Tesla, Inc. annual report, FY2011

Tesla Motors, Inc. Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011, filed February 27, 2012. The request references 2011 Q4; the filing is an annual report but includes unaudited fourth-quarter results.

Business Context

Tesla designed, developed, manufactured and sold fully electric vehicles and electric powertrain components. The Tesla Roadster remained the primary vehicle product, while the company invested heavily in the Model S sedan, the Tesla Factory in Fremont, California, and development of the Model X crossover. Tesla sold directly through company-owned stores, online channels and its service network, and supplied powertrain components and development services to Daimler and Toyota.

Approximately 2,150 Roadsters had been delivered by December 31, 2011, in more than 31 countries.
The Roadster production run ended in January 2012, with remaining inventory expected to be sold during 2012.
Model S customer deliveries were planned by July 2012, with approximately 5,000 deliveries targeted for 2012 and an annual production rate of approximately 20,000 vehicles beginning in 2013.
Model S reservations exceeded 8,000, supported by $90.0 million of refundable reservation payments.

Financial Performance and Position

Metric	2011	2010	Change
Total revenue	$204.2 million	$116.7 million	+75%
Automotive sales	$148.6 million	$97.1 million	+53%
Development services revenue	$55.7 million	$19.7 million	+183%
Gross profit	$61.6 million	$30.7 million	+101%
Gross margin	30.2%	26.3%	+3.9 percentage points
Research and development	$209.0 million	$93.0 million	+125%
Selling, general and administrative	$104.1 million	$84.6 million	+23%
Operating loss	$251.5 million	$146.8 million	Loss increased 71%
Net loss	$254.4 million	$154.3 million	Loss increased 65%
Net loss per share	$2.53	$3.04	Improved due primarily to share dilution

Fourth quarter: Revenue was $39.4 million, gross profit was $7.8 million and net loss was $81.5 million, compared with fourth-quarter 2010 revenue of $36.3 million, gross profit of $11.3 million and net loss of $51.4 million.

Cash and cash equivalents were $255.3 million, and short-term marketable securities were $25.1 million.
Total restricted cash was approximately $31.5 million, including $23.5 million in a dedicated Department of Energy account.
Total assets were $713.4 million and working capital was $181.5 million.
DOE Loan Facility principal outstanding was approximately $276.3 million, with $188.8 million remaining available for future drawdowns under the $465.0 million facility.
Total liabilities were $489.4 million and stockholders’ equity was $224.0 million.
Net cash used in operating activities was $114.4 million; net cash used in investing activities was $175.9 million; and net cash provided by financing activities was $446.0 million.
Capital expenditures were $197.9 million, primarily for the Tesla Factory, Model S tooling and manufacturing equipment. Cash flow before financing, approximated as operating cash flow less capital expenditures, was negative $312.3 million.
Accumulated deficit was $669.4 million at year-end. Management stated that losses were expected to continue until planned Model S volume production in 2013.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven by higher Roadster sales, increased Daimler powertrain shipments and substantially higher Toyota-related development services revenue.
Gross margin improved as Roadster costs declined, average selling prices increased and development-services activities expanded.
Research and development spending more than doubled because of Model S prototypes, engineering, testing, Model X work and Tesla Factory preparation.
Capital expenditures increased from $105.4 million to $197.9 million, while property, plant and equipment increased from $114.6 million to $298.4 million.
Operating cash burn improved from $127.8 million to $114.4 million, but financing remained essential to fund operations and manufacturing investment.
Liquidity increased materially following the June 2011 equity offering and private placements, as well as additional DOE loan draws. Tesla received $231.5 million from the 2011 public offering and concurrent private placements and $204.4 million from DOE borrowings.
Daimler’s Smart fortwo and A-Class powertrain production programs were completed by year-end, creating a near-term risk of lower powertrain revenue before Toyota RAV4 EV production began.

Guidance, Outlook and Management Commentary

Management expected Model S customer deliveries by July 2012, approximately 5,000 Model S deliveries during 2012 and annual Model S production of approximately 20,000 vehicles beginning in 2013.
Management expected Model X production to begin in the fourth quarter of 2013, with significant deliveries in early 2014 and an annual production target of approximately 10,000 to 15,000 vehicles.
Management expected 2012 capital expenditures to be comparable to 2011, focused mainly on Model S and Model X development and manufacturing activities.
Management expected liquidity sources and anticipated operating cash flows to provide adequate funding until profitability in 2013, but acknowledged that delays, cost overruns or failure to draw DOE funds could require additional financing.
Toyota was expected to pay approximately $100 million from 2012 through 2014 for RAV4 EV powertrain systems, subject to delivery and specification requirements. No payments or revenue had been recognized under the supply agreement as of December 31, 2011.
In February 2012, Tesla received an additional $14.4 million DOE loan draw at interest rates ranging from 0.9% to 1.4%.

Key Risks, Contingencies and Unusual Items

Model S execution risk: Tesla had limited experience with high-volume vehicle manufacturing, and final design, supplier qualification, testing and factory commissioning were still in progress.
Liquidity and financing risk: The company remained dependent on DOE loan availability, equity financing and continued access to reservation payments. DOE borrowing was subject to milestones, financial covenants, security interests and other restrictions.
Reservation cancellation risk: Model S reservations were refundable until customers entered purchase agreements; significant cancellations could reduce liquidity and future revenue.
Supply-chain risk: Model S used more than 2,000 purchased parts sourced from more than 200 suppliers, many of which were single-source suppliers. Tesla had qualified only one supplier for selected battery cells.
Battery and product-safety risk: Lithium-ion battery failures, vehicle defects, recalls or adverse publicity could lead to liability, redesign costs, lost sales and reputational damage. Warranty reserves were $6.3 million at year-end.
Regulatory risk: New EPA range-testing methodologies could reduce advertised Model S range by up to 30% compared with Tesla’s steady-speed estimates and could contribute to reservation cancellations.
Environmental contingency: Tesla accrued $5.3 million for environmental liabilities at the Fremont facility. Under its agreement with NUMMI, Tesla was responsible for the first $15.0 million of certain remediation costs over ten years, with NUMMI responsible for the next $15.0 million subject to specified terms.
Customer concentration: Accounts receivable were concentrated with Toyota and Daimler, representing 52% and 38%, respectively, of total accounts receivable at year-end.
Tax assets: Tesla recorded a full valuation allowance against U.S. deferred tax assets because realization was not considered more likely than not. Federal and California net operating loss carryforwards were approximately $605 million and $352 million, respectively.
Unusual accounting item: The DOE warrant liability was remeasured at fair value, producing a $2.8 million expense in 2011. Stock-based compensation expense was $29.4 million.
PricewaterhouseCoopers issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2011.

Investor Verification Checklist

Verify actual Model S launch timing, production ramp, deliveries, cancellations and conversion of refundable reservations into vehicle sales.
Reconcile future DOE loan drawdowns, covenant compliance, debt-service requirements and the remaining $188.8 million facility availability.
Assess whether Toyota RAV4 EV revenue and Daimler-related programs offset the expected Roadster production wind-down.
Monitor gross margin after Model S commercialization, including warranty, battery, logistics, manufacturing overhead and raw-material costs.
Evaluate cash burn, capital expenditures and the timing of profitability relative to management’s 2013 expectation.
Review single-source supplier exposure, Panasonic battery supply, production tooling readiness and potential cost overruns.
Track reservation cancellation rates and the liquidity impact of potential refunds.
Review regulatory range labeling, vehicle safety approvals, environmental remediation exposure and any product recalls or litigation.