Tesla Motors, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing was signed November 8, 2013. Tesla designs, manufactures and sells fully electric vehicles and electric-vehicle powertrain components. Model S production and deliveries were the primary growth driver, with European deliveries beginning in August 2013.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $431.3 million | $50.1 million | $1.398 billion | $106.9 million |
| Automotive sales | $430.2 million | $50.0 million | $1.387 billion | $91.3 million |
| Gross profit (loss) | $102.9 million | $(8.8) million | $299.7 million | $6.2 million |
| Gross margin | 23.9% | Negative | Not clearly provided | Not clearly provided |
| Operating loss | $(30.6) million | $(108.5) million | $(47.9) million | $(303.4) million |
| Net loss | $(38.5) million | $(110.8) million | $(57.8) million | $(306.3) million |
| Net loss per share | $(0.32) | $(1.05) | $(0.49) | $(2.91) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $128.2 million | $(228.6) million |
| Capital expenditures | Not provided quarterly | Not provided quarterly | $174.8 million | $175.2 million |
- Q3 deliveries were slightly over 5,500 Model S vehicles, compared with slightly over 5,150 in Q2 2013. Management stated that production was approximately 550 vehicles per week.
- Q3 automotive sales included $10.4 million of zero-emission vehicle credit revenue and $14.8 million of other regulatory credit revenue. Nine-month ZEV credit revenue was $130.0 million.
- Research and development expense was $56.4 million in Q3, down from $61.9 million; nine-month expense was $163.5 million, down from $205.1 million.
- Selling, general and administrative expense was $77.1 million in Q3, up from $37.8 million; nine-month expense was $184.1 million, up from $104.5 million, reflecting expansion of stores, service centers, Superchargers and international operations.
- Cash and cash equivalents were $795.1 million at September 30, 2013, compared with $201.9 million at December 31, 2012. Including current restricted cash, management cited liquidity of approximately $796.4 million at quarter-end.
- Total assets were $2.166 billion and total liabilities were $1.525 billion at September 30, 2013. Stockholders’ equity was $564.2 million.
- Inventory increased to $347.5 million from $268.5 million at year-end 2012, while operating lease vehicles, net, increased to $268.8 million from $10.1 million.
Material changes versus prior comparable periods
- Revenue growth was driven by the Model S production ramp, European deliveries, regulatory credit sales and Toyota RAV4 EV powertrain sales.
- Gross profit improved substantially from a Q3 2012 gross loss of $8.8 million to $102.9 million, reflecting higher Model S volumes, credit sales and manufacturing and supply-chain efficiencies.
- Operating and net losses narrowed materially, but Tesla remained unprofitable in Q3 and for the first nine months of 2013.
- Operating cash flow improved from an outflow of $228.6 million in the first nine months of 2012 to an inflow of $128.2 million, aided by deferred revenue, resale value guarantee liabilities and other working-capital changes.
- Financing activities provided $624.9 million in the first nine months, including $660.0 million of convertible notes, $415.0 million from common-stock offerings, and $120.3 million from warrants. Tesla used $452.3 million to repay the DOE loan facility in full.
- Q3 2012 cash-flow amounts were restated for the presentation of unpaid capital expenditures; the restatement did not affect previously reported cash balances, balance sheets or statements of operations.
Debt, liquidity and unusual items
- In May 2013, Tesla issued $660.0 million of 1.50% convertible senior notes due 2018 and received approximately $648.0 million of net proceeds. The initial conversion price was approximately $124.52 per share.
- Because stock-price conditions were met, holders could convert the notes during Q4 2013. The $582.5 million carrying value was classified as a current liability and $77.5 million was classified as mezzanine equity. As of the filing date, no notes had been converted.
- Tesla purchased convertible note hedges for $177.5 million and sold warrants for $120.3 million, intended to reduce potential dilution up to an effective conversion price of approximately $184.48 per share.
- The DOE loan facility was fully repaid in May 2013, including an early repayment fee and related interest. The DOE warrant expired and generated a $10.7 million fair-value gain during the first nine months.
- Tesla offered a resale value guarantee on qualifying Model S purchases financed through specified banking partners. At September 30, the company recorded $160.8 million of deferred revenue, $159.0 million of resale value guarantee liability and $262.8 million of operating lease vehicles related to the program.
- The resale value guarantee applied to approximately 44% of North American Model S deliveries in Q3. Management estimated guaranteed resale values at approximately 50% of the base vehicle price and 43% of option prices.
- Warranty reserves were $53.7 million at September 30, 2013. The filing cautions that limited Model S warranty history could require material future adjustments.
Guidance, outlook and management commentary
- Management maintained its expectation of 21,500 worldwide Model S deliveries in 2013, subject to production and international delivery execution.
- Management expected Q4 gross margin to reach 25%, assuming no ZEV credit revenue, supported by cost reductions and manufacturing efficiencies.
- Management expected Q4 R&D expense to increase approximately 25% sequentially and SG&A expense approximately 20% sequentially.
- Planned Q4 capital expenditures were approximately $75 million to $85 million, implying approximately $250 million of capital expenditures for full-year 2013.
- Initial Model X production was planned for late 2014, with a ramp to full production by Q2 2015. Asian Model S deliveries were planned for 2014.
- Tesla expected current liquidity and projected operating cash flow to fund its plans, but stated that additional financing could be required if cash needs or operating conditions deteriorate.
- An October 2013 amendment with Panasonic extended the supply agreement through December 31, 2017 and provided for a minimum purchase of 1.8 billion lithium-ion battery cells from 2014 through 2017.
Key risks, contingencies and control matters
- Production and delivery targets depend on ramp execution, supplier capacity, battery-cell availability, quality control and international logistics. Most vehicle components were sourced from single suppliers.
- The resale value guarantee creates exposure to lower-than-estimated residual values and higher-than-expected vehicle returns, while deferring revenue recognition and adversely affecting near-term reported results.
- Regulatory credit revenue is expected to decline relative to automotive sales as Tesla expands outside the United States; management stated that the business model is not dependent on such credits.
- Convertible-note conversion or a fundamental-change repurchase could require substantial cash payments and potentially shares, adversely affecting liquidity, cash flow and dilution.
- Tesla remains exposed to product defects, recalls, warranty claims, battery safety issues, product liability, intellectual-property claims and environmental remediation costs at the Fremont facility. The company had accrued $5.3 million for environmental liabilities.
- The filing identifies a material weakness in internal control over financial reporting related to the presentation and disclosure of non-cash capital expenditures in the cash-flow statement. Disclosure controls and procedures were therefore considered ineffective as of September 30, 2013.
- Tesla faces regulatory uncertainty over direct vehicle sales, international homologation, government incentives, environmental requirements and the expansion of its Supercharger and service networks.
Investor verification checklist
- Verify Model S deliveries, production rates and the ability to meet the 21,500-vehicle 2013 target.
- Assess Q4 gross-margin performance excluding regulatory credits and the sustainability of stated manufacturing cost reductions.
- Track regulatory-credit revenue and its effect on gross profit and cash flow.
- Monitor resale value guarantee penetration, deferred revenue, vehicle returns and residual-value assumptions.
- Review the cash impact and dilution implications of any convertible-note conversions or fundamental-change events.
- Confirm remediation of the material weakness in cash-flow reporting controls and any subsequent restatements.
- Evaluate battery-cell supply, single-source supplier dependence, warranty claims, recalls and progress toward Model X and Asian-market launches.