Carvana Co. — FY 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Carvana operates an online used-car retail platform and expanded to 44 markets by year-end, from 21 a year earlier.
Financial and operating performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $858.9 million | $365.1 million |
| Gross profit | $68.1 million; 7.9% margin | $19.2 million; 5.3% margin |
| SG&A | $223.4 million | $108.7 million |
| Net loss | $164.3 million | $93.1 million |
| EBITDA (non-GAAP) | $(145.1) million; (16.9)% margin | $(84.9) million; (23.2)% margin |
| Net cash used in operations | $199.9 million | $240.2 million |
| Cash and cash equivalents at year-end | $172.7 million | $39.2 million |
| Debt at year-end | $302.7 million total | $170.8 million total |
Revenue rose 135.2%, while retail units sold increased 135.9% to 44,252. Total gross profit per retail unit grew 50.4% to $1,539; average days to sale rose to 91 from 89. The company attributed stronger vehicle gross profit per unit to purchasing and pricing technology, inventory management, and reconditioning efficiencies. FY 2017 net loss attributable to Carvana Co. was $62.8 million, reflecting the non-controlling interests’ share of consolidated results; net loss attributable to Class A common stockholders was $64.5 million, or $1.31 per share.
Fourth quarter: Revenue was $265.1 million, gross profit $21.9 million, and net loss $47.2 million. Revenue and gross profit exceeded the prior-year quarter, while the quarterly net loss widened from $35.7 million.
Liquidity, financing, and capital structure
- Year-end current assets were $489.7 million and current liabilities $306.0 million. Cash included $14.4 million of restricted cash; vehicle inventory was $227.4 million.
- The floor-plan facility had $248.8 million outstanding at approximately 5.21%, with $26.2 million available at year-end. Its stated capacity increased to $350 million on January 1, 2018; the facility maturity was December 31, 2018.
- Other year-end debt included $26.6 million of notes payable and $27.3 million of finance-lease liabilities. Cash used in investing activities was $82.7 million, primarily reflecting expansion-related property and equipment spending.
- The May 2017 IPO generated approximately $205.8 million net proceeds; the December 2017 preferred-stock issuance generated approximately $98.5 million net proceeds. Management stated existing liquidity and expected financing were sufficient for at least 12 months, while noting future capital needs depend on growth and investment plans.
- The company depends on third-party sales of originated auto finance receivables for cash generation and a substantial portion of gross profit. At year-end it reported unused purchase capacity of approximately $1.2 billion under one agreement and $324.9 million under another; agreements were expected to expire in November 2018.
Material changes, outlook, and risks
- Growth came with sharply higher costs: SG&A more than doubled, including advertising expense of $55.7 million versus $27.0 million, and the annual net loss widened. The company said it expected continued losses while investing in market openings, inventory, logistics, advertising, and technology; no quantified earnings or revenue guidance was provided.
- Management’s strategy is to add markets, deepen penetration, expand inventory selection, improve capacity utilization and grow financing and ancillary-product revenue. It reported 44 markets at year-end and planned further expansion.
- Key risks include ongoing losses and capital requirements; rapid-growth execution and customer-service quality; used-car price, inventory and seasonality exposure; reliance on finance-receivable buyers and inventory lenders; and extensive state and federal regulation.
- Related-party dependence remains relevant: Carvana uses DriveTime affiliates for certain services, vehicle service contracts, GAP administration, and finance-receivable servicing. The Garcia Parties held approximately 97% of voting power at year-end. Carvana Co. owned approximately 12.9% of Carvana Group, with 87.1% held by other unitholders.
- The company’s $27.3 million finance-lease balance arose from sale-leaseback transactions accounted for as financing. Under the master sale-leaseback arrangement, the purchaser could demand repurchase of certain properties beginning November 2019; stated repurchase prices totaled approximately $19.2 million at year-end.
- The 5.5% cumulative-dividend convertible preferred stock raised $98.5 million net and carries senior rights and potential dilution. The tax receivable agreement generally requires payment to LLC unitholders of 85% of specified realized tax benefits; the company reported an estimated $10.9 million unrecorded TRA liability.
- Management concluded disclosure controls were effective. The auditor gave an unqualified opinion on the financial statements; it did not provide an opinion on internal-control effectiveness, and management’s internal-control report was omitted under the newly public company transition relief.
Investor verification priorities
- Track whether unit growth and higher gross profit per unit can offset rising SG&A and reduce losses and operating cash outflow.
- Verify renewal or replacement of floor-plan financing and receivable-sale agreements, and assess available capacity, pricing, and counterparty concentration.
- Review inventory aging, days to sale, vehicle depreciation, and the impact of used-car price changes and seasonality on margins.
- Examine related-party arrangements, voting control, non-controlling interests, preferred-stock terms, and the potential cash cost of the tax receivable agreement.
- Monitor expansion spending, lease and repurchase obligations, and the company’s stated liquidity runway against continuing losses.