Carvana Co. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited; amounts are in millions except per-share and per-unit data. Carvana operates an online used-vehicle retail platform and wholesale marketplace.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2,773 | $3,386 | $8,347 | $10,767 |
| Gross profit | $482 | $359 | $1,322 | $1,053 |
| GAAP net income (loss) | $741 | $(508) | $350 | $(1,453) |
| Net income (loss) attributable to Carvana Co. | $782 | $(283) | $564 | $(781) |
| Adjusted EBITDA (non-GAAP) | $148 | $(186) | $279 | $(750) |
| Adjusted EBITDA margin (non-GAAP) | 5.3% | (5.5%) | 3.3% | (7.0%) |
| Interest expense | $153 | $153 | $467 | $333 |
- Revenue and volume: Q3 revenue fell 18.1%; retail vehicle sales declined 21.8% to $1,949, with retail units down 21.0% to 80,987. For the nine-month period, revenue fell 22.5% and retail units fell 27.2% to 236,757.
- Gross profit and unit economics: Gross margin was approximately 17.4% in Q3 versus 10.6% a year earlier. Total gross profit per retail unit increased to $5,952 from $3,500; non-GAAP total gross profit per unit was $6,396 versus $3,870. Management cited improved vehicle turn times and lower reconditioning and inbound transportation costs.
- Profit quality: Q3 and nine-month GAAP results included an $878 gain on debt extinguishment. Q3 consolidated net income was $741, while income attributable to Carvana Co. was $782 because of losses attributable to non-controlling interests. Adjusted EBITDA excludes the debt-extinguishment gain and is non-GAAP.
- Expenses: SG&A declined to $433 in Q3 from $656 and to $1,357 for nine months from $2,104. Q3 interest expense was flat year over year; nine-month interest expense increased 40.2%.
- Cash flow: Nine-month operating cash flow was $1,042, versus cash used of $585 in 2022. Investing cash flow was $22, compared with cash used of $2,568, largely reflecting the prior-year ADESA acquisition and lower capital spending. Financing cash flow used $1,076, versus $2,994 provided in 2022. Cash, cash equivalents and restricted cash totaled $616 at September 30, 2023, including $544 unrestricted cash.
- Liquidity and debt: Reported committed liquidity resources were $1,587; total liquidity resources, including additional borrowing capacity and assets, were $3,182. Total debt including finance leases was approximately $5,957, versus $8,391 at December 31, 2022. The balance sheet reported total liabilities of $7,227 and stockholders’ deficit of $202.
Material changes and financing
- In September, Carvana exchanged $5.5 billion of senior unsecured notes for $4.2 billion of new senior secured notes, paid $341 million in cash to tender 2025 notes, and paid $146 million of accrued interest. The transaction reduced stated principal debt and generated the $878 million accounting gain. New secured notes carry high initial PIK or cash/PIK rates, with 9% cash interest thereafter; they are secured and contain restrictive covenants.
- Carvana raised $327 million net through its at-the-market stock offering and $126 million from a private placement with the Garcia Parties. Further ATM sales may dilute existing shareholders.
- Vehicle inventory declined to $1,085 from $1,876 at year-end 2022; finance receivables held for sale declined to $650 from $1,334.
- After quarter-end, the floor plan facility was resized to $1.5 billion and extended to April 30, 2025, with revised interest rates and restricted-cash requirements.
Outlook, risks and contingencies
- Management said working capital, operating cash flows and expected financing arrangements should fund operations for at least one year from issuance of the statements. It did not provide numeric earnings or revenue guidance.
- Management’s stated priority is profitability, operating efficiency and expense reduction, while maintaining customer experience and supporting efficient retail growth. It expected macroeconomic and other pressures on vehicle sales to continue through the remainder of 2023.
- Key risks include substantial debt and financing needs, high interest costs, dependence on finance-receivable sales and securitization markets, consumer demand and affordability, used-car price movements, inventory and vehicle-turn risks, and potential dilution from equity issuance. Secured-note covenants restrict certain corporate actions and secured creditors rank ahead of common shareholders.
- The debt exchange resulted in estimated $1.4 billion of cancellation-of-debt income for tax purposes. The company recorded a $14 million tax receivable agreement liability tied to estimated tax savings used against that income; management had not recorded a further estimated $1.6 billion liability because realization of the related deferred tax assets was not considered more likely than not. A full valuation allowance was recorded against deferred tax assets.
- Carvana disclosed ongoing securities, antitrust, consumer-protection, shareholder and vehicle titling/registration disputes, among other matters. It had not established reserves because loss probability or damages could not be estimated; an adverse outcome could materially affect the business. The company stated it was in compliance with debt covenants at September 30.
Most important facts for investors to verify
- How much of reported profitability and earnings per share reflects the one-time $878 million debt-extinguishment gain, versus recurring operating performance and cash generation.
- Whether the reported liquidity resources are accessible in practice, given asset pledges, restricted-cash requirements, facility terms and secured-note covenants.
- The cash-interest burden and future PIK accruals under the new secured notes, and Carvana’s ability to refinance or service debt as it comes due.
- Whether gross profit per unit and operating-cost reductions can be sustained while retail volumes, website inventory and visitor traffic remain substantially below prior-year levels.
- Potential dilution from further ATM sales, and developments in tax obligations, legal proceedings and other contingencies.