Tesla Motors, Inc. 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. Tesla designed, developed, manufactured and sold fully electric vehicles and electric powertrain components. The company commenced Model S customer deliveries in June 2012 while continuing to sell remaining Tesla Roadsters and supply powertrain systems and development services to Toyota and Daimler.
Financial performance and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $26.7 million | $58.2 million | $56.8 million | $107.2 million |
| Automotive sales | $22.1 million | $39.0 million | $41.3 million | $72.7 million |
| Development services revenue | $4.6 million | $19.1 million | $15.5 million | $34.5 million |
| Gross profit | $4.8 million | $18.5 million | $15.0 million | $36.5 million |
| Gross margin | 17.9% | 31.8% | 26.4% | 34.1% |
| Operating loss | $106.2 million | $58.7 million | $194.9 million | $106.1 million |
| Net loss | $105.6 million | $58.9 million | $195.5 million | $107.8 million |
| Basic and diluted loss per share | $1.00 | $0.60 | $1.86 | $1.12 |
Research and development expense increased to $74.9 million in Q2 from $52.5 million, while selling, general and administrative expense increased to $36.1 million from $24.7 million. The increases reflected Model S pre-production, manufacturing readiness, testing, hiring, store expansion and service infrastructure.
At June 30, 2012, cash and cash equivalents were $210.6 million, compared with $255.3 million at December 31, 2011. Total assets were $776.9 million and stockholders’ equity was $62.2 million. Reservation payments for undelivered vehicles were $133.4 million, up from $91.8 million at year-end; these amounts were recorded as current liabilities and remain subject to cancellation until specified purchase conditions are met.
Property, plant and equipment increased to $421.9 million from $298.4 million, primarily due to Model S manufacturing equipment, tooling and construction. Inventory increased to $66.7 million from $50.1 million.
For the six months, operating cash flow was negative $111.1 million, compared with negative $65.8 million in the prior-year period. Investing cash flow was negative $98.7 million, including $129.3 million of property and equipment purchases. Financing cash flow was positive $165.0 million, primarily from $155.5 million of DOE loan drawdowns. Free cash flow was not yet positive.
Long-term debt, including the current portion, totaled approximately $431.8 million at June 30, 2012, primarily under the Department of Energy loan facility. Capital lease obligations totaled $7.2 million. Approximately $33.3 million remained available for future DOE drawdowns at quarter-end. On August 2, 2012, Tesla received an additional $31.8 million DOE drawdown at a 1.0% interest rate.
Material changes versus the prior comparable period
- Q2 revenue declined 54% year over year, reflecting completion of Daimler Smart fortwo and A-Class EV programs, reduced Roadster sales in North America, and completion of major Toyota development milestones.
- Gross margin fell to 17.9% from 31.8%, driven by lower sales volumes and transition costs associated with Model S and Toyota RAV4 EV powertrain production.
- Q2 operating loss increased 81% and six-month net loss increased 81% year over year as operating expenses rose faster than revenue.
- Research and development expense increased 42% in Q2 and 53% for the first six months, while SG&A increased 46% in Q2 and 36% for the first six months.
- Operating cash use increased to $111.1 million for the first six months from $65.8 million, and investing cash use increased substantially because of manufacturing capital expenditures.
- Model S manufacturing began in June 2012; approximately 40 production vehicles had been manufactured as of July 25, 2012.
- Tesla completed its current-generation Roadster production run in January 2012 and had delivered more than 2,350 Roadsters through June 30, 2012.
Guidance, outlook, commentary and risks
- Management targeted approximately 5,000 Model S deliveries in 2012, including approximately 500 vehicles in Q3 and 4,500 in Q4.
- Management expected to approach free cash flow break-even in Q4 2012, based on its delivery target and other stated assumptions.
- Tesla projected approximately $210 million of aggregate 2012 capital expenditures.
- Management targeted a 25% gross margin in 2013 and expected profitability in 2013, but emphasized that these expectations depended on successful production ramp-up, cost reductions and customer acceptance.
- Management expected Q3 2012 automotive gross margin to be slightly negative because factory fixed costs would be spread over limited production, with significant improvement expected in Q4 as volumes increased.
- Operating expenses were expected to remain significant; SG&A was expected to increase 10% to 15% during the remainder of 2012, while R&D expense was expected to decline approximately 20% in Q3 as certain Model S costs shifted into cost of automotive sales.
- Key risks included delays in Model S production ramp-up, supplier concentration and single-source components, battery safety and availability, manufacturing cost overruns, product defects and recalls, uncertain demand for electric vehicles, regulatory restrictions on direct sales, reservation cancellations and the need for additional financing.
- The DOE facility was secured by substantially all of Tesla’s property and contained financial and operating covenants. A covenant breach or failure to satisfy draw conditions could prevent further borrowing or accelerate repayment.
- Tesla had accrued $5.3 million for environmental liabilities associated with the Fremont facility, but stated that ultimate remediation costs could change materially.
- The company reported no material changes adversely affecting internal control over financial reporting, and management concluded that disclosure controls were effective at the reasonable assurance level.
- After quarter-end, the board approved a proposed Elon Musk option grant consisting of ten tranches, each equal to 0.5% of outstanding common stock, subject to operational and market-capitalization milestones.
Most important facts for investors to verify
- Whether Model S production and deliveries achieved the stated Q3 and Q4 targets and whether manufacturing costs declined as planned.
- Actual automotive gross margin, free cash flow and liquidity after the 2012 Model S ramp.
- Remaining availability, covenant compliance, collateral requirements and repayment schedule under the DOE loan facility.
- Reservation cancellation rates and the conversion of the $133.4 million reservation balance into vehicle deliveries and recognized revenue.
- Supplier capacity, quality performance and dependence on single-source battery and vehicle components.
- Warranty claims, product-quality issues, recalls and battery safety performance as the Model S fleet expands.
- Whether Toyota and Daimler powertrain programs generate the expected revenue and whether additional strategic partnerships are secured.
- Capital expenditure needs, financing requirements and potential dilution from future equity issuance or equity awards.
- Environmental remediation exposure at the Fremont facility and the status of any legal or intellectual-property claims.