Tesla Motors, Inc. — Form 10-Q Summary
Business context and reporting period
Tesla Motors, Inc. designs, develops, manufactures and sells fully electric vehicles and electric-vehicle powertrain components. This unaudited quarterly report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Model S deliveries began in June 2012 and became the primary driver of revenue.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $561.8 million | $30.2 million |
| Automotive sales | $555.2 million | $19.2 million |
| Development services revenue | $6.6 million | $10.9 million |
| Gross profit | $96.3 million | $10.2 million |
| Gross margin | 17.1% | Not clearly stated in the filing |
| Loss from operations | $(5.6) million | $(88.8) million |
| Net income (loss) | $11.2 million | $(89.9) million |
| Basic EPS | $0.10 | $(0.86) |
| Cash flow from operations | $64.1 million | $(63.3) million, as restated |
| Capital expenditures | $57.7 million | $54.8 million, as restated |
| Free cash flow | $6.4 million | Not clearly stated in the filing |
- Approximately 4,900 Model S vehicles were delivered, with production exceeding 5,000 vehicles during the quarter.
- Revenue included $67.9 million of zero-emission vehicle credit sales and $17.1 million of other regulatory credit revenue.
- Research and development expense declined to $54.9 million from $68.4 million, while selling, general and administrative expense increased to $47.0 million from $30.6 million.
- Cash and cash equivalents were $214.4 million at March 31, 2013, compared with $201.9 million at December 31, 2012. Including $14.8 million in dedicated DOE restricted cash, management reported approximately $231.1 million of principal liquidity sources.
- Total debt under the DOE Loan Facility was approximately $439.6 million, including $50.8 million classified as current. Capital lease obligations totaled approximately $15.9 million.
- Customer deposits were $130.7 million at March 31, 2013, down from $138.8 million at year-end 2012.
Material changes versus the prior comparable period
- Revenue increased by $531.6 million, primarily because of Model S deliveries, regulatory credit sales and Toyota RAV4 EV powertrain sales.
- Gross profit increased substantially as Model S production scaled, manufacturing efficiency improved, component costs declined and regulatory credits contributed revenue without associated cost of revenues.
- The company reported its first quarterly net income since inception, although operating results remained slightly negative and the net income included a significant noncash benefit.
- Other income included a $10.7 million gain from eliminating the DOE warrant liability after the March 2013 loan amendment made vesting of the warrant no longer expected.
- Operating cash flow improved from a $63.3 million use of cash to $64.1 million of cash generation, supported by increased sales and working-capital management.
- The company restated Q1 2012 cash-flow line items to correct the classification of unpaid capital expenditures. The restatement shifted $13.2 million from investing cash outflows to operating cash outflows and increased disclosed noncash capital expenditures by $27.7 million; total cash, balance sheets and operating results were unaffected.
Guidance, outlook, commentary and risks
- Management expected production capacity of more than 400 Model S vehicles per week to support a goal of 21,000 Model S deliveries worldwide in 2013.
- European deliveries were planned for summer 2013 and Asian deliveries for later in 2013. Tesla acknowledged limited international delivery experience and the risk that delays could impair revenue and the 21,000-vehicle target.
- Management expected gross margin in the high teens for Q2 2013 and targeted 25% in Q4 2013, assuming continued cost reductions and no ZEV credit revenue. The Q2 outlook incorporated lower credit sales, a greater mix of 60 kWh vehicles and limited sales of discontinued 40 kWh vehicles.
- Model X production was planned for late 2014. The company expected approximately $200 million of capital expenditures in 2013, primarily for service, store and Supercharger expansion, new product development and remaining tooling needs.
- Tesla expected research and development and selling, general and administrative expenses to increase during the remainder of 2013.
- A new customer financing program with a Tesla residual-value guarantee was expected to require lease accounting for qualifying sales, potentially deferring revenue recognition. Tesla would face residual-value and vehicle-return risk despite not assuming customer credit risk.
- The DOE Loan Facility amendment accelerated maturity to December 15, 2017, required an approximately 1% principal repayment by June 15, 2013 and introduced potential excess-cash-flow prepayments beginning in 2015. Tesla was in compliance with applicable covenants at March 31, 2013.
- Key risks include sustaining high-volume Model S production and deliveries, dependence on numerous single-source suppliers, battery-cell availability and costs, warranty and product-liability exposure, regulatory restrictions on direct sales, international expansion, competition, potential cancellation of refundable customer deposits and the need for additional financing if projected cash flows are insufficient.
- The company accrued $24.1 million for warranty obligations and $5.3 million for environmental liabilities at the Fremont facility. Management stated that remediation costs could exceed current estimates.
- Disclosure controls were deemed ineffective because of a previously reported material weakness involving the presentation and disclosure of noncash capital expenditures in the cash-flow statement. Remediation procedures had begun but had not yet been proven effective.
Important facts for investors to verify
- Whether Model S production, international deliveries and the 21,000-unit 2013 delivery objective were achieved.
- Whether gross margins reached the stated high-teens Q2 expectation and 25% Q4 target without relying on regulatory credit revenue.
- The recurring operating profitability and cash-generation profile after excluding the $10.7 million noncash DOE warrant gain.
- The effect of residual-value-guaranteed financing and lease accounting on reported revenue, earnings and future vehicle-return obligations.
- Compliance with DOE debt covenants, required prepayments and the December 2017 maturity schedule.
- The adequacy of warranty reserves, environmental accruals and contingencies associated with product quality, recalls and the Fremont facility.
- Whether the material weakness in internal control over financial reporting was fully remediated and whether subsequent filings contain further cash-flow restatements.