Scant Liquidity, Continued Spending And Inflated Deposits Highlight Tesla’s 10-Q Disclosures
After the lovefest that was Tesla’s second quarter earnings call, I was waiting eagerly for Tesla’s 10-Q. It was one of the least revealing earnings calls I have listened to in 26 years of following stocks and, as is its practice, Tesla waited several days after its earnings release to file its 10-Q. It was filed Monday, and there were several interesting revelations, none of which was broached on the call.
Tesla only had $230 million remaining under its credit agreement at June 30th, its main source of cash funding. I broke the story in Forbes in May that Tesla had amended its credit agreement to allow for the inclusion of the Fremont factory and vehicles in transit to its Dutch processing facility. It would appear that, as June 30th, Tesla had not yet done that. So, of the $1.83 billion available under Tesla’s credit agreement, $1.598 billion was drawn as of June 30th.
That is not enough cushion for a global automaker; not nearly enough. If the call taught us anything it is that Elon Musk has no idea what the legal definition of “force majeure” is, but he was getting at the crucial point. In the world of carmaking, stuff happens. With no margin of safety, Tesla is riskier than ever as a business entity.
Tesla’s much-hyped deposits figure contains funds that are not deposits at all, and thus analysts are overstating the amount of true consumer payments for Tesla cars. Tesla’s adoption of new FASB accounting standard for revenue recognition (ASC 606) this year serves to inflate deposits, as service plans that can be cancelled are now counted as deposits. That added $58.5 million to Tesla’s reported deposit figure, so an apple-to-apples deposit figure for June 30th would have been $883.6 million, not the reported $942.1 million.
What’s really interesting, though is what else is in the deposit line. From the 10-Q:
Customer deposits primarily consisted of cash payments from customers at the time they place an order or reservation for a vehicle or an energy product and any additional payments up to the point of delivery or the completion of installation, including the fair values of any customer trade-in vehicles that are applicable toward a new vehicle purchase.
The value of trade-ins are counted as deposits? Really? Any balance sheet is a snapshot, of course, but how many Priuses, Leafs, BMW 3-Series (all listed by Tesla management among the top 5 trade-ins for Model 3s) were counted as deposits as of June 30th? Even 1,000 cars with an auction value of $25,000 would have added $25 million to Tesla’s deposit figure.
When one also realizes that orders for the Model S, Model X, Powerwall and Roadster are also included in that already-inflated deposits figure, the math required to back out a figure of 420,000 reservations for the Model 3 just does not add up. As Tesla has switched to a configure-to-order model (for $2,500 per car) from a reservations model for the Model 3, the third quarter figures will be confusing, anyway. The bottom line is, though, those divining an “order book” for Model 3s of “over 400,000 units” are miscalculating.
Tesla management predicted that the current capital expenditure rate of $2.5 billion an annualized basis ($625 million per quarter) would prevail through mid-2019. CFO Deepak Ahuja had indicated the $2.5 billion rate would hold through the end of the year, but the 10-Q was the first glimpse of Tesla’s planning for 2019.
Assuming that capex rate and the company’s guided figure for third quarter interest expense of $170 million, Tesla will have to produce at least $800 million in operating cash flow in a given quarter to create economic value. Operating cash flow in the second quarter was (-$130 million) in comparison.
Given Tesla’s expanding revenue base and the large sums being thrown at Gigafactories 1 and 2, that doesn’t leave much for what we analysts call “growth capex.” Tesla’s future product plans include the Model Y, Tesla Semi and locally-produced cars in China, but I don’t believe that Tesla can fund any (let alone all) of those projects with a $625 million quarterly spend. While Musk has stated that local financing sources would be used for the construction of the China plant, there still has to be a corporate cash commitment to launch any such project.
I’ll have more on Tesla 10-Q disclosures in my Forbes column tomorrow.