NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS ORGANIZATION
Description of Business
Carvana Co. and its wholly-owned subsidiary Carvana Co. Sub LLC (collectively, "Carvana Co.", and together with its consolidated subsidiaries, the "Company"), is the leading e-commerce platform for buying and selling used cars. The Company is transforming the used car sales experience by giving consumers what they want - a wide selection, great value and quality, transparent pricing, and a simple, no pressure transaction. Using the website, customers can complete all phases of a used vehicle transaction, including financing their purchase, trading in their current vehicle, and purchasing complementary products such as vehicle service contracts ("VSC"), auto insurance, and GAP waiver coverage. Each element of the Company's business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.
Organization
Carvana Co. is a holding company that was formed as a Delaware corporation on November 29, 2016, for the purpose of completing its initial public offering ("IPO") and related transactions in order to operate the business of Carvana Group, LLC and its subsidiaries (collectively, "Carvana Group"). Substantially all of the Company’s assets and liabilities represent the assets and liabilities of Carvana Group, except the Company's Senior Secured Notes and Senior Unsecured Notes (each as defined in Note 10 — Debt Instruments) which were issued by Carvana Co. and guaranteed by its and Carvana Group's existing domestic restricted subsidiaries, excluding, in the case of the Senior Unsecured Notes, ADESA US Auction, LLC ("ADESA"), and its subsidiaries.
In accordance with Carvana Group, LLC's amended and restated limited liability company agreement (the "LLC Agreement"), Carvana Co. is the sole manager of Carvana Group and conducts, directs and exercises full control over the activities of Carvana Group. There are two classes of common ownership interests in Carvana Group, Class A common units (the "Class A Units") and Class B common units (the "Class B Units"). As further discussed in Note 11 — Stockholders' Equity (Deficit), the Class A Units and Class B Units (collectively, the "LLC Units") do not hold voting rights, which results in Carvana Group being considered a variable interest entity ("VIE"). Due to Carvana Co.'s power to control and its significant economic interest in Carvana Group, it is considered the primary beneficiary of the VIE and the Company consolidates the financial results of Carvana Group. As of December 31, 2023, Carvana Co. owned approximately 56.6% of Carvana Group and the LLC Unitholders (as defined in Note 11 — Stockholders' Equity (Deficit)) owned the remaining 43.4%.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). As discussed in Note 1 — Business Organization, Carvana Group is considered a VIE and Carvana Co. consolidates its financial results due to the determination that it is the primary beneficiary. All intercompany balances and transactions have been eliminated.
Liquidity
The Company has incurred losses in prior periods and expects to incur additional losses in the future as it continues to shift priorities to focus on driving profitability through operating efficiency and reducing expenses. Historically, the Company's capital and liquidity needs were primarily satisfied through its debt and equity financings, operating cash flows, and short-term revolving facilities. During the year ended December 31, 2023, the Company (i) received net cash proceeds of $327 million from its "at-the-market offering" program and $126 million from its private placement of Class A Units and Class B common stock to the Garcia Parties; (ii) launched and closed an offer to exchange its Senior Unsecured Notes for new Senior Secured Notes that significantly reduced near-term cash interest expense and total debt outstanding; (iii) amended certain revolving credit facilities primarily to extend maturities; and (iv) on November 1, 2023, the Company resized the Floor Plan Facility to $1.5 billion and extended its maturity date to April 30, 2025. Management believes that current working capital, cash flows
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from operations, and expected continued or new financing arrangements will be sufficient to fund operations for at least one year from the financial statement issuance date.
Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions. Certain accounting estimates involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period, which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience, and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates, which could have a material impact on the carrying values of the Company’s assets and liabilities and the results of operations.
Comprehensive Income (Loss)
During the years ended December 31, 2023, 2022, and 2021, the Company did not have any other comprehensive income (loss) and, therefore, the net income (loss) and comprehensive income (loss) were the same for all periods presented.
Cash and Cash Equivalents
The Company has cash deposits and cash equivalents deposited in or managed by major financial institutions. Cash equivalents include highly liquid investment instruments with original maturities of three months or less, and consist primarily of money market funds. At times the related amounts are in excess of the amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses with these financial institutions and does not believe it represents significant credit risk.
Restricted Cash
Amounts included in restricted cash primarily represent the deposits required under the Company's short-term revolving facilities and any undistributed amounts collected on the finance receivables pledged under the Company's finance receivable facilities as explained in Note 10 — Debt Instruments. As of December 31, 2023 and 2022, restricted cash also includes certain cash held for corporate insurance purposes.
Accounts Receivable, Net
Accounts receivable, net of an allowance for doubtful accounts, includes certain amounts due from customers and their finance providers. The allowance for doubtful accounts is estimated based upon historical experience, current economic conditions, and other factors and is evaluated periodically. The allowance for doubtful accounts was $9 million and $12 million as of December 31, 2023 and 2022, respectively.
Finance Receivables Held for Sale, Net
Finance receivables include installment contracts the Company originates to its customers to facilitate vehicle sales. The Company classifies these receivables as held for sale, as it does not intend to hold the finance receivables it originates to maturity. The Company typically sells the finance receivables it originates, as explained in Note 8 — Finance Receivable Sale Agreements and Note 9 — Securitizations and Variable Interest Entities. The Company records a valuation allowance to report finance receivables at the lower of unpaid principal balance or fair value. To determine the fair value of finance receivables the Company utilizes industry-standard modeling, such as discounted cash flow analysis, factoring in the Company’s historical experience, the credit quality of the underlying receivables, loss trends and recovery rates, as well as the overall economic environment. For purposes of determining the valuation allowance, finance receivables are evaluated collectively to determine the allowance as they represent a large group of smaller-balance homogeneous loans. The allowance was $59 million and $36 million as of December 31, 2023 and 2022, respectively. Principal balances of finance receivables are charged-off when the Company is unable to sell the finance receivable and the related vehicle has been repossessed and liquidated or the receivable has otherwise been deemed uncollectible. Interest income on finance receivables held for sale is recognized when earned based
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on contractual loan terms and is included in other sales and revenues. Loan origination costs are capitalized and recognized as a reduction to the gain on loan sale when the loans are sold.
Vehicle Inventory
Vehicle inventory consists of used vehicles, primarily acquired directly from customers and at auction. Direct and indirect vehicle reconditioning costs including parts and labor, inbound transportation costs and other incremental overhead costs are capitalized as a component of inventory. Inventory is stated at the lower of cost or net realizable value. Vehicle inventory cost is determined by specific identification. Net realizable value is the estimated selling price less costs to complete, dispose and transport the vehicles. Selling prices are derived from historical data and trends, such as sales price and inventory turn times of similar vehicles, as well as independent market resources. Each reporting period the Company recognizes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value through cost of sales in the accompanying consolidated statements of operations.
Property and Equipment
Property and equipment consists of land, buildings and improvements, transportation fleet equipment, software, and furniture, fixtures and equipment and is stated at cost less accumulated depreciation and amortization. Repairs and maintenance costs that extend the life or utility of an asset are also capitalized. Ordinary repairs and maintenance are charged to expense as incurred. Costs incurred during construction are capitalized as construction in progress and reclassified to the appropriate fixed asset categories when the project is completed. In addition, interest on borrowings during the active construction period of construction projects is capitalized and depreciated over the estimated useful lives of the related assets. Costs incurred during the preliminary project planning phase are charged to expense as incurred.
The Company capitalizes direct costs of materials and services consumed in developing or obtaining internal-use software. The Company also capitalizes payroll and payroll-related costs for employees who are directly associated with and who devote time to the development of software products for internal use, to the extent of the time spent directly on the project. Capitalization of costs begins during the application development stage and ends when the software is available for general use. Costs incurred during the preliminary project and post-implementation stages are charged to expense as incurred.
Depreciation and amortization are computed using the straight-line method over the lesser of the remaining lease term or the following estimated useful lives:
| | | | | |
| Buildings and improvements | 15-30 years |
| Transportation fleet equipment | 5-6 years |
| Software | 3 years |
| Furniture, fixtures and equipment | 3-5 years |
Management reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company compares the sum of estimated undiscounted future cash flows expected to result from the use of the asset to the carrying value of the asset. When the carrying value of the asset exceeds its estimated undiscounted future cash flows, the Company recognizes an impairment charge for the amount by the which the carrying value of the asset exceeds the fair value of the asset. The Company periodically reassesses the useful lives of its long-lived assets when events or circumstances indicate that useful lives have significantly changed from the previous estimate. The Company recorded no impairment charges during the years ended December 31, 2023, 2022, and 2021. See Note 4 — Property and Equipment, Net for additional information on property and equipment.
Goodwill and Intangible Assets
Intangible assets are recognized and recorded at their acquisition date fair values. Definite-lived intangible assets consist of developed technology, customer relationships, and non-compete agreements and are generally amortized on a straight-line basis over their estimated useful lives. The Company determined the useful lives of its definite-lived intangible assets based on multiple factors including technological obsolescence, the make-up of the acquired customer base and expected attrition, and the period over which expected cash flows are used to measure the fair value of the intangible asset at acquisition. The Company periodically reassesses the useful lives of its definite-lived intangible assets when events or circumstances indicate
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that useful lives have significantly changed from the previous estimate. No impairment charges related to intangible assets were recognized during the years ended December 31, 2023, 2022, or 2021.
Goodwill represents the excess purchase price over the fair value of the net assets acquired. Goodwill is not amortized but is tested annually or more frequently when events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has one operating segment, which is its reporting unit; therefore, management analyzes goodwill associated with all of its operations when analyzing for potential impairment. When conducting annual or interim impairment assessments, if applicable, a two-step process is used. First, an optional qualitative evaluation is performed as to whether it is more likely than not that the fair value of the Company's sole reporting unit is less than its carrying value, using an assessment of relevant events and circumstances. In performing this assessment, the Company is required to make assumptions and judgments including, but not limited to, an evaluation of macroeconomic conditions as they relate to the business, industry and market trends, as well as the overall future financial performance of the reporting unit. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, no additional tests are performed. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, the Company performs a second step consisting of a quantitative assessment of goodwill impairment. This assessment requires the Company to compare the fair value of its reporting unit with its carrying value. If the carrying amount exceeds the fair value, an impairment charge will be recognized. In performing this assessment, the Company is required to make assumptions and judgments including, but not limited to, financial projections, discount rate, and future market conditions. During the year ended December 31, 2022, the Company performed a quantitative goodwill impairment test for the Company's reporting unit and as a result recorded a non-cash goodwill impairment charge of $847 million, which is reflected as Goodwill impairment in the accompanying consolidated statements of operations.
Leases
The Company determines if an arrangement is a lease at inception by evaluating if the asset is explicitly or implicitly identified or distinct, if the Company will receive substantially all of the economic benefit or if the lessor has an economic benefit and the ability to substitute the asset. Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company assesses whether the lease is an operating or finance lease at its inception. Operating lease liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. To calculate the present value, the Company uses the implicit rate in the lease when readily determinable. However, the Company's leases generally do not provide an implicit rate and it uses its incremental borrowing rate. The incremental borrowing rate is based on collateralized borrowings of similar assets with terms that approximate the lease term when available and when collateralized rates are not available, it uses uncollateralized rates with similar terms adjusted for the fact that it is an unsecured rate. The operating lease ROU asset is the initial lease liability adjusted for any prepayments, initial indirect costs incurred by the Company, and lease incentives. The Company's operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities on the accompanying consolidated balance sheets. The Company's finance leases are included in property and equipment and long-term debt on the accompanying consolidated balance sheets.
Securitizations and Variable Interest Entities
The Company reviews subsidiaries and affiliates, as well as other entities, to determine if they should be considered VIEs, and whether it should change the consolidation determinations based on changes in their characteristics. The Company considers an entity a VIE if its equity investors own an interest therein that lacks the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or if the entity is structured with non-substantive voting interests. A VIE is consolidated by its primary beneficiary, the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company evaluates whether it has variable interests in the VIE and if so, if it is the primary beneficiary of the VIE on an ongoing basis. The Company consolidates VIEs when it is deemed to be the primary beneficiary.
The Company sponsors asset-backed securitization transactions. These transactions often result in the creation of securitization trusts, which are VIEs. To comply with Regulation RR of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Risk Retention Rules") the Company retains at least a 5% interest in the credit risk of the underlying finance receivables, which it accomplishes by retaining at least a 5% interest in each security issued by the securitization trusts. Typically, this includes notes and certificates, which are presented as beneficial interests in securitizations on the accompanying consolidated balance sheets.
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Other Assets
Other current assets consist of various items, including, among other items, software licenses and subscriptions, prepaid expenses, the estimated reserve for vehicle inventory returns, the current portion of the purchase price adjustment receivables based on the performance of the Company's finance receivables, the current portion of the receivable related to the excess cash reserves over realized claims of vehicle service contracts ("VSCs"), and deposits.
Other assets consist of various items, including, among other items, investment in equity instruments (as further discussed in Note 18 — Fair Value of Financial Instruments), the purchase price adjustment receivables based on the performance of the Company's finance receivables, the receivable related to the excess cash reserves over realized claims of VSCs, collateral for insurance, and debt issuance costs on revolving debt instruments.
Accrued Liabilities
Accrued liabilities consist of various items payable within one year, including, among other items, accruals for sales tax, compensation and benefits, vehicle licenses and fees, interest expense on the Senior Unsecured Notes, reserves for returns and cancellations, and advertising expenses.
Other Liabilities
As of December 31, 2023 and 2022, other current liabilities primarily consist of the current portion of operating lease liabilities. Other liabilities consist of various items to be recognized beyond one year, including the deferred revenue associated with Root Warrants (as further discussed in Note 18 — Fair Value of Financial Instruments) and tax receivable agreement ("TRA") liability (as further discussed in Note 15 — Income Taxes).
Revenue Recognition
The Company recognizes revenue in accordance with the five-step model prescribed by ASC 606 that includes: (1) identify the contract; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) performance obligations are satisfied.
Retail Vehicle Sales
The Company sells retail vehicles directly to its customers through its website. The prices of retail vehicles are set forth in the customer contracts at stand-alone selling prices which are agreed upon prior to delivery. The Company satisfies its performance obligation for retail vehicle sales upon delivery when the risks and rewards of ownership and control pass to the customer. The Company recognizes revenue at the agreed upon purchase price stated in the contract, including any delivery charges, less an estimate for returns. Estimates for returns are based on an analysis of historical experience, trends and sales data. Changes in these estimates are reflected as an adjustment to revenue in the period identified. The amount of consideration received for retail vehicle sales includes noncash consideration representing the value of trade-in vehicles, if applicable, as stated in the contract. Prior to the delivery of the vehicle, the payment is received or financing has been arranged. Payments from customers that finance their purchases with third parties are typically due and collected within 30 days of delivery of the retail vehicle. Revenue excludes any sales taxes, title and registration fees, and other government fees that are collected from customers.
Wholesale Sales and Revenues
The Company sells vehicles to wholesalers. These vehicles sold to wholesalers are primarily acquired from customers and do not meet the Company’s quality standards to list and sell through its website. The Company satisfies its performance obligation for wholesale sales and revenues when the wholesale purchaser obtains control of the underlying vehicle, which is upon delivery or pick up at an auction when the transfer of title, risks and rewards of ownership, and control pass to the wholesale purchaser. The Company recognizes revenue at the amount it expects to receive for the used wholesale vehicle, which is the fixed price determined at the auction, or for wholesale marketplace transactions, at the amount it expects to receive for auction fees charged in facilitating the transaction. The purchase price of the wholesale vehicle is typically due and collected within 30 days of delivery of the wholesale vehicle and auction fees are typically due within two days of a completed sale.
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Other Sales and Revenues
Other sales and revenues include gains on the sales of finance receivables, commissions on VSCs, GAP waiver coverage, and customer insurance and interest income received on finance receivables prior to selling them to investors.
Customers purchasing retail vehicles from the Company may enter into contracts for VSCs and, if they finance with the Company, GAP waiver coverage. The prices of VSCs and GAP waiver coverage are set forth in each contract. The Company sells and receives a commission on VSCs under a master dealer agreement with DriveTime, pursuant to which the Company sells VSCs that DriveTime administers and is the obligor. The Company receives a commission on GAP waiver coverage contracts where the administrator of the contract is obligated to reimburse the holder of the underlying finance receivable for a balance that is in excess of the value of the financed vehicle in the event of a total loss. The Company recognizes commission revenue at the time of sale, net of a reserve for estimated contract cancellations. GAP waiver coverage contracts obligate whoever holds the underlying finance receivable to not attempt collection of a balance that is in excess of the value of the financed vehicle in the event of a total loss. GAP waiver coverage is recognized as the performance obligation is satisfied over the period of coverage, generally on a straight-line basis over the expected period the outstanding balance of the related finance receivable will exceed the value of the financed vehicle, less a reserve for cancellations. Upon selling the corresponding finance receivable, the Company recognizes any remaining deferred revenue. The reserve for cancellations of VSCs and GAP waiver coverage contracts is estimated based upon historical experience and recent trends and is reflected as a reduction of other sales and revenues. Changes in these estimates are reflected as an adjustment to other sales and revenues in the period identified.
Under the master dealer agreement with DriveTime, the Company is also contractually entitled to receive profit-sharing revenues based on the performance of the VSCs once a required claims period has passed. This is a form of variable consideration the Company recognizes as revenue to the extent that it is probable that it will not result in a significant revenue reversal. The Company applies the expected value method, utilizing expected VSC performance based on historical claims and cancellation data from its customers, as well as other qualitative assumptions to estimate the amount it expects to receive. The Company reassesses the estimate each reporting period with any changes reflected as an adjustment to other sales and revenues in the period identified. Profit-sharing payments will begin when the underlying VSCs reach a specified level of claims history. As of December 31, 2023 and 2022, the Company had ending receivables of less than $1 million and $8 million, respectively, related to cumulative profit-sharing payments recognized as revenue to which it expects to be entitled. The receivables are included in other current assets and other assets on the accompanying consolidated balance sheets.
The Company accounts for sales of finance receivables in accordance with ASC Topic 860, Transfers and Servicing ("ASC 860"). ASC 860 states that a transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets is accounted for as a sale only if all of the following conditions are met:
•The transferred financial assets have been isolated from the transferor - put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership.
•Each transferee has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both constrains the transferee (or third-party holder of its beneficial interests) from taking advantage of its right to pledge or exchange the asset and provides more than a trivial benefit to the transferor.
•The transferor, its consolidated affiliates included in the financial statements being presented or its agents do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets.
For the years ended December 31, 2023, 2022, and 2021, all transfers of finance receivables met the requirements for sale treatment. The Company records the gain on the sale of a finance receivable upon receipt of proceeds, in an amount equal to the fair value of the net proceeds received less the carrying amount of the finance receivable. The Company has made customary representations related to the sales of finance receivables. Any significant estimated post-sale obligations or contingent obligations to the purchaser of the receivables would be accrued if probable and estimable in accordance with ASC 450, Contingencies. Any such obligations are considered in the Company's determination of the accounting for the transfers of the finance receivables under ASC 860.
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Cost of Sales
Cost of sales includes the cost to acquire used vehicles and direct and indirect vehicle reconditioning costs associated with preparing the vehicles for resale. Vehicle reconditioning costs include parts, labor, inbound transportation costs, and other incremental overhead costs, which are allocated to inventory via specific identification and standard costing. Occupancy and labor costs not related to vehicle acquisition or reconditioning, including those incurred in connection with expanding production capacity, are expensed as incurred as a component of selling, general and administrative expense. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Selling, General, and Administrative Expenses
Selling, general, and administrative ("SG&A") expenses primarily include compensation and benefits, advertising, depreciation expense, facilities costs, technology expenses, logistics and fulfillment expenses, and other administrative expenses. SG&A expenses exclude the costs related to reconditioning vehicles and inbound transportation, which are included in cost of sales, and payroll costs of employees related to the development of software products for internal use, which are capitalized to software and depreciated over the estimated useful lives of the related assets.
Advertising Costs
Advertising production costs are expensed the first time the advertising takes place. All other advertising costs are expensed as incurred. Advertising expenses are included in SG&A expenses on the accompanying consolidated statements of operations. Advertising expenses were $228 million, $490 million, and $479 million during the years ended December 31, 2023, 2022, and 2021, respectively.
Equity-Based Compensation
The Company classifies equity-based awards granted in exchange for services as either equity awards or liability awards. The classification of an award as either an equity award or a liability award is generally based upon cash settlement options. Equity awards are measured based on the fair value of the award at the grant date. Liability awards are re-measured to fair value each reporting period. The Company recognizes equity-based compensation on a straight-line basis over the award’s requisite service period, which is generally the vesting period of the award, less actual forfeitures. No compensation expense is recognized for awards for which participants do not render the requisite services. For equity and liability awards earned based on performance or upon occurrence of a contingent event, when and if the awards will be earned is estimated. If an award is not considered probable of being earned, no amount of equity-based compensation is recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the extent the estimate of awards considered probable of being earned changes, the amount of equity-based compensation recognized will also change. See Note 13 — Equity-Based Compensation for additional information on equity-based compensation.
Shipping and Handling
The Company's logistics costs related to transporting its used vehicle inventory include fuel, maintenance, and depreciation related to operating its own transportation fleet, and third-party transportation fees. The portion of these costs related to inbound transportation from the point of acquisition to the inspection and reconditioning center are capitalized to inventory and then included in cost of sales when the related used vehicle is sold. Logistics costs not included in cost of sales are included in selling, general and administrative expenses in the accompanying consolidated statements of operations and were $119 million, $235 million, and $148 million during the years ended December 31, 2023, 2022, and 2021, respectively, excluding compensation and benefits.
Defined Contribution Plan
The Company sponsors a qualified 401(k) retirement plan (defined contribution plan) for its employees. The plan covers substantially all employees who have attained the age of 18. Participants may voluntarily contribute to the plan up to the maximum limits established by Internal Revenue Service regulations. The Company provides matching contributions of 40% up to the first 6% of an employee’s compensation, which vests evenly over the employee’s initial five-year service period. On January 1, 2022, the plan was amended whereby prospective participants' employer matching contributions vest evenly over the employee's initial four-year service period. Employer contributions to the plan, net of forfeitures, were $8 million, $8 million,
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and $5 million for the years ended December 31, 2023, 2022, and 2021, respectively. Employer contributions are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations.
Derivative Instruments and Hedging Activities
The Company from time to time enters into primarily short-term derivative instruments to manage risks arising from its business operations and economic conditions, primarily cash flow variability that may arise from interest rate changes between the time the Company originates finance receivables and the time it sells them through securitizations. The Company does not designate these derivative instruments as hedges under ASC 815, Derivatives and Hedging for hedge accounting treatment and as a result they are accounted for as economic hedges. Gains and losses related to the derivative instruments are included within other sales and revenues to follow the presentation of the hedged item within the accompanying consolidated statements of operations and any derivative instruments outstanding as of the end of the period are reported at fair value on the accompanying consolidated balance sheets.
Fair Value Measurements
The fair value of financial instruments is based on estimates using quoted market prices, discounted cash flows, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated timing and amount of future cash flows. Therefore, the estimates of fair value may differ substantially from amounts that ultimately may be realized or paid at settlement or maturity of the financial instruments, and those differences may be material. Accordingly, the aggregate fair value amounts presented may not represent the Company’s underlying institutional value.
The Company uses the three-tier hierarchy established by GAAP, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value to determine the fair value of its financial instruments. This hierarchy indicates to what extent the inputs used in the Company’s calculations are observable in the market. The different levels of the hierarchy are defined as follows:
| | | | | |
| Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| |
| Level 2: | Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
| Level 3: | Inputs are unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. |
The Company has elected the fair value option for its beneficial interests in securitizations, which primarily include notes and certificates of the securitization trusts. Electing the fair value option allows the Company to recognize changes in the fair value of these assets in the period the fair value changes. The changes in fair value are recorded within other (income) expense, net and amounts attributable to interest income are reported in interest expense, net as earned on the accompanying consolidated statements of operations. See Note 18 — Fair Value of Financial Instruments for additional information.
Segments
Business segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. Based on the way the Company manages its business, the Company has determined that it currently operates with one operating segment and therefore one reportable segment. The chief operating decision maker ("CODM") focuses on consolidated results in assessing operating performance and allocating resources. Furthermore, the Company offers similar
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products and services and uses similar processes to sell those products and services to similar classes of customers throughout the United States ("U.S."). Substantially all revenue is generated and all assets are held in the U.S. for all periods presented.
Income Taxes
The Company accounts for income taxes pursuant to the asset and liability method, which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. The Company reduces the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more likely than not that such assets will not be realized. In making the assessment under the more likely than not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. The assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods by jurisdiction, the Company's experience with loss carryforwards not expiring unutilized, and all tax planning alternatives that may be available. A valuation allowance is recognized if under applicable accounting standards the Company determines it is more likely than not that its deferred tax assets would not be realized. See Note 15 — Income Taxes for additional information.
Accounting Standards Issued But Not Yet Adopted
In November 2023, the Financial Accounting Standard Board “FASB” issued Accounting Standards Update “ASU” 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which modifies the disclosure and presentation requirements of reportable segments. The amendments in the update require the disclosure of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit and loss. The amendments also require disclosure of all other segment items by reportable segment and a description of its composition. Additionally, the amendments require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. This update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on the presentation of its consolidated financial statements and accompanying notes.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2025. The Company is currently evaluating the impact that this guidance will have on the presentation of its consolidated financial statements and accompanying notes.
NOTE 3 — BUSINESS COMBINATIONS
Acquisition of ADESA U.S. Physical Auction Business
On May 9, 2022, the Company completed its acquisition of 100% of the equity interests in the U.S. physical auction business of ADESA from Openlane, Inc., fka KAR Auction Services, Inc. for approximately $2.2 billion in cash (the "ADESA Acquisition"). Proceeds from the issuance and sale of the 2030 Senior Unsecured Notes (as defined below) were used to fund the acquisition. The acquisition included 56 auction sites throughout the U.S. with 6.5 million square feet of buildings on more than 4,000 acres of land, significantly expanding the Company's infrastructure and enhancing its customer offering by facilitating a broader selection of vehicles and faster delivery times.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the allocation of the purchase price consideration to identifiable assets acquired and liabilities assumed as of December 31, 2022:
| | | | | |
| Purchase Price Allocation |
| (in millions) |
| Assets Acquired | |
| Current assets | $ | 208 | |
| Property and equipment | 1,281 | |
| Operating lease right-of-use assets | 188 | |
| Intangible assets | 79 | |
| Other assets | 1 | |
| Total Assets Acquired | 1,757 | |
| |
| Liabilities Assumed | |
| Current liabilities | 233 | |
| Operating lease liabilities | 167 | |
| |
| Total Liabilities Assumed | 400 | |
| |
| Net Assets Acquired | 1,357 | |
| Purchase price consideration | 2,195 | |
| Goodwill | $ | 838 | |
Identifiable intangible assets acquired consist of the following (in millions):
| | | | | | | | | | | |
| Fair Value | | Useful Life |
| Customer relationships | $ | 50 | | | 10 years |
| Developed technology | $ | 29 | | | 3 years |
Customer relationships were valued using the multi-period excess earnings method of the income approach. Developed technology was valued using the replacement cost method of the cost approach. Significant assumptions used in the valuations were forecasted revenues and attrition rate and are classified as Level 3 due to the lack of observable market data. No residual values were assigned to the customer relationships and developed technology intangible assets and they are amortized on an economic useful life basis commensurate with future anticipated cash flows and straight line, respectively. As of December 31, 2023, the remaining weighted-average amortization period for the intangible assets acquired was 5.6 years.
Real property was valued using market comparable transactions of the market approach, for which the key assumption is the similarity of the acquired property to market comparable transactions. Personal property was valued using the replacement cost method of the cost approach, for which the key assumptions are the costs of similar personal property in new condition and economic obsolescence rates.
The acquisition resulted in the recognition of $838 million of goodwill, which is deductible for tax purposes and represents the future economic benefits expected to arise from anticipated synergies and intangible assets that do not qualify for separate recognition, including an assembled workforce, non-contractual relationships and other agreements.
For the years ended December 31, 2023 and 2022, the Company recognized $856 million and $490 million, respectively, of wholesale sales and revenues, $770 million and $472 million, respectively, of cost of sales, and a net loss of $83 million and $101 million, respectively, from ADESA operations, which includes $122 million and $83 million, respectively, of depreciation and amortization, including acquired intangible assets amortization expense of $15 million for each year.
The following unaudited pro forma combined results of operations information for the years ended December 31, 2022 and 2021 have been prepared as if the ADESA Acquisition occurred on January 1, 2021:
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | | | | | | | | | |
| Unaudited |
| Year ended December 31, |
| 2022 | | 2021 |
| | | |
| (in millions) |
| Revenues | $ | 13,903 | | | $ | 13,675 | |
| Net loss | (3,024) | | | (571) | |
| Net loss attributable to non-controlling interests | (1,343) | | | (276) | |
| Net loss attributable to Carvana Co. | $ | (1,681) | | | $ | (295) | |
| Net loss per share of Class A common stock - basic and diluted | $ | (15.89) | | | $ | (3.00) | |
| Weighted-average shares of Class A common stock - basic and diluted | 105,808 | | | 98,459 | |
The unaudited pro forma combined results of operations information reflect the following pro forma adjustments:
| | | | | | | | | | | |
| Unaudited |
| Year ended December 31, |
| 2022 | | 2021 |
| | | |
| (in millions) |
| Interest expense | $ | 123 | | | $ | 345 | |
| Lease expense | $ | 5 | | | $ | (16) | |
| Depreciation and amortization expense | $ | 13 | | | $ | (6) | |
| Intercompany revenues and cost of sales | $ | (7) | | | $ | (20) | |
The unaudited pro forma combined results of operations information is provided for informational purposes only and is not necessarily intended to represent the results that would have been achieved had the ADESA Acquisition been consummated on January 1, 2021 or indicative of the results that may be achieved in the future.
NOTE 4 — PROPERTY AND EQUIPMENT, NET
The following table summarizes property and equipment, net, as of December 31, 2023 and 2022: | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
| (in millions) |
| Land and site improvements | $ | 1,331 | | | $ | 1,331 | |
| Buildings and improvements | 1,344 | | | 1,267 | |
| Transportation fleet | 570 | | | 673 | |
| Software | 296 | | | 245 | |
| Furniture, fixtures, and equipment | 144 | | | 158 | |
| Total property and equipment excluding construction in progress | 3,685 | | | 3,674 | |
| Less: accumulated depreciation and amortization on property and equipment | (775) | | | (564) | |
| Property and equipment excluding construction in progress, net | 2,910 | | | 3,110 | |
| Construction in progress | 72 | | | 134 | |
| Property and equipment, net | $ | 2,982 | | | $ | 3,244 | |
Depreciation and amortization expense on property and equipment was $386 million, $346 million, and $153 million for the years ended December 31, 2023, 2022, and 2021, respectively, of which $166 million, $183 million, and $103 million was recorded to selling, general, and administrative expense, respectively, $51 million, $49 million, and $26 million was capitalized
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
to vehicle inventory, respectively, and $169 million, $114 million, and $24 million were recorded to cost of sales, respectively, including $66 million, $52 million, and $24 million previously capitalized to vehicle inventory, respectively.
The Company capitalized internal use software costs totaling $56 million, $85 million, and $59 million during the years ended December 31, 2023, 2022, and 2021, respectively, which is included in software and construction in progress in the table above. The Company capitalized $42 million, $68 million, and $45 million during the years ended December 31, 2023, 2022, and 2021, respectively, of payroll and payroll-related costs, excluding equity-based compensation capitalized to property and equipment, for employees who are directly associated with and who devote time to the development of software products for internal use.
The Company capitalizes interest in connection with various construction projects to build, upgrade, or remodel certain of its facilities. During the years ended December 31, 2023, 2022, and 2021, the Company incurred total interest costs, net of interest income, of $637 million, $503 million, and $185 million, respectively, of which $5 million, $17 million, and $9 million, respectively, were capitalized.
NOTE 5 — INTANGIBLE ASSETS
The following table summarizes intangible assets, net as of December 31, 2023 and 2022:
| | | | | | | | | | | | | |
| | | December 31, |
| | | 2023 | | 2022 |
| | | | | |
| | | (in millions) |
| | | | | |
| Customer relationships | | | $ | 50 | | | $ | 50 | |
| Developed technology | | | 41 | | | 41 | |
| Non-compete agreements | | | — | | | 1 | |
| Intangible assets, acquired cost | | | 91 | | | 92 | |
| Less: accumulated amortization | | | (39) | | | (22) | |
| Intangible assets, net | | | $ | 52 | | | $ | 70 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Amortization expense was $17 million, $16 million and $2 million during the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, the remaining weighted-average amortization period for definite-lived intangible assets was 5.0 years. The anticipated annual amortization expense to be recognized in future years as of December 31, 2023 is as follows:
| | | | | |
| Expected Future Amortization |
| (in millions) |
| 2024 | $ | 18 | |
| 2025 | 14 | |
| 2026 | 7 | |
| 2027 | 5 | |
| 2028 | 3 | |
| Thereafter | 5 | |
| Total | $ | 52 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 — ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The following table summarizes accounts payable and other accrued liabilities as of December 31, 2023 and 2022:
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
| (in millions) |
Accounts payable, including $7 and $16, respectively, due to related parties | $ | 231 | | | $ | 232 | |
| Sales taxes and vehicle licenses and fees | 77 | | | 76 | |
| Reserve for returns and cancellations | 57 | | | 60 | |
| Accrued compensation and benefits | 41 | | | 65 | |
| Customer deposits | 30 | | | 23 | |
Accrued interest expense (1) | 7 | | | 99 | |
| Accrued advertising costs | 4 | | | 7 | |
Income tax liability | 3 | | | — | |
| Accrued property and equipment | 1 | | | 10 | |
| Other accrued liabilities | 145 | | | 205 | |
| Total accounts payable and other accrued liabilities | $ | 596 | | | $ | 777 | |
(1) As discussed in Note 10 — Debt Instruments, accrued payment-in-kind ("PIK") interest is included in long-term debt within the accompanying consolidated balance sheets.
NOTE 7 — RELATED PARTY TRANSACTIONS
Lease Agreements
In November 2014, the Company and DriveTime Automotive Group, Inc. (together with its consolidated affiliates, collectively, "DriveTime"), a related party of the Company due to Ernest Garcia II, Ernest Garcia III, and entities controlled by one or both of them (collectively the "Garcia Parties") controlling and owning substantially all of the interests in DriveTime, entered into a lease agreement (the "DriveTime Lease Agreement") that governs the Company’s access to and utilization of temporary storage, reconditioning, offices and parking space at various DriveTime facilities, including hubs and inspection and reconditioning centers. The DriveTime Lease Agreement was most recently amended in December 2018. The last hub facility lease remaining under the DriveTime Lease Agreement expired in April 2023, and the leases for the inspection and reconditioning centers expire between 2024 and 2026, subject to renewal options.
In March 2017, the Company and DriveTime entered into a lease agreement that governs the Company's access to and utilization of office and parking space at various DriveTime facilities (the "DriveTime Hub Lease Agreement"). The DriveTime Hub Lease Agreement was most recently amended in July 2021. The last facility remaining under the DriveTime Hub Lease Agreement expired in April 2023 and was not renewed.
Prior to expiration, the hub locations under the DriveTime Lease Agreement and the DriveTime Hub Lease Agreement both had cancellable lease terms of less than twelve months with rights to terminate at the Company's election with 60 days' prior written notice and certain one-year renewal options provided. At non-reconditioning locations, because it was not reasonably certain that the Company would exercise its options to extend the leases or abstain from exercising its termination rights within these lease agreements to create a lease term greater than one year, the Company accounted for them as short-term leases. For these locations, the Company made variable monthly lease payments based on its pro rata utilization of space at each facility plus a pro rata share of each facility’s actual insurance costs and real estate taxes. Management had determined that the costs allocated to the Company were based on a reasonable methodology. The DriveTime Lease Agreement also includes the Blue Mound and Delanco inspection and reconditioning centers. At both of these locations, the Company expects the lease to continue beyond twelve months, therefore those locations are not considered short-term leases. The Company occupies all of the space at these inspection and reconditioning centers and makes monthly lease payments based on DriveTime's actual rent expense. In addition, the Company is responsible for the actual insurance costs, tenant improvements required to conduct operations, and real estate taxes at these inspection and reconditioning center locations.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In February 2017, the Company entered into a lease agreement with DriveTime for sole occupancy of a fully operational inspection and reconditioning center in Winder, Georgia. The lease has an initial term of eight years, subject to the Company's ability to exercise three renewal options of five years each.
Expenses related to these operating lease agreements are allocated based on usage to inventory and selling, general and administrative expenses in the accompanying consolidated balance sheets and statements of operations. Costs allocated to inventory are recognized as cost of sales when the inventory is sold. Total costs related to these operating lease agreements, including those noted above, were $3 million, $4 million, and $5 million, for the years ended December 31, 2023, 2022, and 2021, respectively, allocated between inventory and selling, general, and administrative expenses.
Office Leases
In September 2016, the Company entered into a lease for office space in Tempe, Arizona. In connection with that lease, the Company entered into a sublease with DriveTime for the use of another floor in the same building. The lease and sublease each have a term of 83 months, subject to the right to exercise three five-year extension options. Pursuant to the sublease, the Company pays the rent equal to the amounts due under DriveTime's master lease directly to DriveTime's landlord. The rent expense incurred related to this first floor sublease was $1 million during each of the years ended December 31, 2023, 2022, and 2021. The lease and sublease expire in February 2024.
In December 2019, Verde Investments, Inc., an affiliate of DriveTime ("Verde"), purchased an office building in Tempe, Arizona that the Company leased from an unrelated landlord prior to Verde's purchase. In connection with the purchase, Verde assumed that lease. The lease has an initial term of ten years, subject to the right to exercise two five-year extension options. The rent expense incurred under the lease with Verde was $1 million during each of the years ended December 31, 2023, 2022, and 2021.
Wholesale Sales and Revenues
DriveTime purchases wholesale vehicles from, and sells wholesale vehicles to, both the Company and unrelated third parties through both competitive online auctions that are managed by unrelated third parties and the Company's wholesale marketplace platform. Additionally, beginning in September 2023, the Company provided DriveTime with reconditioning services through its wholesale marketplace platform. The Company recognized $19 million, $32 million, and $54 million of wholesale sales and revenues from DriveTime during the years ended December 31, 2023, 2022, and 2021, respectively.
Retail Vehicle Acquisitions and Reconditioning
During the second quarter of 2021, the Company began acquiring reconditioned retail vehicles from DriveTime. The purchase price of each vehicle was equal to the wholesale price of the vehicle plus a fee for transportation and reconditioning services. In addition, DriveTime performs reconditioning services for the Company at DriveTime reconditioning centers. As of December 31, 2023, and 2022, less than $1 million and $1 million, respectively, related to vehicles and reconditioning services were included in vehicle inventory in the accompanying consolidated balance sheets. The Company also recognized $4 million, $22 million, and $62 million of cost of goods sold during the years ended December 31, 2023, 2022, and 2021 respectively.
Master Dealer Agreement
In December 2016, the Company entered into a master dealer agreement with DriveTime (the "Master Dealer Agreement"), pursuant to which the Company may sell VSCs to customers purchasing a vehicle from the Company. The Company earns a commission on each VSC sold to its customers and DriveTime is obligated by and subsequently administers the VSCs. The Company collects the retail purchase price of the VSCs from its customers and remits the purchase price net of commission to DriveTime. In November 2018, the Company amended the Master Dealer Agreement to allow the Company to receive payments for excess reserves based on the performance of the VSCs versus the reserves held by the VSC administrator, once a required claims period for such VSCs has passed. In August 2020 and April 2021, the Company and DriveTime further amended the Master Dealer Agreement to adjust excess reserve payment calculations and timing and the scope of DriveTime's after-sale administration services, respectively. During the years ended December 31, 2023, 2022, and 2021, the Company recognized $138 million, $176 million, and $186 million, respectively, of commissions earned on VSCs sold to its customers and administered by DriveTime, net of a reserve for estimated contract cancellations, and payments for excess reserves to
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
which it expects to be entitled. The commission earned on the sale of VSCs and expected payments for excess reserves is included in other sales and revenues in the accompanying consolidated statements of operations.
Beginning in 2017, DriveTime also administers the Company's limited warranty provided to all customers and administered a portion of the Company's GAP waiver coverage under the Master Dealer Agreement. Since the first quarter of 2020, the Company's GAP waiver coverage sales have been administered by an unrelated third party. The Company pays a per-vehicle fee to DriveTime to administer the limited warranty included with every purchase and prior to the first quarter of 2020 paid a per-contract fee to DriveTime to administer a portion of the GAP waiver coverage it sells to its customers. The Company incurred $17 million, $18 million, and $15 million during the years ended December 31, 2023, 2022, and 2021, respectively, related to the administration of limited warranty.
Profit Sharing Agreement
In June 2018, the Company entered into an agreement with an unaffiliated third party, pursuant to which the Company would sell certain Road Hazard ("RH") and Pre-Paid Maintenance ("PPM") contracts. Under this agreement, third parties would administer the RH and PPM contracts, including providing customer and administrative services, and pay a profit sharing component to the Company. In 2022, the Company began selling equivalent offerings from DriveTime, pursuant to the Master Dealer Agreement discussed above, and all rights and obligations in connection with existing RH and PPM contracts were transferred to DriveTime (the "Transferred Contracts"). Finally, in December 2022, the Company entered into a profit sharing agreement with DriveTime with regard to the Transferred Contracts (the "Profit Sharing Agreement"). The Company recognized $7 million and $3 million in revenue during the years ended December 31, 2023 and 2022, respectively, under the Profit Sharing Agreement.
Servicing and Administrative Fees
DriveTime provides servicing and administrative functions associated with the Company's finance receivables. The Company incurred expenses of $13 million, $10 million, and $6 million for the years ended December 31, 2023, 2022, and 2021, respectively, related to these services.
Aircraft Time Sharing Agreement
The Company entered into an agreement to share usage of two aircraft owned by Verde and operated by DriveTime on October 22, 2015, and the agreement was subsequently amended in 2017. Pursuant to the agreement, the Company agreed to reimburse DriveTime for actual expenses for each of its flights. The original agreement was for 12 months, with perpetual 12-month automatic renewals. Either the Company or DriveTime can terminate the agreement with 30 days’ prior written notice. The Company reimbursed DriveTime less than $1 million under this agreement during each of the years ended December 31, 2023, 2022, and 2021.
Shared Services Agreement with DriveTime
In November 2014, the Company and DriveTime entered into a shared services agreement whereby DriveTime provided certain accounting and tax, legal and compliance, information technology, telecommunications, benefits, insurance, real estate, equipment, corporate communications, software and production, and other services primarily to facilitate the transition of these services to the Company on a standalone basis (the "Shared Services Agreement"). The Shared Services Agreement was most recently amended and restated in February 2021 and operates on a year-to-year basis, with the Company having the right to terminate any or all services with 30 days' prior written notice and DriveTime having the right to terminate any or all services with 90 days' prior written notice. Charges allocated to the Company are based on the Company’s actual use of the specific services detailed in the Shared Services Agreement. The Company incurred less than $1 million in expenses related to the Shared Services Agreement during each of the years ended December 31, 2023, 2022, and 2021.
Accounts Payable Due to Related Party
As of December 31, 2023 and 2022, $7 million and $16 million, respectively, was due to related parties primarily related to the agreements mentioned above, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Contributions of Class A Common Stock From Ernest Garcia III
On January 5, 2022, in recognition of the Company selling its 1 millionth vehicle in the fourth quarter of 2021, the Company's CEO, Ernest Garcia III ("Mr. Garcia"), committed to giving then-current employees 23 shares of Class A common stock each from his personal shareholdings once employees reach their two-year employment anniversary ("CEO Milestone Gift" or "Gift"). As a result and during the three months ended March 31, 2022, the Company granted 23 restricted stock units ("RSUs") to each current employee, which vest after they complete their second year of employment, for a total of 435,035 RSUs granted during the period. For every gift that vests, and pursuant to a contribution agreement (the "Contribution Agreement") entered into by and between the Company and Mr. Garcia on February 22, 2022, Mr. Garcia contributes to the Company, at the end of each fiscal quarter, the number of shares of Class A common stock, granted pursuant to the CEO Milestone Gift, that have vested during such quarter. The shares contributed shall be shares of Class A common stock that Mr. Garcia individually owns, at no charge. The contribution is intended to fund RSU awards to certain employees of the Company upon their satisfying the applicable employment tenure requirements. During the years ended December 31, 2023 and 2022, 62,606 and 128,133 RSUs, respectively, vested and an equal number of shares of Class A common stock were contributed by Mr. Garcia. Although the Company does not expect Mr. Garcia to incur any tax obligations related to the contribution, the Company has agreed to indemnify Mr. Garcia from any such obligations that may arise.
Private Placement
On July 17, 2023, the Company entered into a Transaction Support Agreement pursuant to which, among other things, and subject to certain conditions, the Garcia Parties committed to purchase up to $126 million of equity in the Company. In satisfaction of that commitment, on August 18, 2023, the Company entered into a Securities Purchase Agreement with the Garcia Parties providing for the purchase of an aggregate of 3.4 million Class A Units, together with 2.7 million shares of Class B common stock, at a price equivalent to $46.31 per share of Class A common stock, or $37.048 per Class A Unit on an as-exchanged basis. The Company used the proceeds therefrom to partially fund the cash tender offer to purchase a portion of the 2025 Senior Unsecured Notes (as defined below).
NOTE 8 — FINANCE RECEIVABLE SALE AGREEMENTS
The Company originates loans for its customers and sells them to partners and investors pursuant to finance receivable sale agreements. Historically, the Company has sold loans through two types of arrangements: forward flow agreements and fixed pool loan sales, including securitization transactions.
Master Purchase and Sale Agreement
In December 2016, the Company entered into a master purchase and sale agreement (the "Master Purchase and Sale Agreement" or "MPSA") with Ally Bank and Ally Financial Inc. (collectively the "Ally Parties"). Pursuant to the MPSA, the Company sells finance receivables meeting certain underwriting criteria under a committed forward flow arrangement without recourse to the Company for their post-sale performance. The Company and the Ally Parties amended the MPSA at various times throughout 2021, 2022, and 2023 to extend the scheduled commitment termination date to January 12, 2024, establish a commitment by the Ally Parties to purchase up to a maximum of $4.0 billion of principal balances of finance receivables between January 13, 2023 and the scheduled commitment termination date, and broaden the scope of finance receivables eligible for sale to the Ally Parties. On January 11, 2024, the Company and the Ally Parties amended the MPSA to reestablish the commitment by the Ally Parties to purchase up to $4.0 billion of principal balances of finance receivables between January 11, 2024 and January 10, 2025.
During the years ended December 31, 2023, 2022, and 2021, the Company sold $3.6 billion, $3.8 billion, and $2.1 billion, respectively, in principal balances of finance receivables under the MPSA and had $0.4 billion of unused capacity as of December 31, 2023.
Securitization Transactions
The Company sponsors and establishes securitization trusts to purchase finance receivables from the Company. The securitization trusts issue asset-backed securities, some of which are collateralized by the finance receivables that the Company sells to the securitization trusts. Upon sale of the finance receivables to the securitization trusts, the Company recognizes a gain or loss on sales of finance receivables. The net proceeds from the sales are the fair value of the assets obtained as part of the
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
transactions and typically include cash and at least 5% of the beneficial interests issued by the securitization trusts to comply with the Risk Retention Rules, as defined and further discussed in Note 9 — Securitizations and Variable Interest Entities.
During the years ended December 31, 2023, 2022 and 2021, the Company sold $2.8 billion, $2.4 billion and $5.0 billion, respectively, in principal balances of finance receivables through securitization transactions.
Gain on Loan Sales
The total gain related to finance receivables sold to financing partners and pursuant to securitization transactions was $434 million, $411 million, and $718 million during the years ended December 31, 2023, 2022, and 2021, respectively, which is included in other sales and revenues in the accompanying consolidated statements of operations.
NOTE 9 — SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
As noted in Note 8 — Finance Receivable Sale Agreements, the Company sponsors and establishes securitization trusts to purchase finance receivables from the Company. The securitization trusts issue asset-backed securities, some of which are collateralized by the finance receivables that the Company sells to the securitization trusts. Upon sale of the finance receivables to the securitization trusts, the Company recognizes a gain or loss on sales of finance receivables. The net proceeds from the sales are the fair value of the assets obtained as part of the transactions and typically include cash and at least 5% of the beneficial interests issued by the securitization trusts to comply with Regulation RR of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Risk Retention Rules"). The beneficial interests retained by the Company include, but are not limited to, rated notes and certificates of the securitization trusts. The holders of the certificates issued by the securitization trusts have rights to cash flows only after the holders of the notes issued by the securitization trusts have received their contractual cash flows. The securitization trusts have no direct recourse to the Company’s assets, and holders of the securities issued by the securitization trusts can look only to the assets of the securitization trusts that issued their securities for payment. The beneficial interests held by the Company are subject principally to the credit and prepayment risk stemming from the underlying finance receivables.
The securitization trusts established in connection with asset-backed securitization transactions are VIEs. For each VIE that the Company establishes in its role as sponsor of securitization transactions, it performs an analysis to determine whether or not it is the primary beneficiary of the VIE. The Company’s continuing involvement with the VIEs consists of retaining a portion of the securities issued by the VIEs, providing industry standard representations and warranties regarding the underlying finance receivables, and performing ministerial duties as the trust administrator. As of December 31, 2023, the Company is not the primary beneficiary of these securitization trusts because its retained interests in the VIEs do not have exposures to losses or benefits that could potentially be significant to the VIEs. As such, the Company does not consolidate the securitization trusts.
The assets the Company retains in the unconsolidated VIEs are presented as beneficial interests in securitizations on the accompanying consolidated balance sheets, which as of December 31, 2023 and 2022 were $366 million and $321 million, respectively. The Company held no other assets or liabilities related to its involvement with unconsolidated VIEs as of December 31, 2023 and 2022.
The following table summarizes the carrying value and total exposure to losses of its assets related to unconsolidated VIEs with which the Company has continuing involvement, but is not the primary beneficiary at December 31, 2023 and 2022. Total exposure represents the estimated loss the Company would incur under severe, hypothetical circumstances, such as if the value of the interests in the securitization trusts and any associated collateral declined to zero. The Company believes the possibility of this is remote. As such, the total exposure presented below is not an indication of the Company's expected losses.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Carrying Value | | Total Exposure | | Carrying Value | | Total Exposure |
| | | | | | | |
| (in millions) |
| Rated notes | $ | 287 | | | $ | 287 | | | $ | 252 | | | $ | 252 | |
| Certificates and other assets | 79 | | | 79 | | | 69 | | | 69 | |
| Total unconsolidated VIEs | $ | 366 | | | $ | 366 | | | $ | 321 | | | $ | 321 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The beneficial interests in securitizations are considered securities available for sale subject to restrictions on transfer pursuant to the Company’s obligations as a sponsor under the Risk Retention Rules. As described in Note 10 — Debt Instruments, the Company has entered into secured borrowing facilities through which it finances certain of these retained beneficial interests in securitizations. These securities are interests in securitization trusts, thus there are no contractual maturities. The amortized cost and fair value of securities available for sale as of December 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | |
| (in millions) |
| Rated notes | $ | 294 | | | $ | 287 | | | $ | 268 | | | $ | 252 | |
| Certificates and other assets | 71 | | | 79 | | | 43 | | | 69 | |
| Total securities available for sale | $ | 365 | | | $ | 366 | | | $ | 311 | | | $ | 321 | |
NOTE 10 — DEBT INSTRUMENTS
Debt instruments, excluding finance leases, which are discussed in Note 16 — Leases, as of December 31, 2023 and 2022 consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
| (in millions) |
| Asset-based financing: | | | |
| Floor plan facility | $ | 113 | | | $ | 569 | |
| Finance receivable facilities | 555 | | | 965 | |
| Financing of beneficial interest in securitizations | 293 | | | 268 | |
| Notes payable | — | | | 3 | |
| Real estate financing | 485 | | | 486 | |
| Total asset-based financing | 1,446 | | | 2,291 | |
Senior Secured Notes (1) | 4,378 | | | — | |
Senior Unsecured Notes | 205 | | | 5,725 | |
| Total debt | 6,029 | | | 8,016 | |
| Less: current portion | (777) | | | (1,638) | |
Less: unamortized debt issuance costs (2) | (60) | | | (82) | |
Plus: unamortized premium (3) | 37 | | | — | |
| Total included in long-term debt, net | $ | 5,229 | | | $ | 6,296 | |
(1) Includes $185 million of accrued PIK interest through December 31, 2023, which will increase the principal amount of Senior Secured Notes on February 15, 2024, the next semi-annual interest payment date.
(2) The unamortized debt issuance costs related to long-term debt are presented as a reduction of the carrying amount of the corresponding liabilities on the accompanying consolidated balance sheets. Unamortized debt issuance costs related to revolving debt arrangements are presented within other assets on the accompanying consolidated balance sheets and not included here.
(3) The unamortized premium relates to a portion of the Offers (as defined below) which were accounted for as a debt modification.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Short-Term Revolving Facilities
Floor Plan Facility
The Company previously entered into a floor plan facility with a lender to finance its vehicle inventory, which was secured by Carvana LLC's vehicle inventory, general intangibles, accounts receivable, and finance receivables (as amended, the "Floor Plan Facility"). On September 1, 2023, the Company amended the Floor Plan Facility in connection with the issuance of the Senior Secured Notes discussed below to provide for an additional exclusive grant of collateral over certain deposit accounts and the cash on deposit in those accounts in favor of the lender and to amend certain other affirmative and negative covenants. The Company amended and restated the Floor Plan Facility on November 1, 2023, to resize the line of credit to $1.5 billion through April 30, 2025 and to lower the interest rate to (i) a prime rate plus 0.10% when amounts drawn under the facility are under 50% of the then current inventory balance and (ii) a prime rate plus 0.50% when amounts drawn are over 50%.
Under the Floor Plan Facility, repayment of amounts drawn for the purchase of a vehicle should generally be made within several days after selling or otherwise disposing of the vehicle. Outstanding balances related to vehicles held in inventory for more than 120 days require monthly principal payments equal to 10% of the original principal amount of that vehicle until the remaining outstanding balance is equal to the lesser of (i) 50% of the original principal amount or (ii) 50% of the wholesale value. Prepayments may be made without incurring a premium or penalty. Additionally, the Company is permitted to make prepayments to the lender to be held as principal payments under the Floor Plan Facility and subsequently reborrow such amounts. The Floor Plan Facility also requires monthly interest payments and required that at least 12.5% of the total principal amount owed to the lender be held as restricted cash. On November 1, 2023, the restricted cash requirements were amended to introduce a sliding scale whereby at least 12.5% of the total principal amount owed to the lender is required to be held as restricted cash if amounts drawn are under 50% of the then current inventory balance, which requirement increases to (i) 17.5% required to be held as restricted cash if amounts drawn are between 50% and 59.99%, (ii) 22.5% required to be held as restricted cash if amounts drawn are between 60% and 69.99%, and (iii) 25% required to be held as restricted cash if amounts drawn are equal to or over 70%. The Company is also required to pay the lender an availability fee based on the average unused capacity during the prior calendar quarter under the Floor Plan Facility.
As of December 31, 2023, the Company had $113 million outstanding under the Floor Plan Facility, unused capacity of $1.4 billion, and held $14 million in restricted cash related to this facility. During the year ended December 31, 2023, the Company's effective interest rate on the Floor Plan Facility was 7.86%.
As of December 31, 2022, the Company had $569 million outstanding under the Floor Plan Facility, unused capacity of $1.6 billion, and held $71 million in restricted cash related to this facility. For the year ended December 31, 2022, the Company's effective interest rate on the facility was 3.57%.
Finance Receivable Facilities
The Company has various short-term revolving credit facilities to fund certain finance receivables originated by the Company prior to selling them, which are typically secured by the finance receivables pledged to them (the "Finance Receivable Facilities").
In January 2020, the Company entered into an agreement pursuant to which a lender agreed to provide a revolving credit facility to fund certain finance receivables originated by the Company. In 2023, the Company amended its agreement to, among other things, adjust the line of credit to $500 million and extend the maturity date to January 24, 2024, and in January 2024, the maturity was further extended to January 19, 2025.
In February 2020, the Company entered into an agreement pursuant to which a second lender agreed to provide a $500 million revolving credit facility to fund certain finance receivables originated by the Company. In December 2021, the Company amended its agreement to, among other things, increase the line of credit to $600 million and extend the maturity date to December 8, 2023. In December 2023, the Company amended its agreement to, among other things, extend the maturity date to December 8, 2025.
In April 2021, the Company entered into an agreement pursuant to which a third lender agreed to provide a $500 million revolving credit facility to fund certain finance receivables originated by the Company. In December 2021 and September 2022,
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the Company amended its agreement to, among other things, increase this line of credit to $600 million and extend the maturity date to March 30, 2024.
In October 2021, the Company entered into an agreement pursuant to which a fourth lender agreed to provide a $350 million revolving credit facility to fund certain finance receivables originated by the Company. On May 8, 2023, the Company settled all outstanding amounts owed and terminated the agreement with the lender.
In March 2022, the Company entered into an agreement pursuant to which a fifth lender agreed to provide a $500 million revolving credit facility to fund certain finance receivables originated by the Company. In September 2023, the Company amended its agreement to extend the maturity date to September 18, 2024.
In May 2023, the Company entered into an agreement pursuant to which a sixth lender agreed to provide a $500 million revolving credit facility to fund certain finance receivables originated by the Company. The Company can draw upon this facility until May 31, 2024.
The Finance Receivable Facilities require that any undistributed amounts collected on the pledged finance receivables be held as restricted cash. The Finance Receivable Facilities require monthly payments of interest and fees based on usage and unused facility amounts. The Finance Receivable Facilities self-amortize from the end of the draw period until maturity, offer full prepayment rights, and have no credit sublimits or aging restrictions, subject to negotiated concentration limits. The subsidiaries that entered into these Finance Receivable Facilities are each wholly-owned, special purpose entities whose assets are not available to the general creditors of the Company. As of December 31, 2023 and 2022, the Company had $555 million and $965 million, respectively, outstanding under these Finance Receivable Facilities, unused capacity of $2.1 billion and $1.6 billion, respectively, and held $8 million and $36 million, respectively, in restricted cash related to these Finance Receivable Facilities. For the years ended December 31, 2023 and 2022, the Company's effective interest rate on these Finance Receivable Facilities was 6.60% and 2.93%.
Long-Term Debt
Senior Secured Notes
On September 1, 2023, the Company completed a series of transactions whereby it exchanged validly tendered senior unsecured notes for newly issued senior secured notes (the "Exchange Offers"). Concurrently with the Exchange Offers, the Company also completed a cash tender offer to purchase any and all of the Company's outstanding 2025 Senior Unsecured Notes for cash at a purchase price equal to 85.0% of the aggregate principal amount thereof (the "Cash Tender Offer" and together with the Exchange Offers, the "Offers"). Upon consummation of the Offers, the Company exchanged Senior Unsecured Notes with an aggregate outstanding principal amount of $5.5 billion for $4.2 billion in aggregate principal amount of newly issued senior secured notes (collectively the "Senior Secured Notes"), paid $341 million in cash for validly tendered 2025 Senior Unsecured Notes, and paid $146 million in cash related to accrued and unpaid interest for validly tendered Senior Unsecured Notes. Additionally, the Company wrote off $66 million of debt issuance costs in connection with the Offers.
The Company assessed the Offers to determine whether the transactions represent debt modifications or debt extinguishments under Accounting Standards Codification 470. As a result of certain lenders that participated in the Offers, the Company determined that a majority of the Offers were a debt extinguishment and the remainder of the Offers were a debt modification, which resulted in a gain on debt extinguishment of $878 million. As a result, the Company initially recognized a $40 million premium which is reflected as an addition to the principal balance of the Senior Secured Notes and will be amortized against interest expense over the respective lives of the Senior Secured Notes.
The aggregate principal amounts of the Senior Unsecured Notes that were validly tendered and accepted by the Company in the Offers are set forth in the table below.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Principal Amount Validly Tendered and Accepted | | | | | | Allocation to Senior Secured Notes Issued |
Senior Unsecured Notes | Outstanding Principal Prior to Exchange | | | Accepted as % of Outstanding | | Cash Tender Offer Payment | | 2028 Senior Secured Notes | | 2030 Senior Secured Notes | | 2031 Senior Secured Notes | | Total Senior Secured Notes |
| | | | | | | | | | | | | | | |
| (in millions, except percentages) |
2025 Senior Unsecured Notes | $ | 500 | | | $ | 402 | | | 80.3 | % | | $ | 341 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
2027 Senior Unsecured Notes | 600 | | | 568 | | | 94.7 | % | | — | | | 102 | | | 153 | | | 181 | | | 436 | |
2028 Senior Unsecured Notes | 600 | | | 578 | | | 96.3 | % | | — | | | 90 | | | 135 | | | 160 | | | 385 | |
2029 Senior Unsecured Notes | 750 | | | 724 | | | 96.6 | % | | — | | | 110 | | | 165 | | | 195 | | | 470 | |
2030 Senior Unsecured Notes | 3,275 | | | 3,248 | | | 99.2 | % | | — | | | 679 | | | 1,018 | | | 1,205 | | | 2,902 | |
Total | $ | 5,725 | | | $ | 5,520 | | | 96.4 | % | | $ | 341 | | | $ | 981 | | | $ | 1,471 | | | $ | 1,741 | | | $ | 4,193 | |
The following table summarizes the components and interest rate terms of the Company's Senior Secured Notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Secured Notes | December 31,
2023 | | December 31,
2022 | | Year 1 PIK Interest Rate | | Year 2 Cash/PIK Toggle Interest Rate | | Thereafter Cash Interest Rate |
| | | | | | | | | |
| (in millions, except percentages) |
Notes due December 1, 2028 (the "2028 Senior Secured Notes") | $ | 981 | | | $ | — | | | 12% | | 9%/12% | | 9% |
Notes due June 1, 2030 (the "2030 Senior Secured Notes") | 1,471 | | | — | | | 13% | | 11%/13% | | 9% |
Notes due June 1, 2031 (the "2031 Senior Secured Notes") | 1,741 | | | — | | | 14% | | --/14% | | 9% |
Accrued PIK interest | 185 | | | — | | | | | | | |
| Total principal amount | $ | 4,378 | | | $ | — | | | | | | | |
Less: unamortized debt issuance costs | (53) | | | — | | | | | | | |
Plus: unamortized premium | 37 | | | — | | | | | | | |
Total Senior Secured debt | $ | 4,362 | | | $ | — | | | | | | | |
Interest on each of the Senior Secured Notes is payable semi-annually on February 15 and August 15, commencing on February 15, 2024.
The Company may redeem some or all of each series of Senior Secured Notes at any time prior to certain specified redemption dates (the "Secured Early Redemption Dates") and at 100% of the principal amount outstanding plus applicable make-whole premiums set forth in each respective indenture, plus any accrued and unpaid interest to the redemption date. Prior to the Secured Early Redemption Dates, the Company may also redeem up to 35% of the original aggregate principal amount of the 2028 and 2030 Senior Secured Notes at a redemption price equal to 109% of the principal amount outstanding, together with accrued and unpaid interest to, but not including, the date of redemption, using the net cash proceeds of certain equity offerings. Finally, on or after the Secured Early Redemption Dates, the Company may redeem its Senior Secured Notes in whole or in part at redemption prices set forth in each respective indenture, plus accrued and unpaid interest up to but excluding
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the redemption date. If the Company experiences certain change of control events, it must make an offer to purchase all of the Senior Secured Notes at 101% of the principal amount thereof, plus any accrued and unpaid interest, to the repurchase date.
The Senior Secured Notes mature as specified in the table above unless earlier repurchased or redeemed and are fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by all of the domestic restricted subsidiaries of the Company (other than the subsidiaries formed for inventory, finance receivables, securitization facilities, immaterial subsidiaries, or unrestricted subsidiaries). The Senior Secured Notes and the guarantees are secured by (i) second-priority liens on certain assets and property of the Company, pledged in favor of the Ally Parties under the Floor Plan Facility and (ii) first-priority liens on certain assets and property of the Company and the guarantors, as identified in the indentures to the Senior Secured Notes.
The indentures to the Senior Secured Notes contain restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things and subject to certain exceptions, incur additional debt or issue preferred stock, create new liens, create restrictions on intercompany payments, pay dividends and make other distributions in respect of the Company's capital stock, redeem or repurchase the Company’s capital stock or prepay subordinated indebtedness, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers or consolidations.
Senior Unsecured Notes
The Company has issued various tranches of senior unsecured notes (the "Senior Unsecured Notes") each under a separate indenture, as further described below.
The following table summarizes components of the Company's Senior Unsecured Notes:
| | | | | | | | | | | | | | | | | |
| December 31,
2023 | | December 31,
2022 | | Interest Rate |
| | | | | |
| (in millions, except percentages) |
Senior Unsecured Notes due October 1, 2025 ("2025 Senior Unsecured Notes") | $ | 98 | | | $ | 500 | | | 5.625 | % |
Senior Unsecured Notes due April 15, 2027 ("2027 Senior Unsecured Notes") | 32 | | | 600 | | | 5.500 | % |
Senior Unsecured Notes due October 1, 2028 ("2028 Senior Unsecured Notes") | 22 | | | 600 | | | 5.875 | % |
Senior Unsecured Notes due September 1, 2029 ("2029 Senior Unsecured Notes") | 26 | | | 750 | | | 4.875 | % |
Senior Unsecured Notes due May 1, 2030 ("2030 Senior Unsecured Notes") | 27 | | | 3,275 | | | 10.250 | % |
| Total principal amount | 205 | | | 5,725 | | | |
| Less: unamortized debt issuance cost | (1) | | | (76) | | | |
Total Senior Unsecured debt | $ | 204 | | | $ | 5,649 | | | |
Each of the 2025, 2027, 2028 and 2029 Senior Unsecured Notes were issued pursuant to an indenture entered into by and among the Company, each of the guarantors party thereto and U.S. Bank National Association, as trustee. The 2030 Senior Unsecured Notes were issued pursuant to an indenture entered into by and among the Company, each of the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee. Interest on each of the Senior Unsecured Notes is payable semi-annually. The Senior Unsecured Notes mature as specified in the table above unless earlier repurchased or redeemed and are guaranteed by the Company's existing domestic restricted subsidiaries (other than the subsidiaries formed for inventory, finance receivables, securitization facilities, immaterial subsidiaries, or unrestricted subsidiaries). In March 2023, the Company designated ADESA and its subsidiaries as unrestricted subsidiaries under the indentures governing the Senior Unsecured Notes.
The Company may redeem some or all of each series of Senior Unsecured Notes at any time prior to certain specified redemption dates (the "Unsecured Early Redemption Dates") at the redemption prices and applicable make-whole premiums set forth in each respective indenture, plus any accrued and unpaid interest to the redemption date. Prior to the Unsecured Early
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Redemption Dates, the Company may also redeem up to 35% of the aggregate principal amount at a redemption price equal to 100% plus the respective interest rate specified in the table above, together with accrued and unpaid interest to, but not including, the date of redemption, with the net cash proceeds of certain equity offerings. With respect to the 2030 Senior Unsecured Notes, the Company may, at its option, redeem in the aggregate up to 10% of the original aggregate principal amount of the 2030 Senior Unsecured Notes during the period from, and including, May 1, 2025 to, but excluding May 1, 2027, at a redemption price equal to 105.125% of the 2030 Senior Unsecured Notes to be redeemed, plus accrued and unpaid interest thereon to the relevant redemption rate. Finally, on or after the Unsecured Early Redemption Dates, the Company may redeem some or all of the Senior Unsecured Notes in whole or in part at redemption prices set forth in each respective indenture, plus accrued and unpaid interest up to but excluding the redemption date.
As discussed above, on September 1, 2023, the Company completed the Offers, including the Exchange Offers to exchange an outstanding principal amount of $5.1 billion of the Senior Unsecured Notes for newly issued Senior Secured Notes, and the Cash Tender Offer to purchase an outstanding principal amount of $402 million of the 2025 Senior Unsecured Notes, leading to a total reduction of an aggregate outstanding principal amount of $5.5 billion of the Senior Unsecured Notes. In connection with the Exchange Offers, the Company obtained consents from holders of each series of Senior Unsecured Notes to amend the indentures governing the notes to eliminate substantially all of the restrictive covenants as well as certain events of default and related provisions therein, and on August 30, 2023, the Company and the trustee entered into supplemental indentures to effect such amendments.
Notes Payable
The Company entered into promissory note and disbursement agreements to finance certain equipment for its transportation fleet and building improvements. The assets financed with the proceeds from these notes served as the collateral for each note and certain security agreements related to these assets have cross collateralization and cross default provisions with respect to one another. The notes had a fixed annual interest rate, a two- to three-year term and required monthly payments. During December 2023, the Company settled its promissory note and as a result, as of December 31, 2023 there were no outstanding amounts. As of December 31, 2022, the outstanding principal of these notes had a weighted-average interest rate of 7.5% and totaled $3 million net of unamortized debt issuance costs, of which $1 million was due within the next twelve months and is included in current portion of long-term debt in the accompanying consolidated balance sheets.
Real Estate Financing
The Company finances certain purchases and construction of its property and equipment through various sale and leaseback transactions. As of December 31, 2023, none of these transactions have qualified for sale accounting due to meeting the criteria for finance leases, or forms of continuing involvement, such as repurchase options or renewal periods that extend the lease for substantially all of the asset's remaining useful life, and are therefore accounted for as financing transactions. These arrangements require monthly payments and have initial terms of 20 to 25 years. Some of the agreements are subject to renewal options of up to 25 years and some are subject to base rent increases throughout the term. As of December 31, 2023 and 2022, the outstanding liability associated with these sale and leaseback arrangements, net of unamortized debt issuance costs, was $482 million and $483 million, respectively, and was included in long-term debt in the accompanying consolidated balance sheets.
Financing of Beneficial Interests in Securitizations
As discussed in Note 9 — Securitizations and Variable Interest Entities, the Company has retained certain beneficial interests in securitizations pursuant to the Company’s obligations as a sponsor under the Risk Retention Rules. Beginning in June 2019, the Company entered into secured borrowing facilities through which it finances certain retained beneficial interests in securitizations whereby the Company sells such interests and agrees to repurchase them for their fair value at a stated time of repurchase.
As of December 31, 2023 and 2022, the Company has pledged $293 million and $268 million, respectively, of its beneficial interests in securitizations as collateral under the repurchase agreements with expected repurchases ranging from March 2024 to December 2030. The securitization trusts distribute payments related to the Company's pledged beneficial interests in securitizations directly to the lenders, which reduces the beneficial interests in securitizations and the related debt balance. Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transactions. In the event of a decline in the fair value of the pledged collateral, the repurchase price of the pledged collateral will be increased by the amount of the decline.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The outstanding balance of these facilities, net of unamortized debt issuance costs, was $290 million and $265 million, as of December 31, 2023 and 2022, respectively, of which $108 million and $102 million, respectively was included in current portion of long-term debt in the accompanying consolidated balance sheets.
The following table summarizes the aggregate principal maturities due in each period for Senior Secured Notes (excluding any accrued PIK interest), Senior Unsecured Notes, real estate financing, and financing of beneficial interests in securitizations as of December 31, 2023. Maturities related to financing of beneficial interests in securitizations are estimated based on expected timing of payments from the securitization trusts to the lender.
| | | | | |
| As of December 31, 2023 |
| |
| (in millions) |
| 2024 | $ | 108 | |
| 2025 | 183 | |
| 2026 | 59 | |
| 2027 | 62 | |
| 2028 | 1,013 | |
| Thereafter | 3,751 | |
| Total | $ | 5,176 | |
As of December 31, 2023, the Company was in compliance with all debt covenants.
NOTE 11 — STOCKHOLDERS' EQUITY (DEFICIT)
Organizational Transactions
Carvana Co.'s amended and restated certificate of incorporation, among other things, authorizes (i) 50 million shares of Preferred Stock, par value $0.01 per share, (ii) 500 million shares of Class A common stock, par value $0.001 per share, and (iii) 125 million shares of Class B common stock, par value $0.001 per share. Each share of Class A common stock generally entitles its holder to one vote on all matters to be voted on by stockholders. Each share of Class B common stock held by the Garcia Parties generally entitles its holder to ten votes on all matters to be voted on by stockholders, for so long as the Garcia Parties maintain direct or indirect beneficial ownership of at least 25% of the outstanding shares of Carvana Co.'s Class A common stock determined on an as-exchanged basis assuming that all of the Class A Units and Class B Units were exchanged for Class A common stock. All other shares of Class B common stock generally entitle their holders to one vote per share on all matters to be voted on by stockholders. Holders of Class B common stock are not entitled to receive dividends and would not be entitled to receive any distributions upon the liquidation, dissolution or winding down of the Company. Holders of Class A and Class B common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by applicable law.
Carvana Group's amended and restated LLC Agreement provides for two classes of common ownership interests in Carvana Group: (i) Class A Units and (ii) Class B Units (together, the "LLC Units"). Carvana Co. is required to, at all times, maintain (i) a four-to-five ratio between the number of shares of Class A common stock issued and outstanding by Carvana Co. and the number of Class A Units owned by Carvana Co. (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities and subject to adjustment as set forth in the exchange agreement (the "Exchange Agreement") further discussed below, and taking into account Carvana Co. Sub LLC's 0.1% ownership interest in Carvana, LLC) and (ii) a four-to-five ratio between the number of shares of Class B common stock owned by the original holders of LLC units prior to the IPO (the "Original LLC Unitholders") and the number of Class A Units owned by the Original LLC Unitholders. The Company may issue shares of Class B common stock only to the extent necessary to maintain these ratios. Shares of Class B common stock are transferable only if an Original LLC Unitholder elects to exchange them, together with 1.25 times as many LLC Units, for consideration from the Company. Such consideration from the Company can be, at the Company's election, either shares of Class A common stock or cash.
As of December 31, 2023 and 2022, there were 250 million and 236 million Class A Units, respectively, and 2 million and 1 million Class B Units, respectively (as adjusted for the participation thresholds and closing price of Class A common stock on
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2023 and 2022), issued and outstanding. As discussed in Note 13 — Equity-Based Compensation, Class B Units were issued under the Company’s LLC Equity Incentive Plan (the "LLC Equity Incentive Plan") and are subject to a participation threshold, and are earned over the requisite service period.
Equity Offerings
On April 26, 2022, the Company completed a public offering of 15.625 million shares of its Class A common stock at an offering price of $80 for total net proceeds of $1.2 billion, after deducting underwriting discounts and offering expenses. The Garcia Parties purchased an aggregate of 5.4 million shares of the Class A common stock offered at the public offering price. The Company used the net proceeds to purchase 19.5 million newly-issued LLC Units in Carvana Group.
At-the-Market Offering
On July 19, 2023, the Company entered into a distribution agreement with Citigroup Global Markets Inc. and Moelis & Company LLC, whereby the Company may sell up to the greater of (i) shares of Class A common stock representing an aggregate offering price of $1.0 billion, or (ii) an aggregate of 35 million shares of Class A common stock, from time to time, through an "at-the-market offering" program (the "ATM Program").
The following table summarizes the activity pursuant to the ATM Program for the period presented:
| | | | | |
| Year Ended December 31, 2023 |
| |
| (in millions, except share and per share amounts) |
| Shares of Class A common stock issued | 7,156,838 | |
| Weighted-average issuance price per share | $ | 46.94 | |
Gross proceeds(1) | $ | 336 | |
(1) Net proceeds were $327 million after deducting $9 million of commissions and other offering expenses incurred.
Private Placement
On July 17, 2023, the Company entered into a Transaction Support Agreement pursuant to which, among other things, and subject to certain conditions, the Garcia Parties committed to purchase up to $126 million of equity in the Company. In satisfaction of that commitment, on August 18, 2023, the Company entered into a Securities Purchase Agreement with the Garcia Parties providing for the purchase of an aggregate of 3.4 million Class A Units, together with 2.7 million shares of Class B common stock, at a price equivalent to $46.31 per share of Class A common stock. The price equivalent of $46.31 per share of Class A common stock was equal to the weighted average sale price per share of Class A common stock sold under the ATM Program through August 18, 2023. As further described below, Class B common stock is exchangeable for an equivalent number of shares of Class A common stock, which exchange must be accompanied by 1.25 times as many Class A Units. As exchanged, the price per Class A Unit was $37.048. The Company may, at its election, pay consideration for such exchange in either shares of Class A common stock or in cash. The Company used the proceeds therefrom to partially fund the Cash Tender Offer as discussed in Note 10 — Debt Instruments.
Exchange Agreement
Carvana Co. and the Original LLC Unitholders together with any holders of LLC Units issued subsequent to the IPO (together, the "LLC Unitholders") entered into an Exchange Agreement under which each LLC Unitholder (and certain permitted transferees thereof) may receive shares of the Company's Class A common stock in exchange for their LLC Units on a four-to-five conversion ratio, or cash at the option of the Company, subject to (i) conversion ratio adjustments for stock splits, stock dividends, reclassifications and similar transactions, (ii) vesting for certain LLC Units, and (iii) the respective participation threshold for Class B Units. To the extent such owners also hold Class B common stock, they are required to deliver to Carvana Co. a number of shares of Class B common stock equal to the number of shares of Class A common stock
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
being exchanged for. Any shares of Class B common stock so delivered are canceled. The number of exchangeable Class B Units is determined based on the value of Carvana Co.'s Class A common stock and the applicable participation threshold.
During each of the years ended December 31, 2023 and 2022, certain LLC Unitholders exchanged less than 0.1 million LLC Units and no shares of Class B common stock for less than 0.1 million newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, Carvana Co. received less than 0.1 million LLC Units during each of the years ended December 31, 2023 and 2022, increasing its total ownership interest in Carvana Group.
Class A Non-Convertible Preferred Units
On October 2, 2018, Carvana Group, LLC amended its LLC Agreement to create a class of non-convertible preferred units (the "Class A Non-Convertible Preferred Units"), effective September 21, 2018. The Class A Non-Convertible Preferred Units were created in connection with Carvana Co.'s issuance of its Senior Unsecured Notes, as discussed further and defined in Note 10 — Debt Instruments. On October 2, 2020, Carvana Group, LLC amended and restated its LLC Agreement to, among other things, authorize the issuance of 1.1 million Class A Non-Convertible Preferred Units to be sold to Carvana Co. in connection with the issuance of its 2025 and 2028 Senior Unsecured Notes and authorize the issuance of additional Class A Non-Convertible Preferred Units, in each case in consideration for the capital contribution made or deemed to have been made by Carvana Co. of the net proceeds of notes issuances. Carvana Co. used the net proceeds from the issuance of its Senior Unsecured Notes to purchase the Class A Non-Convertible Preferred Units, and, in the case of the Senior Secured Notes, received Class A Non-Convertible Preferred Units upon the cancellation of units previously issued in connection with the issuance of the Senior Unsecured Notes, as specified below:
| | | | | | | | | | | | | | | | | | | | |
Date | Senior Notes Issuance | Class A Non-Convertible Preferred Units | | Cancelled in Connection with Offers | | Net Total Class A Non-Convertible Preferred Units |
| | (in thousands) |
| | | | | | |
| October 2020 | 2025 Senior Unsecured Notes | 500 | | | (402) | | | 98 | |
| March 2021 | 2027 Senior Unsecured Notes | 600 | | | (568) | | | 32 | |
| October 2020 | 2028 Senior Unsecured Notes | 600 | | | (578) | | | 22 | |
| August 2021 | 2029 Senior Unsecured Notes | 750 | | | (724) | | | 26 | |
| May 2022 | 2030 Senior Unsecured Notes | 3,275 | | | (3,248) | | | 27 | |
| September 2023 | 2028 Senior Secured Notes | 981 | | | — | | | 981 | |
| September 2023 | 2030 Senior Secured Notes | 1,471 | | | — | | | 1,471 | |
| September 2023 | 2031 Senior Secured Notes | 1,741 | | | — | | | 1,741 | |
| | 9,918 | | (5,520) | | | 4,398 | |
When Carvana Co. makes payments on the Senior Unsecured Notes and Senior Secured Notes (collectively the "Senior Notes"), Carvana Group makes an equal cash distribution, as necessary, to the Class A Non-Convertible Preferred Units. For each $1,000 principal amount of Senior Notes that Carvana Co. repays or otherwise retires, one Class A Non-Convertible Preferred Unit is canceled and retired. As discussed in Note 10 — Debt Instruments, the Company exchanged a majority of its Senior Unsecured Notes for new Senior Secured Notes, at which time 5.5 million Class A Non-Convertible Preferred Units were canceled and retired.
Tax Asset Preservation Plan
On January 16, 2023, the Company entered into a Section 382 Rights Agreement (the “Tax Asset Preservation Plan”) designed to preserve shareholder value and the value of certain tax assets primarily associated with federal net operating loss carryforwards and built-in losses under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). The Tax Asset Preservation Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of the Company's outstanding Class A common stock (any such person an “Acquiring Person”), without the approval of the Company’s board of directors (the "Board").
In connection therewith, the Board declared a dividend of one preferred share purchase right (a “Right”) for each share of Class A common stock, par value $0.001 per share, of the Company. Each Right entitles the registered holder to purchase from
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the Company one one-thousandth of a share of Series B Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Shares”) at a price of $50.00 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment. The Rights will separate and begin trading separately from the Class A common stock, and right certificates will be caused to evidence the Rights, on the earlier to occur of (i) the Close of Business (as such term is defined in the Tax Asset Preservation Plan) on the tenth day following a public announcement, or the public disclosure of facts indicating, that a Person (as such term is defined in the Tax Asset Preservation Plan) or group of affiliated or associated Persons has acquired Beneficial Ownership (as such term is defined in the Tax Asset Preservation Plan) of 4.9% or more of the outstanding Class A common stock (or, in the event that the Board determines to effect an exchange in accordance with Section 24 of the Tax Asset Preservation Plan and the Board determines that a later date is advisable, then such later date) and (ii) the close of business on the tenth business day (or such later date as may be determined by action of the Board prior to such time as any Person becomes an Acquiring Person) following the commencement of a tender offer or exchange offer the consummation of which would result in the Beneficial Ownership by a Person or group of 4.9% or more of the outstanding Class A common stock. If issued, each Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void) will become exercisable for Class A common stock having a value equal to two times the exercise price of the Right. However, prior to exercise, a Right does not give its holder any rights as a stockholder of the Company, including without limitation any dividend, voting or liquidation rights.
On July 18, 2023, the Company amended and restated its Tax Asset Preservation Plan in order to adjust the definition of Beneficial Ownership to exclude derivatives that may only be settled in cash, do not confer voting rights, and lack other features consistent with beneficial ownership of shares of Class A common stock.
NOTE 12 — NON-CONTROLLING INTERESTS
As discussed in Note 1 — Business Organization, Carvana Co. consolidates the financial results of Carvana Group and reports a non-controlling interest related to the portion of Carvana Group owned by the LLC Unitholders. Changes in the ownership interest in Carvana Group while Carvana Co. retains its controlling interest will be accounted for as equity transactions. Exchanges of LLC Units result in a change in ownership and reduce the amount recorded as non-controlling interests and increase additional paid-in capital.
Upon the issuance of shares of Class A common stock by Carvana Co. related to the Company's equity compensation plans such as the exercise of options, issuance of restricted or non-restricted stock, payment of bonuses in stock or settlement of stock appreciation rights in stock, Carvana Group is required to issue to Carvana Co. a number of Class A Units equal to 1.25 times the number of shares of Class A common stock being issued in connection with the exercise of such options or issuance of other types of equity compensation, subject to adjustment for stock splits, stock dividends, reclassifications, and similar transactions. Activity related to the Company's equity compensation plans may result in a change in ownership which will impact the amount recorded as non-controlling interest and additional paid-in capital.
The non-controlling interest related to the Class B Units is determined based on the respective participation thresholds and the share price of Class A common stock on an as-converted basis. To the extent that the number of as-converted Class B Units change or Class B Units are forfeited, the resulting difference in ownership will be accounted for as equity transactions adjusting the non-controlling interest and additional paid-in capital.
During the years ended December 31, 2023, 2022, and 2021, the total adjustments related to exchanges of LLC Units were a decrease in non-controlling interests and a corresponding increase in additional paid-in capital of $1 million, $1 million, and $43 million, respectively, which have been included in exchanges of LLC Units in the accompanying consolidated statements of stockholders' equity (deficit). During the years ended December 31, 2023, and 2022, Carvana Co. utilized its net proceeds from its equity offerings to purchase LLC Units, which resulted in adjustments to increase non-controlling interests and to decrease additional paid-in capital by $83 million, and $554 million, respectively, which have been included in adjustment to non-controlling interests related to equity offerings in the accompanying consolidated statements of stockholders' equity (deficit). No LLC Units were purchased during 2021.
As of December 31, 2023, Carvana Co. owned 56.6% of Carvana Group with the LLC Unitholders owning the remaining 43.4%. The net income (loss) attributable to the non-controlling interests on the accompanying consolidated statements of operations represents the portion of the net income (loss) attributable to the economic interest in Carvana Group held by the non-controlling LLC Unitholders calculated based on the weighted average non-controlling interests' ownership during the periods presented.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
| (in millions) |
| Transfers from (to) non-controlling interests: | | | | | |
| Decrease as a result of issuances of Class A and B common stock | $ | (83) | | | $ | (554) | | | $ | — | |
| | | | | |
| Increase as a result of exchanges of LLC Units | 1 | | | 1 | | | 43 | |
| | | | | |
| Total transfers from (to) non-controlling interests | $ | (82) | | | $ | (553) | | | $ | 43 | |
NOTE 13 — EQUITY-BASED COMPENSATION
Equity-based compensation is recognized based on amortizing the grant-date fair value on a straight-line basis over the requisite service period, which is generally the vesting period of the award, less actual forfeitures. A summary of equity-based compensation recognized during the years ended December 31, 2023, 2022, and 2021 is as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
| (in millions) |
| | | | | |
| Restricted Stock Units and Awards excluding those granted in relation to the CEO Milestone Gift | $ | 66 | | | $ | 41 | | | $ | 35 | |
| Restricted Stock Units granted in relation to the CEO Milestone Gift | (1) | | | 39 | | | — | |
| Options | 16 | | | 13 | | | 11 | |
| Class A Units | — | | | — | | | 1 | |
| Total equity-based compensation | 81 | | | 93 | | | 47 | |
| Equity-based compensation capitalized to property and equipment | (7) | | | (8) | | | (7) | |
| Equity-based compensation capitalized to inventory | (1) | | | (16) | | | (1) | |
| Equity-based compensation, net of capitalized amounts | $ | 73 | | | $ | 69 | | | $ | 39 | |
During the years ended December 31, 2023, 2022, and 2021, the Company capitalized $7 million, $8 million, and $7 million, respectively, of equity-based compensation to property and equipment related to software development and real estate projects and $1 million, $16 million, and $1 million, respectively, to inventory related to reconditioning and inbound transportation of vehicles. All other equity-based compensation is included in selling, general, and administrative expenses in the accompanying consolidated statements of operations.
As of December 31, 2023, unrecognized equity-based compensation related to outstanding awards and the related weighted-average period over which it is expected to be recognized subsequent to December 31, 2023 is presented in the table below. Total unrecognized equity-based compensation will be adjusted for actual forfeitures.
| | | | | | | | | | | |
| Unrecognized Equity-Based Compensation Related to Outstanding Awards (in millions) | | Remaining Weighted-Average Amortization Period (in years) |
| | | |
| Restricted Stock Units and Awards | $ | 143 | | | 2.7 |
| Options | 33 | | | 2.5 |
| | | |
| Total unrecognized equity-based compensation | $ | 176 | | | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2017 Omnibus Incentive Plan
In connection with the IPO, the Company adopted the 2017 Omnibus Incentive Plan (the "2017 Incentive Plan"). The number of shares authorized for issuance under the 2017 Incentive Plan is subject to an automatic annual increase (the "Automatic Increase") of the lesser of two percent of the Company's outstanding Class A common stock or an amount determined by the Compensation and Nominating Committee of the Board. On each of January 1, 2023, and January 1, 2024, the number of shares authorized for issuance under the 2017 Incentive Plan increased by two percent of the outstanding Class A common stock under the Automatic Increase. In addition, on May 1, 2023, the Company's stockholders approved an amendment to the 2017 Incentive Plan to further increase the number of shares available under the 2017 Incentive Plan by 20 million shares (the "Amendment Increase"). After taking into account the January 1, 2023 Automatic Increase and the Amendment Increase, as of December 31, 2023, 36 million shares of Class A common stock are available for issuance under the 2017 Incentive Plan, which the Company may grant as stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards to employees, directors, officers, and consultants. The majority of equity granted by the Company vests over four-year periods based on continued employment with the Company. As of December 31, 2023, 17 million shares remain available for future equity-based award grants under this plan.
The Company also maintains a clawback policy (the "Clawback Policy"), which requires the Company's officers, as defined by Rule 16a-1 of the Securities Exchange Act of 1934, to repay the Company certain Incentive Compensation (as defined in the Clawback Policy) if (i) the Company is required to prepare an accounting restatement of its financial statements due to its material noncompliance with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (each a "Restatement"), and (ii) no more than three years have elapsed since the original filing date of the financial statements. In the event of a Restatement, the Company must recover the amount of Incentive Compensation received that exceeds the amount of Incentive Compensation that otherwise would have been received, had it been determined based on the restated amounts, computed without regard to any taxes paid. To date, there has been no repayment of compensation from executive officers pursuant to the Clawback Policy.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSAs") entitle recipients to vote and to receive all dividends declared with respect to such shares, payable upon vesting. RSAs vest over a period of two years, subject to the recipient's continued employment or service. During the year ended December 31, 2022, the Company issued certain employees an aggregate of less than 0.1 million RSAs pursuant to the terms of the 2017 Incentive Plan with a weighted-average grant-date fair value of $34.21. The Company determined the grant-date fair value of the RSAs based on the closing price of the Company's Class A common stock on the grant date. The Company did not grant any RSAs during the years ended December 31, 2023 and 2021.
Restricted stock units ("RSUs") do not entitle recipients to vote or receive dividends. RSUs generally vest over a period of four years, subject to the recipient's continued employment. RSUs also include performance-based awards granted to certain executive employees that cliff vest upon the achievement of certain financial targets, subject to the recipient's continued employment. During the years ended December 31, 2023, 2022, and 2021, the Company issued certain employees an aggregate of 10.4 million, 3.5 million, and 0.3 million RSUs, respectively, pursuant to the terms of the 2017 Incentive Plan with a weighted-average grant-date fair value of $13.13, $65.26, and $288.27, respectively. The Company determined the grant-date fair value of the RSUs based on the closing price of the Company's Class A common stock on the grant date. RSUs are settled in shares of Class A common stock on a one-to-one basis within thirty days of vesting. As discussed in Note 7 — Related Party Transactions, the RSUs granted during the year ended December 31, 2022 include 0.5 million RSUs granted in connection with the CEO Milestone Gift for which the Company recognized a benefit of $1 million as a result of more forfeitures than employees continuing to vest and an expense of $39 million for the years ended December 31, 2023 and 2022, respectively, a portion of which related to the production of the Company's used vehicle inventory and was therefore capitalized to inventory.
RSA and RSU activity during the years ended December 31, 2023, 2022, and 2021 was as follows:
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | | | | | | | | | |
| Number of RSAs/RSUs (in thousands) | | Weighted-Average Grant-Date Fair Value |
Outstanding at January 1, 2021 | 738 | | | $ | 76.43 | |
| Granted | 258 | | | $ | 288.27 | |
| Settled | (385) | | | $ | 86.57 | |
| Forfeited | (58) | | | $ | 132.88 | |
Outstanding and nonvested at December 31, 2021 | 553 | | | $ | 162.32 | |
| | | |
| Granted | 3,482 | | | $ | 65.26 | |
| Settled | (432) | | | $ | 113.96 | |
| Forfeited | (951) | | | $ | 134.83 | |
Outstanding and nonvested at December 31, 2022 | 2,652 | | | $ | 52.62 | |
| | | |
| Granted | 10,392 | | | $ | 13.13 | |
| Settled | (1,550) | | | $ | 41.39 | |
| Forfeited | (1,591) | | | $ | 24.25 | |
Outstanding and nonvested at December 31, 2023 | 9,903 | | | $ | 17.49 | |
Employee Stock Purchase Plan
In May 2021, the Company adopted an employee stock purchase plan (the "ESPP"). On July 1, 2021, the ESPP went into effect. The ESPP allows substantially all employees, excluding members of senior management, to acquire shares of the Company's Class A common stock through payroll deductions over six-month offering periods, commencing on January 1 and July 1 of each year. The per share purchase price is equal to 90% of the fair market value of a share of the Company's Class A common stock on the last day of the offering period. Participant purchases are limited to maximums that may vary between $10,000 and $25,000 of stock per calendar year. The Company is authorized to grant up to 0.5 million shares of Class A common stock under the ESPP.
During the years ended December 31, 2023, 2022 and 2021, the Company issued 32,790, 86,352 and 2,494 shares of Class A common stock, respectively, and as of December 31, 2023, 378,364 shares of Class A common stock remained available for future issuance. During all three years ended December 31, 2023, 2022 and 2021, the Company recognized less than $1 million of equity-based compensation expense related to the ESPP.
Non-Qualified Stock Options
Non-qualified stock options allow recipients to purchase shares of Class A common stock at a fixed exercise price. The fixed exercise price is equal to the price of a share of Class A common stock at the time of grant. The options typically vest 25% on the anniversary of the grant date and in equal monthly installments thereafter for a total vesting period of four years and expire ten years after the grant date.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock option activity during the years ended December 31, 2023, 2022, and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options (in thousands) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in millions) |
Outstanding at January 1, 2021 | 1,072 | | | $ | 41.01 | | | 7.7 | | $ | 213 | |
| Options granted | 97 | | | $ | 178.42 | | | | | n/a |
| Options exercised | (75) | | | $ | 24.32 | | | | | $ | 20 | |
| Options forfeited or expired | (28) | | | $ | 27.62 | | | | | n/a |
Outstanding at December 31, 2021 | 1,066 | | | $ | 39.74 | | | 6.7 | | $ | 183 | |
| | | | | | | |
| Options granted | 297 | | | $ | 119.53 | | | | | n/a |
| Options exercised | (89) | | | $ | 37.89 | | | | | $ | 7 | |
| Options forfeited or expired | (9) | | | $ | 30.97 | | | | | n/a |
Outstanding at December 31, 2022 | 1,265 | | | $ | 80.26 | | | 6.4 | | $ | — | |
| | | | | | | |
| Options granted | 2,805 | | | $ | 10.07 | | | | | n/a |
| Options exercised | (17) | | | $ | 13.62 | | | | | $ | — | |
| Options forfeited or expired | (47) | | | $ | 50.08 | | | | | n/a |
Outstanding at December 31, 2023 | 4,006 | | | $ | 31.75 | | | 8.1 | | $ | 135 | |
| | | | | | | |
Vested and exercisable as of December 31, 2023 | 996 | | | $ | 68.23 | | | 5.3 | | $ | 14 | |
Expected to vest as of December 31, 2023 | 3,010 | | | $ | 19.68 | | | 9.1 | | $ | 120 | |
The Company determined the grant-date fair value of the options granted during the years ended December 31, 2023, 2022, and 2021 using the Black-Scholes valuation model with the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
Expected volatility(1) | 74.6 | % | | 69.2 | % | | 67.1 | % |
| Expected dividend yield | — | % | | — | % | | — | % |
Expected term (in years)(2) | 6.30 | | 6.28 | | 6.14 |
| Risk-free interest rate | 3.6 | % | | 2.0 | % | | 0.7 | % |
| Weighted-average grant-date fair value per option | $6.94 | | $74.85 | | $178.41 |
(1) Measured using the Company's historical data, market option volatility and selected high-growth guideline companies and considering the risk factors that would influence the range of expected volatility because the Company does not have sufficient historical data to provide a reasonable basis upon which to estimate the expected volatility for the entirety of the term.
(2) Expected term represents the estimated period of time until an option is exercised and was determined using the simplified method because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.
Class A Units
During 2018, the Company granted certain employees Class A Units with service-based vesting over two- to four-year periods and a grant-date fair value of $18.58 per Class A Unit. The grantees entered into the Exchange Agreement under which each LLC Unitholder (and certain permitted transferees thereof) may receive shares of the Company's Class A common stock in
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
exchange for their LLC Units on a four-to-five conversion ratio, or cash at the option of the Company, subject to conversion ratio adjustments for stock splits, stock dividends, reclassifications, and similar transactions and subject to vesting.
A summary of the Class A Unit activity for the years ended December 31, 2023, 2022, and 2021 is as follows:
| | | | | | | | | | | |
| Class A Units |
| Number of Class A Units (in thousands) | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1, 2021 | 121 | | | |
| Granted | — | | | n/a |
| Exchanged | (36) | | | $ | 18.58 | |
| Forfeited | — | | | n/a |
Outstanding at December 31, 2021 | 85 | | | |
| | | |
| Granted | — | | | n/a |
| Exchanged | — | | | n/a |
| Forfeited | (6) | | | $ | 18.58 | |
Outstanding at December 31, 2022 | 79 | | | |
| | | |
| Granted | — | | | n/a |
| Exchanged | — | | | n/a |
| Forfeited | — | | | n/a |
Outstanding at December 31, 2023 | 79 | | | |
| | | |
Vested as of December 31, 2023 | 79 | | | $ | 18.58 | |
Expected to vest as of December 31, 2023 | — | | | n/a |
Class B Units
In March 2015, Carvana Group adopted the LLC Equity Incentive Plan. Under the LLC Equity Incentive Plan, Carvana Group could grant Class B Units to eligible employees, non-employee officers, consultants and directors with service-based vesting, typically four to five years. In connection with the completion of the IPO, Carvana Group discontinued the grant of new awards under the LLC Equity Incentive Plan, however the LLC Equity Incentive Plan will continue in connection with administration of existing awards that remain outstanding. Grantees may receive shares of the Company's Class A common stock in exchange for Class B Units on a four-to-five conversion ratio, or cash at the option of the Company, subject to conversion ratio adjustments for stock splits, stock dividends, reclassifications, and similar transactions and subject to vesting and the respective participation threshold for Class B Units. Class B Units do not expire. There were no Class B Units issued during the years ended December 31, 2023, 2022, and 2021. As of December 31, 2023, outstanding Class B Units had participation thresholds between $0.00 to $12.00.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of the Class B Unit activity for the years ended December 31, 2023, 2022, and 2021 is as follows:
| | | | | | | | | | | | | | | |
| Class B Units | | |
| Number of Class B Units (in thousands) | | Weighted-Average Participation Threshold per Class B Unit | | | | |
Outstanding at January 1, 2021 | 3,163 | | | $ | 4.94 | | | | | |
| Granted | — | | | n/a | | | | |
| Exchanged | (535) | | | $ | 1.70 | | | | | |
| Forfeited | (1) | | | $ | 12.00 | | | | | |
Outstanding at December 31, 2021 | 2,627 | | | $ | 5.60 | | | | | |
| | | | | | | |
| Granted | — | | | n/a | | | | |
| Exchanged | (61) | | | $ | 5.75 | | | | | |
| Forfeited | — | | | n/a | | | | |
Outstanding at December 31, 2022 | 2,566 | | | $ | 5.60 | | | | | |
| | | | | | | |
| Granted | — | | | n/a | | | | |
| Exchanged | (34) | | | $ | 3.52 | | | | | |
| Forfeited | — | | | n/a | | | | |
Outstanding at December 31, 2023 | 2,532 | | | $ | 5.62 | | | | | |
| | | | | | | |
Vested as of December 31, 2023 | 2,532 | | | $ | 5.62 | | | | | |
Expected to vest as of December 31, 2023 | — | | | n/a | | | | |
NOTE 14 — NET EARNINGS (LOSS) PER SHARE
Basic and diluted net earnings (loss) per share is computed by dividing the net earnings (loss) attributable to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. Diluted net earnings (loss) per share is computed by giving effect to all potentially dilutive shares. For the years ended December 31, 2022 and 2021, potentially dilutive shares are excluded from diluted net earnings (loss) per share because they would have an anti-dilutive impact. Net earnings (loss) for all periods presented is attributable only to Class A common stockholders, due to no activity related to convertible preferred stock during those periods.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table presents the calculation of basic and diluted net earnings (loss) per share during the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
| (in millions, except number of shares, which are reflected in thousands, and per share amounts) |
| Numerator: | | | | | |
| Net income (loss) attributable to Carvana Co. Class A common stockholders - basic | $ | 450 | | | $ | (1,587) | | | $ | (135) | |
| Impact on net income of assumed conversions from LLC Units | (300) | | | — | | | — | |
Net income (loss) attributable to Carvana Co. Class A common stockholders - diluted | $ | 150 | | | $ | (1,587) | | | $ | (135) | |
| | | | | |
| Denominator: | | | | | |
| Weighted-average shares of Class A common stock outstanding | 109,347 | | | 100,848 | | | 82,839 | |
| Nonvested weighted-average restricted stock awards | (24) | | | (20) | | | (34) | |
| Weighted-average shares of Class A common stock outstanding - basic | 109,323 | | | 100,828 | | | 82,805 | |
| Dilutive effect of Class A common shares: | | | | | |
Options (1) | 979 | | | — | | | — | |
Restricted Stock Units and Awards (1) | 4,815 | | | — | | | — | |
Class A Units (2) | 83,976 | | | — | | | — | |
Class B Units (2) | 1,485 | | | — | | | — | |
| Weighted-average shares of Class A common stock outstanding - diluted | 200,578 | | | 100,828 | | | 82,805 | |
| | | | | |
| Net earnings (loss) per share of Class A common stock - basic | $ | 4.12 | | | $ | (15.74) | | | $ | (1.63) | |
| Net earnings (loss) per share of Class A common stock - diluted | $ | 0.75 | | | $ | (15.74) | | | $ | (1.63) | |
(1) Calculated using the treasury stock method, if dilutive
(2) Calculated using the if-converted method, if dilutive
Shares of Class B common stock do not share in the losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted net earnings (loss) per share of Class B common stock under the two-class method has not been presented.
The following table presents potentially dilutive securities, as of the end of the period, excluded from the computations of diluted net earnings (loss) per share of Class A common stock for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in thousands) |
| | | | | |
Options (1) | 976 | | | 1,265 | | | 1,066 | |
Restricted Stock Units and Awards (1) | 1,308 | | | 64 | | | 666 | |
Class A Units (2) | — | | | 82,963 | | | 89,773 | |
Class B Units (2) | — | | | 1,559 | | | 2,217 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
_________________________
(1) Represents number of instruments outstanding at the end of the period that were evaluated under the treasury stock method for potentially dilutive effects and were determined to be anti-dilutive.
(2) Represents the weighted-average as-converted LLC units that were evaluated under the if-converted method for potentially dilutive effects and were determined to be anti-dilutive.
NOTE 15 — INCOME TAXES
As described in Note 1 — Business Organization and Note 11 — Stockholders' Equity (Deficit), as a result of the IPO, Carvana Co. began consolidating the financial results of Carvana Group. Carvana Group is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Carvana Group is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Carvana Group is passed through to and included in the taxable income or loss of its members, including Carvana Co., based on its economic interest held in Carvana Group. Carvana Co. was formed on November 29, 2016 and did not engage in any operations prior to the IPO. Carvana Co. is taxed as a corporation and is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income or loss of Carvana Group, as well as any stand-alone income or loss generated by Carvana Co.
Net income (loss) before income taxes was $175 million, $(2.9) billion, and $(286) million for the years ended December 31, 2023, 2022, and 2021, respectively. The Company had an income tax expense of $25 million for the year ended December 31, 2023, and $1 million for both years ended December 31, 2022 and 2021.
The components of income tax expense are as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
| (in millions) |
| Federal - Current | $ | 25 | | | $ | 2 | | | $ | 2 | |
| Federal - Deferred | (4) | | | (1) | | | (1) | |
Federal - Total | 21 | | | 1 | | | 1 | |
| | | | | |
| State - Current | 4 | | | — | | | — | |
| State - Deferred | — | | | — | | | — | |
State - Total | 4 | | | — | | | — | |
| | | | | |
Income tax provision | $ | 25 | | | $ | 1 | | | $ | 1 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of the U.S. federal rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| | | | | | | | | | | | |
| | (dollars in millions) |
| Expected U.S. federal income taxes at statutory rate | $ | 37 | | | 21.0 | % | | $ | (607) | | | 21.0 | % | | $ | (60) | | | 21.0 | % |
| | | | | | | | | | | |
| Loss attributable to non-controlling interests | 61 | | | 34.9 | % | | 274 | | | (9.5) | % | | 32 | | | (11.2) | % |
| State taxes | 19 | | | 10.9 | % | | (64) | | | 2.2 | % | | (8) | | | 2.8 | % |
| Stock based compensation | — | | | — | % | | — | | | — | % | | (16) | | | 5.6 | % |
| Valuation allowance | (96) | | | (54.9) | % | | 398 | | | (13.7) | % | | 53 | | | (18.5) | % |
| Disallowed interest | 5 | | | 2.9 | % | | — | | | — | % | | — | | | — | % |
| Benefit of tax credits | (2) | | | (1.1) | % | | — | | | — | % | | — | | | — | % |
| Other | 1 | | | 0.6 | % | | — | | | — | % | | — | | | — | % |
| Income tax provision | $ | 25 | | | 14.3 | % | | $ | 1 | | | — | % | | $ | 1 | | | (0.3) | % |
Deferred income taxes reflect the net tax effects of temporary differences between the tax basis in an asset or liability and its reported amount under GAAP. These temporary differences result in taxable or deductible amounts in future years. The components of the Company’s deferred tax assets are as follows:
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2023 | | 2022 |
| | | | |
| | (in millions) |
| Deferred tax assets: | | | |
| Investment in Carvana Group | $ | 1,362 | | | $ | 1,471 | |
| Net operating loss carryforward | 299 | | | 451 | |
| Interest expense carryforward | 177 | | | 130 | |
| Tax credit carryforward | 4 | | | 6 | |
| Cancellation of debt income | 116 | | | — | |
| Other | 9 | | | 2 | |
| Total gross deferred tax assets | 1,967 | | | 2,060 | |
| Valuation allowance | (1,962) | | | (2,058) | |
| Total deferred tax assets, net of valuation allowance | $ | 5 | | | $ | 2 | |
| | | | |
| Deferred tax liabilities: | | | |
| Intangibles | $ | — | | | $ | (1) | |
| | | | |
| Total deferred tax assets and liabilities | $ | 5 | | | $ | 1 | |
| | | |
As of December 31, 2023 and 2022, the Company had federal and state net operating loss carry forwards of $1.2 billion and $1.9 billion, respectively. Federal losses that arose prior to 2018 are anticipated to be fully utilized. Federal losses generated after 2017 will be carried forward indefinitely.
As described in Note 11 — Stockholders' Equity (Deficit), during the year ended December 31, 2023, the Company acquired less than 0.1 million LLC Units in connection with exchanges with LLC Unitholders. The Company also issued 7.2 million shares of Class A common stock and received gross proceeds of $336 million under the ATM program. The Company utilized the proceeds from the issuance of Class A common stock to purchase 8.9 million newly issued Class A units in Carvana Group. As a result, the Company recognized a gross deferred tax asset of less than $1 million associated with the
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
basis difference in its investment in Carvana Group which is reflected as an increase to additional paid-in capital in the accompanying statements of stockholders' equity (deficit). During the year ended December 31, 2022, the Company acquired less than 0.1 million LLC Units in connection with exchanges with LLC Unitholders. On April 26, 2022, the Company issued 15.625 million shares of its Class A common stock and received net proceeds from the offering of $1.2 billion. The Company utilized the proceeds from the issuance of Class A common stock to purchase 19.5 million newly issued Class A units in Carvana Group. As a result, the Company recognized a gross deferred tax asset of $22 million associated with the basis difference in its investment in Carvana Group which is reflected as an increase to additional paid-in capital in the accompanying consolidated statements of stockholders' equity (deficit).
As described in Note 10 — Debt Instruments, the Company completed the Exchange Offers, whereby it exchanged validly tendered Senior Unsecured Notes for newly issued Senior Secured Notes. For U.S. tax purposes the Company is required to recognize cancellation of debt income (“CODI”) on the difference between the adjusted issue price of the debt exchanged and the fair market value of the new debt issued. The Company has determined that it should recognize $1.4 billion of CODI for tax purposes.
As described in Note 3 — Business Combinations, the Company acquired ADESA on May 9, 2022. The Company made an election under Section 336(e) of the United States Internal Revenue Code of 1986, as amended (the “Code”) to treat the acquisition as a deemed asset acquisition for income tax purposes and as such will receive a step up in asset basis and will be able to amortize the acquired Goodwill under Section 197 of the Code over a 15-year period. The total Goodwill amortization expense for the years ended December 31, 2023 and 2022 was $56 million and $37 million, respectively.
During the year ended December 31, 2023, management performed an assessment of the recoverability of deferred tax assets. Management determined, based on the accounting standards applicable to such assessment, that there was sufficient evidence as a result of the Company’s cumulative losses to conclude it was more likely than not that its deferred tax assets would not be realized and has recorded a full valuation allowance of $2.0 billion against its deferred tax assets. The Company has $5 million in deferred tax assets and less than $1 million in deferred tax liabilities from separate filing entities that are not available to offset its deferred tax assets. In the event that management was to determine that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be made which would reduce the provision for income taxes.
The Company recognizes uncertain income tax positions when it is more-likely-than-not the position will be sustained upon examination. As of the year ended December 31, 2023 and 2022, the Company has not identified any uncertain tax positions and has not recognized any related reserves.
The Company's effective tax rate for the years ended December 31, 2023 and 2022 was an expense of 14.3% and 0.0%, respectively. The effective tax rate for the year ended December 31, 2023 differs from the statutory tax rate primarily due to the current year income tax expense related to the impact of CODI, partially offset by a change to the valuation allowance on the Company's deferred tax assets.
Tax Receivable Agreement
Carvana Co. expects to obtain an increase in its share of the tax basis in the net assets of Carvana Group when LLC Units are exchanged by the LLC Unitholders and other qualifying transactions. As described in Note 11 — Stockholders' Equity (Deficit), each change in outstanding shares of Class A common stock results in a corresponding increase or decrease in Carvana Co.'s ownership of LLC Units. The Company intends to treat any exchanges of LLC Units as direct purchases of LLC interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that Carvana Co. would otherwise pay in the future to various taxing authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the IPO, the Company entered into a TRA. Under the TRA, the Company generally will be required to pay to the LLC Unitholders 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes directly or indirectly (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes created as a result of any sales or exchanges (as determined for U.S. federal income tax purposes) to or with the Company of their interests in Carvana Group for shares of Carvana Co.'s Class A common stock or cash, including any basis adjustment relating to the assets of Carvana Group and (ii) tax benefits attributable to payments made under the TRA (including imputed interest). The Company expects to benefit from the remaining 15% of any tax benefits that it may actually realize. To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
If the Internal Revenue Service or a state or local taxing authority challenges the tax basis adjustments that give rise to payments under the TRA and the tax basis adjustments are subsequently disallowed, the recipients of payments under the agreement will not reimburse the Company for any payments the Company previously made to them. Any such disallowance would be taken into account in determining future payments under the TRA and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments are disallowed, the Company’s payments under the TRA could exceed its actual tax savings, and the Company may not be able to recoup payments under the TRA that were calculated on the assumption that the disallowed tax savings were available.
The TRA provides that if (i) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur, (ii) there is a material breach of any material obligations under the TRA; or (iii) the Company elects an early termination of the TRA, then the TRA will terminate and the Company's obligations, or the Company's successor’s obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and that any LLC Units that have not been exchanged are deemed exchanged for the fair market value of the Company's Class A common stock at the time of termination.
As of December 31, 2023, the Company has recorded a $14 million TRA liability related to the estimated cash savings in U.S. federal, state or local tax related to the tax benefits utilized to offset recognized CODI, which is included in other liabilities in the accompanying consolidated balance sheets, and of which $11 million will be paid to related parties. For the remaining $1.6 billion TRA liability as of December 31, 2023, the Company has concluded, based on applicable accounting standards, that it was more likely than not that its deferred tax assets subject to the TRA would not be realized; therefore, the Company has not recorded an additional liability related to the tax savings it may realize from utilization of such deferred tax assets. If utilization of the deferred tax assets subject to the TRA becomes more likely than not in the future, the Company will record a liability related to the TRA which will be recognized as expense within its consolidated statements of operations.
Uncertain Tax Positions
Based on the Company's analysis of tax positions taken on income tax returns filed, no uncertain tax positions existed as of December 31, 2023, 2022, and 2021. Carvana Co. was formed in November 2016 and did not engage in any operations prior to the IPO and associated organizational transactions. Carvana Co. was not required to file 2016 tax returns and filed its first tax returns for the tax year 2017, the first year it became subject to examination by taxing authorities for U.S. federal and state income tax purposes. Carvana Group, LLC is treated as a partnership for U.S. federal and state income tax purposes and its tax returns are subject to examination by taxing authorities. Carvana Group has filed income tax returns for years through 2022. These returns are subject to examination by the taxing authorities in the respective jurisdictions, generally for three or four years after they were filed.
NOTE 16 — LEASES
The Company is party to various lease agreements for real estate and transportation equipment. For each lease agreement, the Company determines its lease term as the non-cancellable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company also assesses whether each lease is an operating or finance lease at the lease commencement date. Rent expense of operating leases is recognized on a straight-line basis over the lease term and includes scheduled rent increases as well as amortization of tenant improvement allowances.
Operating Leases
As of December 31, 2023, the Company is a tenant under various operating leases related to certain of its hubs, vending machines, inspection and reconditioning centers, auction locations, storage, parking, and corporate offices. The initial terms expire at various dates between 2024 and 2038. Many of the leases include one or more renewal options ranging from one to twenty years and some contain purchase options. The Company leases and subleases certain of its real estate to third parties. Lease and sublease income for the years ended December 31, 2023, 2022, and 2021 was $5 million, $3 million, and zero,
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
The Company's operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities on the accompanying consolidated balance sheets.
Refer to Note 7 — Related Party Transactions for further discussion of operating leases with related parties.
Finance Leases
The Company has finance leases for certain equipment in its transportation fleet. The leases have initial terms of two to five years, some of which include extension options for up to four additional years, and require monthly payments. The Company's finance leases are included in long-term debt on the accompanying consolidated balance sheets.
Lease Costs and Activity
The Company's lease costs and activity during the years ended December 31, 2023, 2022, and 2021 were as follows:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
| (in millions) |
| Lease costs: | | | | | |
| Finance leases: | | | | | |
| Amortization of finance lease assets | $ | 108 | | | $ | 95 | | | $ | 38 | |
| Interest obligations under finance leases | 17 | | | 19 | | | 8 | |
| Total finance lease costs | $ | 125 | | | $ | 114 | | | $ | 46 | |
| | | | | |
| Operating leases: | | | | | |
Fixed lease costs to non-related parties (1) | $ | 66 | | | $ | 129 | | | $ | 56 | |
| Fixed lease costs to related parties | 5 | | | 5 | | | 6 | |
| Variable short-term lease costs to related parties | — | | | 1 | | | 1 | |
| Total operating lease costs | $ | 71 | | | $ | 135 | | | $ | 63 | |
| | | | | |
| Cash payments related to lease liabilities included in operating cash flows: | | | | | |
| Operating lease liabilities to non-related parties | $ | 109 | | | $ | 83 | | | $ | 35 | |
| Operating lease liabilities to related parties | $ | 5 | | | $ | 5 | | | $ | 5 | |
| Interest payments on finance lease liabilities | $ | 18 | | | $ | 19 | | | $ | 8 | |
| | | | | |
| Cash payments related to lease liabilities included in financing cash flows: | | | | | |
| Principal payments on finance lease liabilities | $ | 115 | | | $ | 139 | | | $ | 56 | |
(1) The year ended December 31, 2022 includes $28 million of lease termination fees, net of amounts written off for the corresponding operating lease right-of-use assets and operating lease liabilities which were terminated.
Maturity Analysis of Lease Liabilities
The following table summarizes maturities of lease liabilities as of December 31, 2023:
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Operating Leases (1) | | |
| Finance Leases | | Related Party (2) | | Non-Related Party | | Total Operating | | Total |
| | | | | | | | | |
| (in millions) |
| 2024 | $ | 95 | | | $ | 3 | | | $ | 92 | | | $ | 95 | | | $ | 190 | |
| 2025 | 85 | | | 2 | | | 90 | | | 92 | | | 177 | |
| 2026 | 72 | | | 2 | | | 86 | | | 88 | | | 160 | |
| 2027 | 35 | | | 2 | | | 79 | | | 81 | | | 116 | |
| 2028 | 7 | | | 1 | | | 72 | | | 73 | | | 80 | |
| Thereafter | — | | | 1 | | | 225 | | | 226 | | | 226 | |
| Total minimum lease payments | 294 | | | 11 | | | 644 | | | 655 | | | 949 | |
| Less: amount representing interest | (27) | | | (2) | | | (159) | | | (161) | | | (188) | |
| | | | | | | | | |
| Total lease liabilities | $ | 267 | | | $ | 9 | | | $ | 485 | | | $ | 494 | | | $ | 761 | |
(1) Leases that are on a month-to-month basis, short-term leases, and lease extensions that the Company does not expect to exercise are not included.
(2) Related party lease payments exclude rent payments due under the DriveTime Lease Agreement and the DriveTime Hub Lease Agreement for locations where the Company shares space with DriveTime, as those are variable lease payments contingent upon the Company's utilization of the leased assets.
As of December 31, 2023 and 2022, none of the Company's lease agreements contain material residual value guarantees or material restrictive covenants.
Lease Terms and Discount Rates
The weighted-average remaining lease terms and discount rates as of December 31, 2023, 2022, and 2021 were as follows, excluding short-term operating leases:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 | | 2021 |
| Weighted average remaining lease terms (years) | | | | | |
| Operating leases | 7.8 | | 8.4 | | 9.2 |
| Finance leases | 3.5 | | 4.2 | | 4.4 |
| Weighted-average discount rate | | | | | |
| Operating leases | 7.1 | % | | 7.1 | % | | 7.2 | % |
| Finance leases | 5.9 | % | | 5.7 | % | | 5.4 | % |
NOTE 17 — COMMITMENTS AND CONTINGENCIES
Accrued Limited Warranty
As part of its retail strategy, the Company provides a 100-day or 4,189-mile limited warranty to customers to repair certain broken or defective components of each used vehicle sold. As such, the Company accrues for such repairs based on actual claims incurred to-date and repair reserves based on historical trends. The liability was $16 million and $19 million, as of December 31, 2023 and 2022, respectively, and is included in accounts payable and other accrued liabilities in the accompanying consolidated balance sheets. The expense was $87 million, $144 million, and $111 million for the years ended December 31, 2023, 2022, and 2021, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Purchase Obligations
The Company has purchase obligations for certain customary services related to operating a wholesale auction business of $139 million in aggregate over the next five years, as of December 31, 2023. These purchase obligations are recorded as liabilities when the services are rendered.
Legal Matters
From time to time, the Company is involved in various claims and legal actions that arise in the ordinary course of business for a publicly traded auto retail and e-commerce company. For example, the Company is currently a party to legal and regulatory disputes, including putative class action and shareholder derivative lawsuits, alleging, among other things, the violation of federal securities and antitrust laws and state laws regarding consumer protection, stockholders' rights and the titling and registration of vehicles sold to its customers. These disputes include, but are not limited to, In re Carvana Co. Securities Litigation, United States District Court for the District of Arizona (Case No. CV-22-2126-PHX-MTL); In re Carvana Co. Stockholders Litigation, Delaware Chancery Court (Case No. 2020-0415-KSJM); Taiae Bradley v. Carvana, LLC, United States District Court for the Eastern District of Pennsylvania (Case No. 2:22-cv-02525-MMB); Dana Jennings, et al. v. Carvana, LLC, United States District Court for the Eastern District of Pennsylvania (Case No. 5:21-cv-05400-EGS); Syretta Harvin et al. v. Carvana, LLC et al., United States District Court for the Eastern District of Pennsylvania (Case No. 2:23-cv-02068-MRP); and In re Carvana Co. Stockholders Litigation, Delaware Chancery Court (Case No. 2023-0600-KSJM).
In 2023, Neal Vestal v. Carvana Co., et al., Delaware Chancery Court (Case No. 2022-0609-KSJM), Mountaineer Motors of Lenoir, LLC v. Carvana, LLC, et al., United States District Court for the Western District of North Carolina (Case No. 5:22-cv-00171), and City of Warwick Retirement System v. Carvana Co., et al., Maricopa County, Arizona Superior Court (Case No. CV2022-013054) were all dismissed with prejudice, and Brittany Fischer v. Carvana, LLC, Lee County, Florida Circuit Court (Case No. 2022-007133-CA-01) was settled for an immaterial amount.
The Company believes the claims in these matters are not material or are without merit and intends to defend the matters vigorously. The Company also continues to work closely with government agencies to respond to their requests. It is not possible to determine the probability of loss or estimate damages, if any, for any of the above matters, and therefore, the Company has not established reserves for any of these proceedings. If the Company determines that a loss is both probable and reasonably estimable, the Company will record a liability, and, if the liability is material, disclose the amount of the liability reserved. If an unfavorable ruling or development were to occur, there exists the possibility of a material adverse impact on the Company's business, results of operations, financial condition or cash flows.
Future litigation may be necessary to defend the Company and its partners by determining the scope, enforceability and validity of third-party proprietary rights or to establish its proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 18 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company holds certain assets that are required to be measured at fair value on a recurring basis, and beneficial interests in securitizations for which it elected the fair value option. A description of the fair value hierarchy and the Company's methodologies are included in Note 2 — Summary of Significant Accounting Policies.
The following tables are a summary of fair value measurements and hierarchy level at December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| (in millions) |
Assets: | | | | | | | |
Money market funds | $ | 339 | | | $ | 339 | | | $ | — | | | $ | — | |
Beneficial interests in securitizations | $ | 366 | | | $ | — | | | $ | — | | | $ | 366 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| (in millions) |
Assets: | | | | | | | |
Money market funds | $ | 272 | | | $ | 272 | | | $ | — | | | $ | — | |
| Beneficial interests in securitizations | $ | 321 | | | $ | — | | | $ | — | | | $ | 321 | |
Money market funds consist of highly liquid investments with original maturities of three months or less and are classified in cash and cash equivalents and restricted cash in the accompanying consolidated balance sheets.
As of December 31, 2023 and 2022, the Company has purchase price adjustment receivables of $7 million and $37 million, respectively, which are carried at fair value and classified as other assets in the accompanying consolidated balance sheets. Under the MPSA, the purchaser will make future cash payments to the Company based on the performance of the finance receivables sold. The fair value of the purchase price adjustment receivables are determined based on the extent to which the Company’s estimated performance of the underlying finance receivables exceeds a mutually agreed upon performance threshold of the underlying finance receivables as of measurement dates specified in the MPSA. The Company develops its estimate of future cumulative losses based on the historical performance of finance receivables it originated with similar characteristics as well as general macro-economic trends. The Company then utilizes a discounted cash flow model to calculate the present value of the expected future payment amounts. Due to the lack of observable market data these receivables are classified as Level 3. The adjustments to the fair value of the purchase price adjustment receivables were a gain of $1 million and $14 million during the years ended December 31, 2023 and 2022, respectively, and are reflected in other (income) expense, net in the accompanying consolidated statements of operations.
Beneficial Interests in Securitizations
Beneficial interests in securitizations include rated notes and certificates of the securitization trusts, the same securities as issued to other investors as described in Note 9 — Securitizations and Variable Interest Entities. Beneficial interests in securitizations are initially treated as Level 2 assets when the securitization transaction occurs in close proximity to the end of the period and there is a lack of observable changes in the economic inputs. When the securitization transaction does not occur in close proximity to the end of the period and there have been observable changes in the economic inputs, beneficial interests in securitizations are classified as Level 3.
The Company's beneficial interests in securitizations include rated notes and certificates and other assets, all of which are classified as Level 3 due to the lack of observable market data. The Company determines the fair value of its rated notes based on non-binding broker quotes. The non-binding broker quotes are based on models that consider the prevailing interest rates, recent market transactions, and current business conditions. The Company determines the fair value of its certificates and other assets using a combination of non-binding market quotes and internally developed discounted cash flow models. The
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
discounted cash flow models use discount rates based on prevailing interest rates and the characteristics of the specific instruments. As of December 31, 2023 and 2022, the range of discount rates were 6.2% to 12.0% and 7.1% to 11.3%, respectively. Significant increases or decreases in the inputs to the models could result in a significantly higher or lower fair value measurement. The Company elected the fair value option on its beneficial interests in securitizations, which allows it to recognize changes in the fair value of these assets in the period the fair value changes. Changes in the fair value of the beneficial interests in securitizations are reflected in other (income) expense, net in the accompanying consolidated statements of operations.
For beneficial interests in securitizations measured at fair value on a recurring basis, the Company's transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis.
There were no transfers out of Level 3 during the years ended December 31, 2023 and 2022.
In December 2021, the Company began selling certain of its beneficial interests in securitizations that are not required to be retained by the Risk Retention Rules. For the years ended December 31, 2023 and 2022, the Company sold beneficial interests in securitizations for a purchase price totaling $13 million and $43 million, respectively.
The following table presents additional information about Level 3 beneficial interests in securitizations measured at fair value on a recurring basis for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in millions) |
| Opening Balance | $ | 321 | | | $ | 382 | |
| | | |
| Received in securitization transactions | 194 | | | 148 | |
Payments received | (150) | | | (172) | |
| Change in fair value | 14 | | | 6 | |
| Sales of beneficial interests | (13) | | | (43) | |
| Ending Balance | $ | 366 | | | $ | 321 | |
Fair Value of Financial Instruments
The carrying amounts of restricted cash, accounts receivable, accounts payable and accrued liabilities, and accounts payable to related party approximate fair value due to their respective short-term maturities. The carrying value of the short-term revolving facilities were determined to approximate fair value due to their short-term duration and variable interest rates that approximate prevailing interest rates as of each reporting period. The carrying value of notes payable and sale leasebacks were determined to approximate fair value as each of the transactions were entered into at prevailing interest rates during each respective period and they have not materially changed as of or during the years ended December 31, 2023 and 2022. The carrying value of the financing of beneficial interests in securitizations was determined to approximate fair value because in the event of a decline in the fair value of the pledged collateral of the financing, the repurchase price of the pledged collateral will be increased by the amount of the decline.
The fair value of the Senior Notes, which are not carried at fair value on the accompanying consolidated balance sheets, was determined using Level 2 inputs based on quoted market prices for the identical liability. The fair value of the Senior Notes as of December 31, 2023 and 2022 was as follows:
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
| (in millions) |
Carrying value, net of unamortized debt issuance costs, unamortized premium, and accrued PIK interest | $ | 4,566 | | | $ | 5,649 | |
| Fair value | $ | 3,866 | | | $ | 2,533 | |
The fair value of finance receivables, which are not carried at fair value on the accompanying consolidated balance sheets, was determined utilizing the estimated sales price based on the historical experience of the Company. Such fair value
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
measurement of the finance receivables, net is considered Level 2 under the fair value hierarchy. The carrying value and fair value of the finance receivables as of December 31, 2023 and 2022 were as follows:
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
| (in millions) |
| Carrying value | $ | 807 | | | $ | 1,334 | |
| Fair value | $ | 854 | | | $ | 1,437 | |
Investment in Equity Securities
In October 2021, the Company purchased Series A convertible preferred shares in Root, Inc. ("Root"), an equity security that does not have a readily determinable fair value. The Company elected to measure this investment using a measurement alternative pursuant to the accounting standards and recorded the investment at its cost of $126 million, which will subsequently be adjusted for observable price changes. The Company considered all relevant transactions since the date of its investment and has not recorded any impairments or upward or downward adjustments to the carrying amount of its investment in Root, as there have not been changes in the observable price of its equity interest through December 31, 2023. On August 12, 2022, Root effected a reverse stock split of its Class A common stock and Class B common stock at a ratio of 18:1, whereby each 18 shares of Root's Class A common stock and Class B common stock were automatically combined into one share of Class A common stock or Class B common stock, respectively (the "Reverse Stock Split"). The shares of Root's Class A common stock issuable to the Company on the conversion of the Series A convertible preferred shares were adjusted proportionally.
Also in October 2021, the Company entered into a commercial agreement with Root, under which the Root auto insurance products were to be embedded into the Company's e-commerce platform. In accordance with the provisions of the commercial agreement, the Company received eight tranches of warrants to purchase shares of Root's Class A common stock (the "Root Warrants"). On September 1, 2022, the integrated auto insurance solution, which embedded into the Company's e-commerce platform (the "Integrated Platform"), was completed. The first tranche of Root Warrants, consisting of 2.4 million shares of Root's Class A common stock, as adjusted pursuant to the Reverse Stock Split, became exercisable upon completion of the Integrated Platform, and is considered a derivative instrument. The second tranche of Root Warrants, consisting of 3.2 million shares of Root's Class A common stock, became exercisable on November 14, 2023, upon the achievement of certain insurance sales metrics through the Integrated Platform, and is considered a derivative instrument. The other tranches vest based on further insurance product sales through the Integrated Platform and are considered derivative instruments. The Company used a Monte Carlo simulation to estimate the fair value of these Root Warrants, which are classified as Level 3. At contract inception, the Company recognized an asset of $30 million for the Root Warrants and deferred revenue, classified in other assets and other liabilities, respectively in the accompanying consolidated balance sheets. During the year ended December 31, 2022, the Company determined it was probable that the volume of insurance products required to earn the Root Warrants would be achieved and recorded an additional $75 million of Root Warrants and deferred revenue based on the contract inception date fair value as determined by the Monte Carlo simulation. The Root Warrants and deferred revenue are classified in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets. The deferred revenue is recognized over the
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
expected contract performance period within other sales and revenues in the accompanying consolidated statements of operations.
The following table presents changes in the Company's Level 3 Root Warrants measured at fair value:
| | | | | | | | | | | |
| Years Ended December 31 |
| 2023 | | 2022 |
| | | |
| (in millions) |
Opening Balance | $ | 2 | | | $ | 6 | |
| Warrants to acquire Root's Class A common stock | — | | | 75 | |
Total unrealized gain (loss) | 3 | | | (79) | |
Ending Balance | $ | 5 | | | $ | 2 | |
The Company recognized the increase (decrease) in fair value in relation to the Root Warrants through other (income) expense, net in the accompanying consolidated statements of operations. The Company recognized an increase in fair value of $3 million and a decrease in fair value of $79 million during the years ended December 31, 2023 and 2022, respectively.
Derivative Instruments
The Company utilizes non-designated cash flow hedges including interest rate cap agreements to minimize its exposure to interest rate fluctuations on variable rate debt borrowings. Interest rate caps provide that the counterparty will pay the purchaser at the end of each contractual period in which the index interest rate exceeds the contractually agreed upon cap rate.
During the year ended December 31, 2023, the Company entered into two interest rate cap agreements to limit exposure to interest rate risk on variable rate debt associated with finance receivables. The two interest rate caps each had cap rates of 5.0%, notional amounts of $364 million and $236 million, and expiry date of July 2027 and April 2027, respectively.
The fair value of the Company's interest rate caps is impacted by the credit risk of both the Company and its counterparty. The Company has an agreement with its derivative financial instrument counterparty that contains provisions providing that if the Company defaults on the indebtedness associated with its derivative financial instrument, then the Company could also be declared in default on its derivative financial instrument obligation. In addition, the Company minimizes nonperformance risk on its derivative instrument by evaluating the creditworthiness of its counterparty, which is limited to major banks and financial institutions.
The Company does not apply hedge accounting to the interest rate caps and records all mark-to-market adjustments directly to other (income) expense, net in the accompanying consolidated statements of operations. The fair value of the interest rate caps is categorized as Level 2 in the fair value hierarchy as they are based on well-recognized financial principles and available market data. For the year ended December 31, 2023, the Company recognized mark-to-market adjustments of $2 million of expense within other (income) expense, net in the accompanying consolidated statements of operations. As of December 31, 2023, the interest rate caps were terminated and the value was zero in the accompanying consolidated balance sheets.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 19 — SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes supplemental cash flow information for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
| (in millions) |
| Supplemental cash flow information: | | | | | |
Cash payments for interest | $ | 538 | | | $ | 423 | | | $ | 152 | |
Cash payments for taxes | $ | 28 | | | $ | 3 | | | $ | 2 | |
| Non-cash investing and financing activities: | | | | | |
| | | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 1 | | | $ | 18 | | | $ | 102 | |
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 2 | | | $ | 375 | | | $ | 253 | |
| Property and equipment acquired under finance leases | $ | 51 | | | $ | 326 | | | $ | 152 | |
| Warrants to acquire Root Class A common stock | $ | — | | | $ | 75 | | | $ | 30 | |
| Equity-based compensation expense capitalized to property and equipment | $ | 8 | | | $ | 8 | | | $ | 7 | |
| | | | | |
| Fair value of beneficial interests received in securitization transactions | $ | 194 | | | $ | 148 | | | $ | 338 | |
| Reductions of beneficial interests in securitizations and associated long-term debt | $ | 110 | | | $ | 134 | | | $ | 38 | |
| | | | | |
| | | | | |
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying consolidated balance sheets that sum to the total of the same amounts shown in the accompanying consolidated statements of cash flows for all periods presented:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
| (in millions) |
| Cash and cash equivalents | $ | 530 | | | $ | 434 | | | $ | 403 | |
| Restricted cash | 64 | | | 194 | | | 233 | |
| Total cash, cash equivalents and restricted cash | $ | 594 | | | $ | 628 | | | $ | 636 | |
NOTE 20 — SUBSEQUENT EVENTS
Master Purchase and Sale Agreement
On January 11, 2024, the Company and the Ally Parties amended the MPSA to, among other things, reestablish the commitment by the Ally Parties to purchase up to $4.0 billion of principal balances of finance receivables between January 11, 2024 and January 10, 2025.
Finance Receivable Facilities
On January 19, 2024, the Company amended one of its agreements governing one of its short-term revolving credit facilities to, among other things, extend the maturity date to January 19, 2025.
