Business

Tesla’s Big Bill Coming Due For Purchased Property And Equipment

Background

In two prior articles, I made estimates of the amounts I believe Tesla (TSLA) owed for property, plant and equipment (P, P & E) already purchased. In these two articles, which are now locked, I estimated the amounts at about $1.2 billion at December 31, 2016, $1.8 billion at March 31, and about $2.2 billion at September 30, 2017.

I now update this figure and believe the amount owed as of December 31, 2017, was approximately $1.6 billion, in part due to a minor decrease in the balance in the fourth quarter, but mainly because Tesla recently changed some descriptive language in its financial statements, suggesting a different interpretation of some of the numbers they contain.

In this article, I do a comprehensive analysis of the issue, so referencing my prior locked articles is not necessary. However, if anyone would like to do so, they are A Capital Raise Could Be Around the Corner and Tesla Has $2.2 Billion Coming Due for Property and Equipment.

The Issue

When Tesla decides to purchase capital equipment or expand a manufacturing or sales and service facility, the purchase frequently doesn’t simply happen one day, with an asset getting added to the balance sheet and cash for the purchase going out the door. Instead, Tesla first signs a contract and commits to a purchase. At that stage, it would not show up on the balance sheet at all, but would simply be part of the total that Tesla reports in its footnotes for purchase commitments.

At a certain point in the process, Tesla is deemed to have taken title to the property or equipment, even if Tesla has not yet paid for it, in which case an offsetting liability for payment would appear. Frequently, the payment is not due for a period of time as Tesla explained in its 2016 year-end earnings release shareholder letter. Specifically, the letter said: “… we continue to negotiate more favorable payment terms with our capital equipment suppliers, pushing some payments closer to the start of Model 3 production and some payments beyond the start of production.”

In the related conference call, there was an exchange between Brian Johnson of Barclays Capital and Jason Wheeler, Tesla’s outgoing CFO at the time, further clarifying this point:

Brian A. Johnson – Barclays Capital, Inc

OK. So, those deferred capital expenditure payments are actually in the accounts payable or is it in more like an accrued liability line? Just housekeeping.

Jason S. Wheeler – Tesla, Inc.

It depends on if there’s – many payments have milestones set to them. So, when the piece of equipment is actually installed and up and running. And until you hit that milestone, you won’t see a payable.”

TSLA’s 10-K’s provide a bit of further clarification regarding this. It states:

“Accrued purchases reflected primarily liabilities related to the construction of Gigafactory 1, along with engineering design and testing accruals. As these services are invoiced, this balance will reduce and accounts payable will increase.”

So, there you have it. Initially the amount owed goes into a category called “accrued purchases” and then when the equipment is running and Tesla gets invoiced, it gets transferred to the “accounts payable” category. Simply add these two categories to determine the amount Tesla owes at any date for P, P & E already purchased.

Well, it’s not quite that simple. We only receive the accrued purchases number once per year in the 10-K and we are never told the exact amount of the payables that are related to P, P & E purchases vs. normal trade payables. As a result, this article is long and complicated with some estimates, rather than short and simple with exact numbers.

Current Status

Is any of this even relevant now that Tesla has the Model 3 line up and running? Shouldn’t everything have been paid for by now? Well, it hasn’t been, and in fact was the subject of an exchange between Tony Sacconaghi and the company on the most recent earnings conference call:

Antonio M. Sacconaghi – Sanford C. Bernstein & Co. LLC

Yes. Thank you. You commented in the shareholder letter that capital expenditures for 2018 were expected to be a bit higher than 2017. I’m wondering if you could tell us what exactly is in that, call it roughly, $3.5 billion. Are you going to get to full like 10,000 car per week capacity? Is that in the $3.5 billion? What will Gigafactory production be? And in the slightly more than $3.4 billion, is that also including the investments, Elon, that you mentioned on Model Y? So where exactly is this level of capital spending going to take us in 2018? And I have a follow-up, please.

Deepak Ahuja – Tesla, Inc.

Sure. I mean, our biggest โ€“ our very high level, sort of breakdown, our biggest investment is obviously in the Model 3. And that includes completion of the payments that we still have to make on the capacity we are putting in place now as well as significant investment in our required up front for the next phase of Model 3 production to 10,000 plus per week. So that’s, I would say, overall more than 50%. Way more than 50% is Model 3, and the rest is all the many other things we talked about, whether it’s energy storage, whether it’s –

Elon Reeve Musk – Tesla, Inc.

Primarily Y and energy storage.

Deepak Ahuja – Tesla, Inc.

And then our infrastructure spend, superchargers, stores, service centers, we want to significantly increase the service capacity, we want to significantly increase our supercharging capacity.

Determining The Amount Owed – A Rough Cut

From the discussion, it is clear that there’s a material amount due, much of it related to the current Model 3 line theoretically already in place. The one firm number we have is the $753.4 million of accrued purchases listed in the 2017 10-K. (Note 10; p. 91). In addition, there is the unknown accounts payable amount for P, P & E, which needs to be added to this amount. We do know that total accounts payable at December 31 was $2.39 bn. and that a significant portion of this is related to normal trade payables, while the remainder is the payables for P, P & E.

Although there is no way to get a particularly accurate number using this method, we can at least do a “reasonableness” test. Trade accounts should be no more than 50% of the subsequent quarter’s sales – to argue otherwise would suggest either that an extremely high proportion of the cost of a Tesla car is the component parts or that Tesla is delaying payments to suppliers.

With automotive sales revenue in Q1 likely to be less than the $2.4 bn. for Q4, this suggests that about half of the payables at December 31, or roughly $1.2 bn. is trade payables, while the remaining $1.2 billion is a reasonable estimate for the amount related to purchases of P, P & E. Adding this amount to the $753 million of Accrued Purchases at December 31 results in a total amount owed for property and equipment already on the balance sheet possibly approaching $2 bn.

Refining The Estimate Of Amount Owed

Beginning in 2014, Tesla began reporting a non-cash item at the bottom of its cash flow statements, titled Acquisition of property and equipment included in accounts payable and accrued liabilities. The cash flow statements provide three years of data, so this amount, defined in this way, was actually available starting January 1, 2012. (The minor amounts for earlier years also were reported although using a slightly different definition.) The definition indicates this is exactly the number we need to complete the puzzle, so I put together the following chart for the entire period of Tesla’s existence as a public company:

($MMs)
PERIOD

Increase in A/P and Accrued Liabilities in P, P & E.

YE 12/31/11 $16
YE 12/31/12 $45
YE 12/31/13 $39
YE 12/31/14 $254
YE 12/31/15 $267
YE 12/31/16 $664
YE 12/31/17 $914
Total $2,199

These figures suggest that Tesla actually had about $1.446 billion ($2.199 bn. – $753 million) of accounts payable for P, P & E at December 31. This figure is surprisingly high.

However, the plot thickens. I used the same methodology in my two earlier articles. The first one, posted on June 23, relied on the most recent financial statement available then, which was March 31, 2017. In that, this line item was defined exactly as I have stated above and as it had been every quarter for years previously. (i.e. Acquisition of property and equipment included in accounts payable and accrued liabilities.)

Interestingly, in the very next 10-Q, the one for June 30, the description of this line item changed to Acquisition of property and equipment included in liabilities, a potentially much more encompassing category. The historical numbers reported in that 10-Q didn’t change, however, so it was simply a change in the description. Based upon the fact that this change was made immediately after I highlighted this issue in an article, after remaining the same for years, I believe my article caused Tesla to realize the description had been inaccurate, and changed it.

This does raise the question of what other liabilities Tesla might be referring to for purchased P, P & E. One option is obligations under capital leases. This amount is not reported directly, but needs to be calculated by adding the total of debt and capital leases (both long term and short term) on the balance sheet ($10.212 billion), and then subtracting the carrying value of debt listed in Note 13 ($9.628 billion). This leaves a balance of $584 million.

Since these obligations are paid over a number of years and I’m attempting to estimate the amount of payables imminently due, I subtracted these from the total of $2.199 billion I estimated is owed for P, P & E. This leaves a balance of $1.615 billion for both payables and accrued liabilities. Since we know that accrued liabilities at December 31 were $753 million, this means payables for P, P & E were about $862 million at that date. Of course, this suggests that trade payables are somewhat higher than my “rough cut” above, and would be about $1.528 billion. ($2.39 bn. – $862 million) It becomes a bit of a game of “whack-a mole.”

There’s a fair amount of ambiguity in Tesla’s financial statements, along with changing and inexact definitions, which makes it impossible to come up with a specific number for the amount currently due for P, P & E already purchased. There may be other reasonable ways to parse the numbers and come up with a moderately different estimate. In prior articles, I attempted to confirm the reasonableness of my conclusions by examining gross additions to P, P & E and comparing that to total payments for P, P & E made.

Unfortunately, Tesla disposed of a fair amount of equipment at a loss of $105 million in 2017 (plus smaller amounts in earlier years), and the statements don’t show gross additions and removals to P, P & E, just net additions, causing this approach to be very inexact. Although my examination of these numbers confirms the general “reasonableness” of my estimates, the data has enough variability that there would be no benefit to discussing it here.

I look forward to any comments that may help me refine my estimates of the amounts due for P, P & E, along with the expected timing of such payments.

Where Does This Leave Us?

There are some important conclusions investors should draw from this discussion:

  • Recent conference calls and company statements make it clear that there’s a significant amount due for P, P & E already purchased.
  • We know that the minimum amount due at December 31 was $753 million of accrued purchases plus an additional amount of accounts payable, which I have estimated at $863 million. This is a total of more than $1.6 billion due soon. (My “rough cut” actually suggested closer to $2 billion.) In addition, there are ongoing expenditures related to P, P & E, such as salary expenses that need to be paid promptly.
  • Even if my estimate is a bit high, Tesla will undoubtedly need to make payments for P, P & E of $800 million to $1 billion per quarter the next couple of quarters. (Of course, if my estimate of the P, P & E portion of the accounts payables is too high, then it means my estimate of the portion related to trade payables is too low, suggesting a separate set of problems.)
  • Tesla has estimated P, P & E expenditures in 2018 to be greater than the $3.4 billion paid in 2017. Since a large portion of this is already owed, it is not discretionary and can’t be postponed until M3 production increases and presumably cash flow improves.
  • As a result, anyone modeling Tesla cash flows should assume that cash payments for capital expenditures in 2018 will, at a minimum, be $800 million or more each quarter. Furthermore, any discretionary cut backs could only impact payments in the second half of the year; obligations for the first half are already mostly locked in.

My Almost “Close Encounter of the Third Kind” With A Future Citizen of Mars

I returned less than two weeks ago from an absolutely fantastic college alumni trip to Israel and Jordan. Greatly enhancing the trip was the fact that we had a professor accompanying us who is one of the world’s experts on the history of ancient Israel and the Bible. We spent five days/nights at the King David Hotel in Jerusalem. On our first night at the hotel, our professor, who was staying on the first floor, noticed that security was particularly tight there.

The next morning, I’m checking Seeking Alpha before breakfast, and see that Elon Musk also is in Jerusalem, busily lighting absinthe on fire. (I have the strong temptation to make a joke about Nero long about now.) Since I’m staying in the nicest hotel in Jerusalem, I start to put two and two together and get suspicious. (Yeah, yeah, I know, I’m always suspicious.) Later in the week, the hotel staff confirmed that he had been staying at the hotel. Too bad he wasn’t aware of the expert staying down the hall from him. Otherwise, he would have had as good a trip to Israel as I had.

I do have one question for Elon, however: “Is it true that absinthe makes the heart grow fonder?”

Tesla's Big Bill Coming Due For Purchased Property And Equipment

Holding a 4,000-year-old clay pot at the Albright Institute of Archeological Research in Jerusalem (“You break it, you bought it?”)

Seeking Alpha – TMZ Edition

During my stay at the King David, Miyam Bialik of “Big Bang Theory” fame was spotted in the dining room at breakfast. She and Elon must have met on the set when he did a guest appearance on the show. Did they have a secret rendezvous in Jerusalem? Is something going on there?

Honestly, that’s as likely as Tesla reporting positive GAAP earnings in Q4 of this year. Besides, Miyam was with her family.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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