Tesla Motors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2013. Tesla designed, manufactured and sold fully electric vehicles, primarily Model S, and supplied electric powertrain components and development services to other automakers. Model S deliveries began in June 2012, and Tesla delivered slightly more than 5,150 Model S vehicles during the second quarter of 2013.
Financial Highlights
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Total revenue | $405.1 million | $26.7 million | $966.9 million | $56.8 million |
| Automotive sales | $401.5 million | $22.1 million | $956.7 million | $41.3 million |
| Gross profit | $100.5 million | $4.8 million | $196.8 million | $15.0 million |
| Gross margin | 24.8% | 17.9% | Approximately 20.4% | Approximately 26.4% |
| Loss from operations | $(11.8) million | $(106.2) million | $(17.4) million | $(194.9) million |
| Net loss | $(30.5) million | $(105.6) million | $(19.3) million | $(195.5) million |
| Net loss per share | $(0.26) | $(1.00) | $(0.17) | $(1.86) |
| Operating cash flow | Not separately provided | Not separately provided | $25.9 million | $(127.6) million |
Q2 gross margin was 24.8%, up from 17.1% in the first quarter of 2013, reflecting lower component costs, higher production volume and manufacturing and supply-chain efficiencies. Six-month gross margin was lower year over year because the prior-year period included relatively limited early-stage revenue and cost structure differences.
Cash and cash equivalents were $746.1 million at June 30, 2013, compared with $201.9 million at December 31, 2012. Total assets were $1.89 billion and stockholders’ equity was $629.4 million. Customer deposits were $133.7 million.
Debt, Financing and Liquidity
- In May 2013, Tesla issued $660.0 million of 1.50% convertible senior notes due 2018, generating approximately $648.0 million of net proceeds. The notes had a carrying value of $578.7 million at quarter-end and an initial conversion price of approximately $124.52 per share.
- Tesla completed a common-stock offering and concurrent private placement that generated approximately $410.5 million of proceeds, including purchases by CEO Elon Musk.
- Tesla repaid the DOE loan facility in full, paying approximately $451.8 million, including principal, interest and a $10.8 million early repayment fee. The DOE warrant expired upon termination of the facility.
- Capital lease obligations totaled $14.9 million. The filing states that current liquidity and projected operating cash flows were expected to support current plans, but additional financing might be required if costs or investment needs exceeded expectations.
- Six-month investing cash outflows were $82.4 million, including $98.2 million of capital expenditures. Management expected approximately $150 million of capital expenditures during the second half of 2013.
Material Changes Versus the Prior Comparable Period
- Revenue increased sharply as Model S deliveries became the primary business driver; Q2 revenue rose by $378.5 million year over year.
- Q2 net loss improved by $75.1 million, and the six-month net loss improved by $176.2 million, primarily due to Model S revenue and gross profit.
- Research and development expense declined to $52.3 million in Q2 from $74.9 million, while selling, general and administrative expense increased to $60.0 million from $36.1 million as Tesla expanded its retail, service and operating infrastructure.
- Interest expense increased substantially to $20.1 million in Q2, principally because of the new convertible notes, DOE loan repayment costs and amortization of related debt costs.
- Operating cash flow turned positive for the first six months, helped by automotive sales, deferred revenue and resale-value-guarantee liabilities, despite increased receivables, inventory and operating lease vehicles.
- The prior-year six-month cash-flow statement was restated for the classification of unpaid capital expenditures. The restatement reduced reported operating cash flow by $16.5 million and increased investing cash flow by the same amount; total cash, the balance sheet and the income statement were unaffected.
Guidance, Outlook, Commentary and Risks
- Management maintained a goal of approximately 21,000 Model S deliveries worldwide in 2013, supported by increasing production from approximately 400 vehicles per week to an average of 500 vehicles per week.
- European Model S deliveries were expected to begin in August 2013, with Asian deliveries planned later in the year. Management expected average selling price to rise in the third quarter due to European Signature Series deliveries and a higher mix of 85 kWh vehicles and options.
- Management expected gross margin to reach a 25% target in the fourth quarter of 2013, assuming no ZEV-credit revenue and continued cost reductions and manufacturing efficiencies.
- Q2 included $51.5 million of ZEV-credit revenue and $17.9 million of other regulatory-credit revenue. Management expected ZEV-credit revenue to decline significantly relative to automotive sales as international sales increased.
- Tesla planned to start Model X production in late 2014 and expected higher research and development, selling and administrative expenses as it developed Model X, localized Model S and expanded stores, service centers and the Supercharger network.
- The resale-value-guarantee program covered more than 30% of Q2 Model S deliveries. Tesla deferred revenue and recorded operating lease vehicles for these transactions, which reduced near-term reported revenue and profit and exposed Tesla to potential resale-value and vehicle-return risk.
- Key risks included limited experience with high-volume manufacturing and international deliveries, dependence on numerous single-source suppliers, battery-cell availability and costs, product defects and recalls, warranty-estimate uncertainty, regulatory restrictions on direct vehicle sales, competition, foreign-exchange exposure and the need to achieve planned cost reductions.
- Tesla initiated a recall of slightly more than 1,000 Model S vehicles to inspect and repair rear-seat strikers. The filing stated that the cost was not material.
- An accrued environmental liability of $5.3 million related to pre-existing contamination at the Fremont facility remained outstanding; potential remediation costs could exceed current estimates.
- Management reported that disclosure controls and procedures were not effective as of June 30, 2013 because of a previously disclosed material weakness involving controls over the presentation and disclosure of non-cash capital expenditures in the cash-flow statement.
Important Facts for Investors to Verify
- Whether production and international delivery execution supported the 21,000-vehicle 2013 target.
- The sustainability of the 24.8% Q2 gross margin excluding ZEV credits and other unusual or low-cost revenue sources.
- The impact of increasing resale-value-guarantee participation on reported revenue, profit, lease assets and future vehicle-return obligations.
- Whether Tesla achieved the targeted 25% fourth-quarter gross margin while funding Model X, international expansion and infrastructure investment.
- The adequacy of warranty reserves, including the impact of the expanded Model S battery warranty and limited historical claims experience.
- Progress in remediating the internal-control material weakness and the effect of the cash-flow restatement on comparable analysis.
- Future liquidity requirements, including the $660.0 million convertible notes, planned capital expenditures and any need for additional financing.