CARVANA CO. quarterly report, Q3 FY2022

Business context and reporting period

Carvana Co. operates an online used-car buying and selling platform, including vehicle financing, ancillary products, logistics and wholesale auctions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022; amounts below are in millions unless noted. Carvana completed its $2.2 billion acquisition of ADESA’s U.S. physical auction business on May 9, 2022.

Financial performance and liquidity

Q3 revenue declined 2.7%, while gross profit fell 31.4%. Retail vehicle sales were $2,492; wholesale sales and revenues were $697; other sales and revenues were $197. SG&A was $656 and interest expense was $153 in Q3. For the nine months, SG&A was $2,104 and interest expense was $333. The filing reports no quarterly cash-flow statement; nine-month operating cash use was $585, investing cash use was $2,568, and financing cash provided was $2,994. Cash, cash equivalents and restricted cash totaled $477 at September 30, including $316 of unrestricted cash.

At September 30, total liabilities were $9,247 and stockholders’ equity was $374. Senior notes totaled $5,725, including $3,275 of 10.25% notes due 2030. Short-term floor-plan borrowings were $575. Management reported total debt principal, including finance leases, of approximately $7.5 billion. Committed liquidity resources were $2,272; total liquidity resources, including assets available for potential financing, were $4,386. These broader liquidity figures include unpledged assets and are not equivalent to cash.

Material changes versus prior comparable periods

• Q3 retail units sold fell 8.4% to 102,570; for the first nine months they rose 4.2% to 325,319. Q3 retail revenue declined 6.0%, despite a 2.6% increase in average retail selling price.
• Total gross profit per retail unit declined 25.1% to $3,500 in Q3 and 28.5% to $3,237 for the nine months. Retail gross profit per unit fell to $1,131 in Q3 and $1,027 for the nine months, primarily due to higher acquisition, reconditioning and inbound transport costs.
• Wholesale revenue increased, substantially reflecting ADESA marketplace activity. ADESA contributed $193 of Q3 wholesale revenue and recorded a $36 net loss for the quarter; its nine-month net loss was $57.
• Other sales and revenues declined, largely because rapidly rising benchmark interest rates reduced gains on loan sales. Q3 interest expense more than tripled year over year, reflecting additional notes and real-estate financing costs.
• The ADESA acquisition increased property and equipment and added $838 of preliminary goodwill. Carvana issued $3,275 of 10.25% senior notes to help fund the acquisition and raised $1,227 net through a Class A share offering.
• Nine-month operating cash use improved from $1,422 to $585, mainly due to lower cash use for vehicle inventory; investing cash use increased by $2,216, primarily due to the acquisition.

Outlook, commentary and risks

The filing provides no specific quantified revenue, earnings or unit-sales guidance. Management said it expects losses to continue as it invests in infrastructure, technology and market coverage, and believes working capital, operating results and existing financing arrangements are sufficient to fund operations for at least one year from the financial statement issuance date. Management also emphasized improving efficiency, maximizing infrastructure utilization and pursuing higher gross profit per unit.

Management attributed weaker Q3 demand primarily to inflation and rising interest rates reducing vehicle affordability, and noted increased supply-chain, logistics, materials and labor costs. Used-car price declines and seasonal depreciation could pressure inventory values and margins. Other significant risks include the company’s history of losses, high debt and interest burden, access to financing and securitization markets, the ability to sell inventory promptly, and integrating ADESA.

Unusual items include a $77 nine-month fair-value loss on Root warrants, including $72 in Q3; the warrants and deferred revenue were recorded in connection with an insurance-platform agreement. The company also recorded $26 of nine-month SG&A compensation expense for the CEO Milestone Gift. A full valuation allowance was recorded against deferred tax assets; a $1.6 billion potential Tax Receivable Agreement liability was unrecorded because realization of the related tax benefits was considered not more likely than not.

Legal matters include title and registration issues, government information requests, class actions and shareholder derivative suits. The company had not established reserves because loss probability or damages could not be estimated; an unfavorable development could materially affect results. The company stated it was in compliance with debt covenants and that disclosure controls were effective.

Important facts for investors to verify

• Whether retail demand, unit volumes and gross profit per unit stabilize as inflation, interest rates and used-vehicle prices change.
• How quickly Carvana can reduce operating cash use and sustain liquidity, distinguishing unrestricted cash from borrowing availability and financeable assets.
• Debt maturities, interest costs, covenants and refinancing access, particularly the 10.25% 2030 notes and floor-plan facility arrangements.
• ADESA integration progress, actual contribution to earnings and cash flow, and final purchase-price allocation, which remained preliminary.
• Loan-sale gains and access to forward-flow and securitization funding, as well as the fair-value assumptions for Root warrants and retained securitization interests.
• Developments in title and registration proceedings, government inquiries, other litigation and the potential Tax Receivable Agreement obligation.