Almost there but not out of the woods yet.

Good:

$1.3B cash from ops, $1B increase in receivables

Bad:

$2B current portion of debt coming due, $1.2B increase in payables

Still need stellar numbers (and cash) in Q4.

$2 Billion? I'm only aware of the $920 Million due in March 2019. Is there another major bond worth discussing?

> $1.2B increase in payables

That's a yearly increase. $500M-ish increase between Q2 -> Q3. I think its reasonable to expect payables to go up as they ramp up from 2000 M3/week to 4000 M3/week, but the number still gives me worry.

I think you're right to worry about these numbers. But its important to worry about the CORRECT numbers.

Actually there are a lot of bonds outstanding

Per http://ir.tesla.com/static-files/6db4f56e-1532-4cd6-b8dc-3ff... they have $230 million due in Nov 2018, $920 million due in March 2019, $560 million due in Nov 2019, $113 million due in Dec 2020, $1,380 million due March 2021, and $977.5 million due in March 2022. Plus coupons on all of these payable regularly between now and then.

By my count this totals $4.1805 billion. They claim to currently have $3 billion in cash and cash equivalents on hand. But there are various outstanding liabilities.

Given a GAAP profit in the $300 million+ range this quarter, and a projected European market twice the size of the American one, this may all be doable. But it is still a balancing act.

A lot of companies have a lot of bonds out. Its not necessarily unhealthy to keep some debt around, especially through the 2013 through 2017 timeframe when interest rates were abnormally low.

Elon will have to roll over the debt somehow: either into stock offerings or maybe into new bonds. The meager profits reported this quarter aren't anywhere near the amount they need to pay off those debts... even if the profits grow 2x or 3x larger in Q4 and Q1-2019.

But, paying off some of those debts will put the company into a stronger position.

>Its not necessarily unhealthy to keep some debt around, especially through the 2013 through 2017 timeframe when interest rates were abnormally low.

The Tesla bonds in question have a coupon of 5.3% and were sold into one of the lowest interest rate environments in history. They currently have an 8.5% yield. Rolling debt over on those terms is not fun.

According to financial theory, how you structure a company has no correlation with its success. Therefore the kind of debt financing that Elon is using is just fine.

Financial theory and reality tend to agree except in a crisis. Unfortunately crises do tend to come along periodically. How TSLA weathers the next one will be interesting to see.

The Modigliani-Miller 'theorem' is dangerous nonsense. It proves a fact about a model rather than a fact about the real world.

From Wikipedia "The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed". See anything wrong with this picture?

I agree with you that the grandparent misinterpreted the theorem as the Wikipedia article includes something similar to your reply:

"These results might seem irrelevant (after all, none of the conditions are met in the real world), but the theorem is still taught and studied because it tells something very important. That is, capital structure matters precisely because one or more of these assumptions is violated."

[0] https://en.wikipedia.org/wiki/Modigliani–Miller_theorem

But it's already painfully obvious that one or more of the assumptions is violated. That should only be surprising if you've spent years being indoctrinated by academic finance or economics.

What this isn't true. The theory says some debt is optimal due to taxes. However I am rusty on these courses.

Your comment got me interested and I was looking at this March 2021 bond issuance. Does anyone know how in the world Tesla was able to borrow over $1.3B at 1.25%?

There must be some special case here.

Who would loan money to Tesla below the rate they could get in risk free t-bills?

This is the bond in question. https://markets.businessinsider.com/bonds/tesla_inc-bond-202...

Its a convertible. It turns into shares instead of dollars at the end of its lifetime.

Furthermore, it was sold below par value. There's 1.25% coupon, but the overall yield is closer to 5% IIRC.

All but the Nov loans will most likely convert based on share price. Nov ‘18 will be paid per the conference call.

Your claim seems optimistic given that at the current after hours share price, only the December 2020 issue would convert. And just a few hours ago it would not have.

Yes, it is possible that in March Tesla could be trading around over 20% above what it was most of today, but it would be unwise to depend on it.

I'm not actually keen on the details of the March 2019 bond. A lot of people seem to think its a mandatory conversion (ie: it ALWAYS turns into stock).

If its a mandatory convertible, then Tesla pays it off in shares proportional to the value assuming Tesla was $360ish in price. So you "can't lose", you'll get 33% more stocks if TSLA was only $270 to ensure the bond-holder doesn't lose money.

I haven't been able to verify the status of the March 2019 convertible however. But just note that mandatory convertible vs non-mandatory is a big detail.

I believe that they are not mandatory.

First because articles like http://www.latimes.com/business/la-fi-musk-convertible-bonds... indicate that they are not. And also because the potential dilution indicated in the Tesla statement that I linked to shows zero dilution if the stock prices is not sufficient for them to convert.

But realizing the huge financial consequences for the company of having the stock price high does shed light on why Elon is so eager to push his stock price up. He would much rather pay in stock than cash.

Incidentally the LA Times article indicates that there is a lot more debt than just the issues I listed. That's a list of all of Tesla's convertible debt. But not all of it is convertible...

Err... they have $3B cash and that increased $731M Q3. So I don't see why there would be any short term issues with those other numbers.

They have $3B cash, but owe their suppliers a total of $3.5 Billion right now. (Accounts payable).

There's a LOT of assets / liabilities to juggle. Tesla also has $1.5 Billion of incoming cash (Accounts receivable), which is basically people who are currently in the process of paying Tesla right now.

But in any case: Tesla's liquid liabilities are larger than their liquid assets. Its a bad spot to be in for sure. Its solvable though, but the question is what does Tesla lose by solving it.

You forgot Tesla's $3.3 billion in inventory. Their liabilities are greater than their assets to the tune of $1.7 billion. That plus the $4.2 billion in bonds is $5.9 billion in debt.

Subtract the $3 billion in cash and they'll need to come up with $2.9 billion between now and March of 2022, which is $.2+ billion per quarter.

Edit - Double counted cash. It should be $.4+ billion per quarter.

I didn't mean to have a complete list. My only point is that "its complicated". There's a lot of moving parts here. Full details can be found on page 8 of the linked PDF.

> Their liabilities are greater than their assets to the tune of $1.7 billion. That plus the $4.2 billion in bonds is $5.9 billion in debt.

You're double-counting. Liabilities include debt. No need to double-count.

> Subtract the $3 billion in cash

You're double-counting, again. Assets include cash. Lets do this once, and correctly, shall we?

* Total current assets: $7,920,491 (thousands)

* Total current liabilities $9,775,324 (thousands)

That's a total shortfall of $1.85 Billion. Again, page 8 of the PDF provides these numbers.

> they'll need to come up with $2.9 billion between now and March of 2022, which is $.2+ billion per quarter.

Elon Musk has raised capital ever year, roughly to the tune of ~$1 Billion/ year. Either by convincing people to take on more debt for the company... OR by selling more shares out.

The only issue is if a recession hits between today and then, which would close capital markets.

Good point! Still, Tesla went from -$520 million to +$516 million in non-GAAP net income, and that's with the vast majority of 3s being sold in the US. Expanding to Canada and launching in Europe should be very profitable.

In terms of capital raises, this SA article posits why Tesla may not need as much capital going forward.

https://seekingalpha.com/article/4100718-teslas-unusual-sour...

What are "adjusted" earnings?

They take the "official" accounting earnings and add back in charges they either 1) don't feel represent the true financial position or 2) are one-off charges. In this case they back out stock-based compensation (like most companies), turning GAAP earnings of $311m into adjusted earnings of $516m. Voila!

It can also include the fines payable after settlement with SEC

Worth noting that Tesla didn't really experience those losses due its special stock issuance to Musk to cover the portion of the fine that was due to Tesla. The only material effect to Tesla's corporate finances from that debacle was Musk now has more concentrated equity ownership of the company.

I think that money helps on the cashflows side, but not in the income statement.

> Musk now has more concentrated equity ownership of the company

You mean Musk gained control through that, not lost it? How so? That's quite different an assumption from what I expected.

Correct. Details can be found discussed in the "Tesla" section of this link: https://www.bloomberg.com/opinion/articles/2018-10-22/front-...

Yes, it's an interesting result of corporate mismanagement, that he gets to sign off (with board approval, but let's be honest about the control they have) on even more equity stake. However, he did have to give up the chairmanship, so overall he lost control of the company though in this dimension (portion of equity ownership) it is an interesting curiosity and contradiction.