DUBLIN — When Tesla reported its biggest-ever profit last month, the market reacted favourably. The company’s share price ticked up and the chatter around CEO Elon Musk’s behaviour died down. But as analysts dig into the numbers, some of them are ringing alarm bells. While the auto manufacturer did have a good quarter, it may not be quite so good as it seems. Some analysts have identified possible accounting tricks that may have been used to bump up the numbers, including reducing voluntary provisions for expenses and delaying supplier payments. This is not to say that the news out of the company isn’t good – it seems to be slowly getting its production lines working properly and sales of the Model 3 have been strong. It is, however, important to fully consider how much of the good news is real, and how much is not. – Felicity Duncan
How Tesla Made a Record Profit
By Charley Grant
___STEADY_PAYWALL___
Tesla has produced a turnaround for the ages. Knowing how the company pulled it off is important for investors.
Last week, chief executive Elon Musk said the electric car maker was struggling for survival up until September. Turns out, Tesla produced its biggest profit ever that quarter.
A new regulatory filing from the company that came out on Friday should help investors reconcile these competing facts. There is no doubt that Tesla delivered a record number of cars, grew revenues by 70% from the second quarter and kept costs down. Tesla booked $271 million in pre-tax income in the quarter.
The biggest boost to profits came from the sale of government credits, which Tesla earns by producing clean energy products like electric cars and can be sold to other companies to satisfy regulatory requirements. Tesla booked $189.5 million in credit revenue in the quarter, an unusually high result. Tesla had booked a total of about $135 million in the first two quarters of the year. These credits are almost pure profit for Tesla.
Tesla’s earnings press release only mentioned $52 million in revenue from credits. The total amount was only revealed in Tesla’s 10Q regulatory filing on Friday, after a nearly 20% run in the stock. Companies have wide latitude in some areas of financial reporting and one is reserves that they set aside for future expenses. Predicting costs of defective products or lawsuits is difficult but when companies change the amount they set aside and enjoy an earnings boost as a result, it is worth watching.
In the third quarter, Tesla set aside $187 million in estimated warranty expenses, or about $2,242 per vehicle delivered. In the second quarter, that expense was $2,910 per car. That quarter was the first period where the Model 3 was Tesla’s best-selling product. Net income would have been about $56 million lower using the same figure as in the second quarter, according to analysts at UBS .
Tesla said the UBS calculation is inaccurate and that the provision should be lower for cheaper cars like the Model 3, and it needed to account for the reserves for solar panels and batteries it sells. But Tesla’s energy sales amounted to about 6% of sales in the third quarter. And cars have more ongoing service needs than batteries and solar panels do.
The car maker’s strong quarter did calm concerns about its debt levels. Tesla has $3 billion in cash but that is dwarfed by $3.5 billion in accounts payable, which rose $500 million in the quarter, and about $10 billion in debt. Tesla said it in its regulatory filing that it plans to spend between $2.5 billion and $3 billion in 2019 and 2020. This is necessary for Tesla’s plans to design and produce new models, build out its service infrastructure, and expand into China.
Tesla should make good use of the improved quarter and the rallying stock price to do what it has needed to do all year—raise money by selling stock. Investors may lose out but the extra cash is necessary for Tesla to succeed in its long-term goals.
Write to Charley Grant at [email protected]
