.0 x as of December 31, 2023, respectively, and calculated in accordance with the Company's Credit Agreement. Senior Unsecured Notes. In October 2020, the Company issued $ 400.0 million aggregate principal amount of 6.375 % senior unsecured notes due in 2028. Interest on the notes is due semi-annually on May 1 and November 1. Debt Issuance Costs. Debt issuance costs related to the various amendments and issuances were $ 8.1 million and $ 11.1 million as of December 31, 2023 and December 31, 2022, respectively. Depending on the nature of the debt issuance costs and the underlying debt to which it relates, they are recorded as either a reduction of debt and accreted using the effective interest method or as a deferred asset and accreted using the straight-line method with the amortization recorded in Interest expense, net on the Consolidated Statements of Income. Debt Guarantors, Collateral, Covenants and Restrictions. The obligations under the debt agreements are guaranteed by the Company and its subsidiary guarantors. The Guarantors secured their respective obligations under the debt agreements by granting liens in favor of the agent on substantially all of their assets. The terms of the debt agreement include representations and warranties, affirmative and negative covenants (including certain financial covenants) and events of default that are customary for credit facilities of this nature. The negative covenants place restrictions and limitations on the Company’s ability to incur additional indebtedness, make distributions or other restricted payments, create liens, make certain equity or debt investments, engage in mergers or consolidations and engage in certain transactions with affiliates. As of December 31, 2023, the Company is in compliance with the covenants under its debt agreements. Long-term Debt Maturities. Long-term debt includes future principal payments on long-term borrowings through scheduled maturity dates. Excluded from these amounts are the amortization of debt issuance and other costs related to indebtedness. As of December 31, 53 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) 2023, the Company’s contractual payments under then-outstanding long-term debt agreements in each of the next five calendar years and thereafter are as follows (in thousands): 2024 $ 25,000 2025 65,000 2026 — 2027 — 2028 400,000 Thereafter — Total $ 490,000 Note 8. 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 initial Term Loan, the Company entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, the Company was locked into a fixed rate of interest of 2.96 %, on a notional amount of $ 300.0 million until May 31, 2022. The Swap was initially designated as a cash flow hedge of interest rate risk. During the second quarter of 2020, the Company entered into the second amendment to the Credit Agreement, which triggered a quantitative hedge effectiveness test that resulted in the loss of hedge accounting. As a result, as of the date of the second amendment, the unrealized loss included within Accumulated other comprehensive income was frozen and then was ratably reclassified into Net income over the remaining life of the Swap through Interest expense, net and Income tax (benefit) expense within the Consolidated Statements of Income. Subsequent to the second amendment, any changes in the fair value of the Swap were recorded within Other expense, net on the Consolidated Statements of Income. During the fourth quarter of 2020, the Company entered into the Third Amendment to the Credit Agreement, which triggered a partial debt extinguishment, including a partial extinguishment of the underlying Term Loan. Due to the reduction in the Term Loan as compared to the notional amount of the Swap, the Company wrote-off a proportional amount of the frozen Accumulated other comprehensive income balance as of the date of the partial extinguishment proportional to the reduction in the underlying notional amount of Term Loan. The Company continued to amortize the remaining Accumulated other comprehensive income to Interest expense, net and Income tax (benefit) expense within the Consolidated Statements of Income through the remainder of the term of the Swap. Any changes in the fair value of the Swap were recorded within Other expense, net on the Consolidated Statements of Income. The Swap expired on May 31, 2022 and, as such, is no longer recorded on the Consolidated Balance Sheets. During the years ended December 31, 2022 and 2021, $ 2.4 million and $ 5.7 million was reclassified from Accumulated other comprehensive income and recorded in Interest expense, net, respectively. During the years ended December 31, 2022 and 2021, the Company made payments of $ 3.3 million and $ 8.6 million related to the Swap. During the years ended December 31, 2022 and 2021, $ 0.4 million and $ 0.9 million was reclassified as a tax benefit from Accumulated other comprehensive income into Income tax (benefit) expense on the Consolidated Statements of Income. 54 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Note 9. Leases Leases. The Company is obligated as a lessee under certain non-cancelable operating leases for office space, and is also obligated to pay insurance, maintenance and other executory costs associated with the leases. In May 2016, the Company entered into a lease of office space in Chicago, Illinois, which is the Company's most material lease. The lease extends through June 2031 and monthly rental payments under the lease escalate by 2.5 % each year throughout the lease. As of December 31, 2023, the Company’s scheduled future minimum lease payments under operating leases having initial noncancelable lease terms of more than one year, is as follows (in thousands): 2024 $ 4,707 2025 4,722 2026 4,842 2027 4,151 2028 5,087 Thereafter 13,041 Total minimum lease payments 36,550 Less: Imputed interest (1) ( 8,970 ) Present value of the minimum lease payments 27,580 Less: Current maturities of lease obligations ( 2,378 ) Long-term lease obligations $ 25,202 (1) The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available from the Company’s lessors. Therefore, in order to discount lease payments to present value, the Company has estimated its incremental borrowing rate based on information available at either the lease transition date (for those leases that commenced prior to January 1, 2019) or the lease commencement or acquisition date (for those leases that commenced or were acquired after January 1, 2019). As of December 31, 2023 and 2022, the Company’s operating lease assets, included in Investments and other assets , net, were $ 13.0 million and $ 13.7 million, respectively, and operating lease liabilities were $ 27.6 million and $ 28.5 million, respectively, the current maturities of which is included in Other accrued liabilities and the long-term portion of which is included in Other noncurrent liabilities . The difference between the operating lease assets and the operating lease liabilities is primarily due to a lease incentive received related to the lease in Chicago, Illinois. Other information related to the Company’s operating leases for the years ended December 31, 2023, 2022 and 2021 is as follows (in thousands, except months and percentages): Year Ended December 31, Income statement information: 2023 2022 2021 Operating lease cost $ 3,035 $ 2,993 $ 3,541 Short-term lease cost 79 137 600 Variable lease cost 3,461 3,443 3,034 Total lease cost $ 6,575 $ 6,573 $ 7,175 Other information: Cash paid for amounts included in the measurement of operating lease liabilities $ 3,672 $ 4,470 $ 4,856 Weighted-average remaining lease term (in months) 89 101 112 Weighted-average discount rate as of December 31, 7.5 % 7.5 % 7.4 % Note 10. Commitments and Contingencies From time to time, the Company and its subsidiaries are parties 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. 55 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Note 11. 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 year ended December 31, 2023, the Company repurchased and subsequently retired 1.7 million shares for $ 31.3 million at an average price paid per share of $ 18.43 . As of December 31, 2023, $ 119.7 million of the program remains available. Note 12. Stock-Based Compensation Omnibus Plan. In May 2017, the Company’s Board of Directors approved the Cars.com Inc. Omnibus Incentive Compensation Plan (the “Omnibus Plan”), which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and other stock-based and cash-based awards. A maximum of 18.0 million common shares may be issued under the Omnibus Plan. As of December 31, 2023, there were 4.6 million common shares available for future grants. The Company issues new shares of common stock for shares delivered under the Omnibus Plan. Information related to stock-based compensation expense is as follows (in thousands): Year Ended December 31, 2023 2022 2021 Stock-based compensation expense $ 28,491 $ 22,342 $ 21,431 Income tax benefit related to stock-based compensation expense 4,505 — — S tock-based compensation expense by financial statement line item on the Company’s Consolidated Statements of Income is as follows (in thousands): Year Ended December 31, 2023 2022 2021 Cost of revenue and operations $ 1,487 $ 955 $ 876 Product and technology 8,814 6,647 5,455 Marketing and sales 5,740 4,921 5,202 General and administrative 12,450 9,819 9,898 Total $ 28,491 $ 22,342 $ 21,431 For the years ended December 31, 2023 and 2022, excluded from stock-based compensation expense is $ 0.3 million and $ 0.1 million of capitalized internally developed technology costs, respectively. Information related to outstanding stock-based compensation awards as of December 31, 2023 for restricted share units (“RSUs”), performance share units (“PSUs”), stock options and the Cars Commerce Employee Stock Purchase Plan (“ESPP”) is as follows (in thousands, except for weighted-average remaining period): Unearned Compensation Weighted-Average Remaining Period (in years) RSUs $ 33,371 1.8 PSUs 4,107 2.1 Stock Options 1,132 1.0 ESPP 270 0.3 Total $ 38,880 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, 56 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) generally ranging between one and three 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 year ended December 31, 2023 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, 2022 3,771 $ 12.88 Granted 1,852 16.72 Vested and delivered ( 1,764 ) 10.80 Forfeited ( 134 ) 15.71 Outstanding as of December 31, 2023 (1) 3,725 $ 15.67 (1) Includes 358 RSUs that were vested, but not yet delivered. The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2022 and 2021 was $ 14.21 and $ 14.94 , respectively. The total grant-date fair value of RSUs that vested during the years ended December 31, 2023, 2022 and 2021 was $ 19.1 million, $ 16.9 million and $ 14.7 million, respectively. 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 after the end of the respective performance period. PSU activity for the year ended December 31, 2023 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, 2022 245 $ 14.78 Granted 267 16.47 Vested and delivered — — Forfeited — — Outstanding as of December 31, 2023 512 $ 15.66 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 year ended December 31, 2023 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, 2022 1,067 $ 6.28 7.98 $ 4,296 Granted — — — — Exercised — — — — Forfeited — — — — Outstanding as of December 31, 2023 1,067 6.28 6.98 9,096 Exercisable as of December 31, 2023 513 2.80 6.22 6,965 There were no stock options granted during the year ending December 31, 2023. The fair value of the stock options granted during the years ended December 31, 2022 and 2021 were estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions: 57 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) 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 Employee Stock Purchase Plan ("ESPP"). Eligible employees may authorize payroll deductions of up to 10 % of the employee’s base earnings with a maximum of $ 10,000 per every six-month offering period to purchase Cars Commerce common stock at a purchase price per share equal to 85 % of the lower of (i) the closing market price per share of Cars Commerce at the beginning of the offering period or (ii) the closing market price per share at the end of the offering period. A maximum of three million shares are available for issuance under the ESPP. As of December 31, 2023, 1.9 million shares were available for issuance under the ESPP. The Company issued 0.2 million, 0.2 million and 0.2 million shares related to the ESPP and recorded $ 0.8 million, $ 0.6 million and $ 0.7 million of stock-based compensation expense related to the ESPP for the years ended December 31, 2023, 2022 and 2021, respectively. Note 13. 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 impact. As part of the AccuTrade Acquisition, the Company may pay up to $ 15.0 million of the contingent consideration in stock at a future date at the Company's discretion. Those potential shares have been excluded from the computations below because they are contingently issuable shares, and the contingency to which the issuance relates was not met at the end of the reporting period . The computations of the Company’s basic and diluted earnings per share is as follows (in thousands, except per share amounts): Year Ended December 31, 2023 2022 2021 Net income $ 118,442 $ 17,206 $ 10,791 Basic weighted-average common shares outstanding 66,742 68,215 68,727 Effect of dilutive stock-based compensation awards (1) 1,485 1,434 2,610 Diluted weighted-average common shares outstanding 68,227 69,649 71,337 Earnings per share, basic $ 1.77 $ 0.25 $ 0.16 Earnings per share, diluted 1.74 0.25 0.15 (1) There were 290 , 2,033 and 1,304 potential common shares excluded from diluted weighted-average common shares outstanding for the years ended December 31, 2023, 2022 and 2021 respectively, as their inclusion would have had an anti-dilutive effect. Note 14. Income Taxes Selected Information Related to Income Taxes. Significant components of Income before income taxes are as follows (in thousands): Year Ended December 31, 2023 2022 2021 U.S. $ 20,917 $ 22,533 $ 9,444 Non-U.S. ( 2,812 ) 43 39 Income before income taxes $ 18,105 $ 22,576 $ 9,483 58 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Year Ended December 31, 2023 2022 2021 Current: U.S. federal $ 11,603 $ 2,991 $ 516 U.S. state and local 2,289 1,122 1,267 Non-U.S. 269 ( 26 ) ( 164 ) Total current income tax expense 14,161 4,087 1,619 Deferred: U.S. federal ( 95,298 ) 579 ( 2,599 ) U.S. state and local ( 19,034 ) 671 ( 332 ) Non-U.S. ( 166 ) 33 4 Total deferred income tax (benefit) expense ( 114,498 ) 1,283 ( 2,927 ) Income tax (benefit) expense $ ( 100,337 ) $ 5,370 $ ( 1,308 ) The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows (in thousands, except percentages): Year Ended December 31, 2023 2022 2021 $ % $ % $ % Income tax provision at statutory rate $ 3,803 21.0 % $ 4,743 21.0 % $ 1,994 21.0 % State income taxes, net of federal income tax expense 148 0.8 1,122 5.0 378 4.0 Nondeductible executive compensation 2,771 15.3 1,974 8.7 1,365 14.4 Nondeductible transaction expenses 461 2.5 ( 2,608 ) ( 11.6 ) 2,638 27.8 Tax credits ( 2,462 ) ( 13.6 ) ( 1,455 ) ( 6.4 ) ( 2,379 ) ( 25.1 ) Stock-based compensation ( 2,859 ) ( 15.8 ) ( 1,432 ) ( 6.3 ) ( 3,010 ) ( 31.7 ) Return to provision adjustments ( 2,972 ) ( 16.4 ) 4,627 20.5 ( 453 ) ( 4.8 ) Uncertain tax positions 1,070 5.9 ( 4,042 ) ( 17.9 ) 1,551 16.4 Valuation allowance ( 101,182 ) ( 558.9 ) 1,194 5.3 ( 3,943 ) ( 41.6 ) Other, net 885 5.0 1,247 5.5 551 5.8 Income tax (benefit) expense $ ( 100,337 ) ( 554.2 ) % $ 5,370 23.8 % $ ( 1,308 ) ( 13.8 ) % Deferred Tax Assets and Liabilities and Valuation Allowance. The Company has recorded deferred tax assets related to federal and state income tax net operating loss (“NOL”) carryforwards of approximately $ 2.4 million and $ 2.5 million as of December 31, 2023, and 2022, respectively. These federal NOLs, and certain state NOLs, can be carried forward indefinitely. Prior 2023, the Company concluded a valuation allowance was required against its deferred tax assets. In reaching this conclusion, in accordance with U.S. GAAP, the Company 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 significant negative evidence to require a valuation allowance. Therefore, the Company recorded a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized in future periods. At each reporting date, the Company evaluates the realizability of its deferred tax assets to determine whether a valuation allowance is warranted. During 2023, the Company evaluated all available evidence and determined that the Company's recent performance and future projections enabled the Company to release a significant portion of the Company's valuation allowance that was previously recorded. The Company also has recorded deferred tax assets related to federal and state research and development (“R&D”) tax credit carryforwards of $ 1.2 million, as of December 31, 2023 and 2022. The federal and state R&D tax credits generally may be carried forward 20 years and 5 years, respectively. The Tax Cuts and Jobs Act enacted in December 2017, amended Internal Revenue Code Section 174 to require that specific research and experimental expenditures be capitalized and amortized over five years (15 years for non-U.S. R&D expenditures) beginning in the Company’s 2022 fiscal year. 59 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) Significant components of the deferred tax assets and liabilities are as follows (in thousands): December 31, 2023 2022 Deferred income tax liabilities: Indefinite lived intangibles $ ( 14,203 ) $ ( 4,237 ) Right of use assets ( 3,274 ) ( 3,445 ) Depreciation — ( 5,787 ) Other — ( 2,833 ) Total deferred tax liabilities $ ( 17,477 ) $ ( 16,302 ) Deferred income tax assets: Accrued compensation $ 12,006 $ 8,748 Capitalized research and development costs 24,818 15,242 Definite lived intangibles 2,596 239 Goodwill 73,172 79,994 Lease obligations 6,941 7,161 NOL and tax credit carryforwards 3,603 3,688 Other 855 3,171 Total deferred tax assets 123,991 118,243 Less: Valuation allowance ( 2,318 ) ( 103,294 ) Net deferred tax asset (liability) $ 104,196 $ ( 1,353 ) The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets as of December 31, 2023 and 2022 were as follows (in thousands): December 31, 2023 2022 Investments and other assets, net $ 112,953 $ 48 Other noncurrent liabilities ( 8,757 ) ( 1,401 ) Net deferred tax asset (liability) $ 104,196 $ ( 1,353 ) Uncertain Tax Positions. A summary of the Company’s uncertain tax positions is as follows (in thousands): Year Ended December 31, 2023 2022 Balance as of January 1 $ 2,553 $ 9,851 Additions based on tax positions related to the current year 620 382 Additions for tax positions of prior years 304 294 Reductions for tax positions of prior years — ( 7,974 ) Balance as of December 31 $ 3,477 $ 2,553 The Company believes it is reasonably possible that within the next twelve months the amount of the Company's uncertain tax positions may be decreased by an immaterial amount. The Company has recorded its best estimate of the potential exposure for these issues. As of December 31, 2023 and 2022, the Company had $ 2.4 million and $ 0.3 million, respectively, of uncertain tax positions that if recognized, would affect the annual tax rate. The Company files a consolidated U.S. federal income tax return as well as income tax returns in various state and local jurisdictions. The Company's tax returns are routinely audited by federal and state tax authorities and these tax audits are at various stages of completion at any given time. The Company’s tax returns open to examination by a federal or state taxing authority are for years beginning on or after January 1, 2018. Note 15. Segment Information Operating segments are components of an enterprise where separate financial information is available that is evaluated regularly by the chief operating decision maker (the “CODM”), or decision-making group, in deciding how to allocate resources and in assessing 60 Cars.com Inc. Notes to Consolidated Financial Statements (Continued) performance. The Company’s CODM is the Cars Commerce Chief Executive Officer. The CODM makes resource allocation decisions to maximize the Company’s consolidated financial results. For the years ended December 31, 2023, 2022 and 2021, the Company had one operating and reportable segment. For the years ended December 31, 2023, 2022 and 2021, the Company did not have any one customer that generated greater than 10% of total revenue. Substantially all revenue and long-lived assets were generated and located within the U.S. 61 Item 9. Changes in and Disagreements With Accou ntants on Accounting and Financial Disclosure. None.