Carvana Co. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; amounts below are in U.S. dollars. Carvana operates an online used-car retail platform and completed its acquisition of ADESA’s U.S. physical auction business on May 9, 2022.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $3.884B | $3.336B | $7.381B | $5.581B |
| Gross profit | $396M | $552M | $694M | $890M |
| Gross margin | 10.2% | 16.5% | 9.4% | 15.9% |
| Net income (loss), consolidated | $(439)M | $45M | $(945)M | $(37)M |
| Net income (loss) attributable to Carvana Co. | $(238)M | $22M | $(498)M | $(14)M |
| Adjusted EBITDA, non-GAAP | $(239)M | $112M | $(595)M | $80M |
- Revenue mix and volume: Q2 used-vehicle sales were $2.962B, up 18.3%; wholesale sales and revenues were $704M, up 26.4%, including $108M from ADESA’s wholesale marketplace; other revenues were $218M, down 20.7%. Retail units sold rose 9.0% to 117,564. For the first half, retail units rose 11.2% to 222,749.
- Profitability: Q2 total gross profit per retail unit declined 34.2% to $3,368. Used-vehicle gross profit per unit fell to $1,131 from $2,022; wholesale gross profit per wholesale unit fell to $814 from $1,254. Management cited higher acquisition, reconditioning, transport and depreciation costs. Other revenue, including loan-sale gains, declined as rising benchmark interest rates reduced loan-sale gains.
- Operating costs and interest: Q2 SG&A increased to $721M from $470M; interest expense rose to $116M from $43M. Higher SG&A reflected growth-related staffing and costs, ADESA, advertising and logistics. The first-half SG&A increase also included $24M of CEO Milestone Gift compensation.
- Cash flow: First-half operating cash use was $487M, versus $1.139B in 2021. Investing cash use was $2.525B, including $2.189B for acquisitions and $361M of property and equipment purchases. Financing provided $3.573B. Cash, cash equivalents and restricted cash totaled $1.197B at June 30, including $1.047B of unrestricted cash.
- Debt and liquidity: Total debt including finance leases was approximately $8.0B, compared with $5.4B at year-end 2021. The balance sheet reported $7.650B of debt excluding finance leases, before debt issuance costs. The company issued $3.275B of 10.25% senior notes due 2030 and raised $1.227B net from a Class A share offering. Management reported $2.650B of committed liquidity resources and $4.746B of total liquidity resources, the latter including assets available to finance, not just cash. Management stated existing working capital and financing arrangements were expected to fund operations for at least one year from the financial-statement issuance date.
- Balance sheet: Total assets were $10.502B and total liabilities $9.638B at June 30. Stockholders’ equity was $864M. Vehicle inventory was $2.865B. The ADESA acquisition contributed preliminary goodwill of $838M; total goodwill was $847M.
Material changes and notable items
- On April 26, Carvana issued 15.625M Class A shares for $1.2B net proceeds. On May 6, it issued $3.275B of 10.25% senior unsecured notes, primarily to fund the ADESA acquisition and related uses.
- The approximately $2.2B ADESA acquisition added 56 sites. Preliminary purchase accounting recorded $838M of goodwill, subject to revision during the measurement period. ADESA contributed $108M of wholesale revenue and a $21M net loss in the quarter.
- The company reported a previously announced workforce reduction; Q2 adjusted EBITDA included $14M of related expenses. The CEO Milestone Gift generated $30M of compensation expense in the first half across cost of sales and SG&A.
- Carvana recorded a full valuation allowance against its deferred tax assets based on cumulative losses. A potential $1.6B Tax Receivable Agreement liability was unrecorded because management concluded realization of the relevant deferred tax assets was not more likely than not.
Outlook, risks and contingencies
- No quantified quarterly or annual earnings guidance is provided. Management expects retail sales to grow with greater market penetration and expansion, and plans to continue investing in technology, logistics, reconditioning capacity and customer acquisition. The filing cautions that further losses are expected as the business invests and that returns on those investments are not assured.
- Key risks include sustained losses and cash use, substantial debt and interest costs, access to financing and securitization markets, used-vehicle price changes and depreciation, inventory sourcing and turnover, lower loan-sale gains when rates rise, and execution and integration of ADESA.
- Other disclosed risks include competition, operational scaling, customer service and reputation, regulatory compliance, related-party relationships with DriveTime and the Garcia parties, and seasonal or COVID-related disruption. Senior-note covenants restrict certain financial and corporate actions; the company said it was in compliance with debt covenants at June 30.
- The company disclosed $181M of purchase obligations for auction-business services over seven years and ordinary-course litigation; management did not expect the current legal matters to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Investor verification priorities
- Track whether retail growth translates into improving gross profit per unit and lower operating losses, particularly as vehicle prices and reconditioning and transport costs change.
- Reconcile cash burn and reported liquidity: distinguish unrestricted cash and borrowable facility capacity from asset-based resources that require financing or pledging.
- Review debt maturities, interest expense, covenants and the cost and availability of inventory, receivables and real-estate financing.
- Monitor ADESA integration, operating performance, capital needs and completion of its preliminary purchase-price allocation.
- Assess the impact of share issuance and non-controlling interests on per-share results, and the contingent TRA exposure if tax benefits become realizable.