Annual Report Project Tesla Motors Inc.

Armaan Sikand

BUS 210 Summer 2013

Link to: Tesla Motors-Annual Report http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-13-96241&CIK=1318605

Executive Summary • Tesla Motor’s performance under various ratio analysis in 2012 was

far from stellar but was a significant increase from 2011. The net loss it posted in 2012 is the primary reason for the sub-par performance, but it should be kept in mind that Tesla Motors is a relatively new company that is on an upward trajectory.

• Tesla’s stock’s performance has been nothing short of spectacular as it has increased by 500% since June 2010.

• Tesla will face significant challenges going forward, but Elon Musk has proven to be a resourceful and capable CEO and Tesla has continued to produce industry leading innovations.

• However, Tesla’s long term objective of making an affordable mass market car is still at least four years away and this goal is hugely contingent on advances by Tesla’s Research and Development Team.

• Overall, Tesla Motors is a business in a satisfactory financial state and has its hands on a game changing product. Going forward, Tesla faces the difficult task of ensuring that its success is sustainable and this sustainable success needs to be built on a solid financial foundation.

Introduction

• CEO: Elon Musk • Home Office: 3500 Deer Creek Road • Palo Alto, California 94304 • Ending date of latest fiscal year:

12/31/2013 • Tesla Motors develops, manufactures, and

sells high-performance fully electric vehicles and electric vehicle powertrain components.

• Main Geographic Areas: Cars have been sold to customers in more than 30 countries.

Audit Report

• Name of Auditor: PricewaterhouseCoopers

• Comment on Auditors Report: PricewaterhouseCoopers maintains that the financial statements accurately report the financial status of Tesla Motors and are in accordance with generally accepted accounting principles. However, they also state that Tesla Motors did not maintain stringent controls over financial reporting.

Audit Report

• This was because of a material weakness (when a companies internal controls, which are put in place to detect irregularities in financial reporting, may fail to point out material misstatement in a timely manner) in their reporting of non-cash capital expenditures in their consolidated statement of cash flows. It is the responsibility of the management of Tesla Motors to ensure that they maintain stringent internal controls over financial reporting.

Stock Market Information

• Price of Tesla Stock (NASDAQ: TSLA) – 103.2

• 12 Month High: 114.90

• 12 Month Low: 25.52

• Tesla Motors has never declared dividends on its common stock. Dividends are not expected in the foreseeable future as Tesla Motors intends to reinvest all its future earnings.

• It should be noted that the ratio analysis carried out below is a reflection of Tesla Motors’ performance till December 2012. The current stock price is a reflection of its exemplary performance in the first quarter of 2013.

• Accurate as of: 11:27 AM ET on June 17th 2013

Stock Market Information

• Stock Opinion: Buy

Tesla Motors stock price over 12 months

Income Statement

• Tesla Motors follows a multi-step format

• Income from operations increased by a 102% in a one year period as Tesla Motors started producing and selling higher numbers of its Model S sedans.

• Gross Profit decreased by 51% because of a large increase in costs related to automotive sales, which was expected to accompany a large increase in production.

• The 55% decrease in Net Income was primarily because of a significant increase in Research & Development expenses and because of the decrease in Gross Profit.

Year

2012 2011

In thousands ($)

Gross Profit 30,067 61,595 Income from Operations 413,256 204,242

Loss before income taxes -396,077 -253,922 (Net loss) -396,213 -254,411

Balance Sheet

• Inventory increased by 436% as Tesla started production of its Model S. The Property, Plant, and Equipment account increased by 85%.

• Accounts Payable increased by 440% . Reservation payments (an unearned revenue account) also increased by 51%.

• Long term debt increased by almost 50% .

• Additional paid-in capital increased by 33%.

In thousands ($)

Year Assets = Liabilities + Stockholders Equity

2012 1,114,190 989,490 124,700

2011 713,448 489,403 224,045

Statement of Cash Flows

• In 2012 and 2011, cash flow from operations was 48% and 49% higher, respectively, than net income.

• The company is growing through investment with purchases of property and equipment.

• Tesla Motor’s primary form of financing is its issuance of common stock.

• Overall, cash has decreased over the past two years. This was chiefly because of negative cash flow balances in investing and operating.

In thousands ($)

Year Net Cash used in Operating Activities

Net Cash used in Investing Activities

Net Cash used in Financing Activities

2012 -266,081 -206,930 419,635

2011 -128,034 -162,258 446,000

Accounting Policies

Significant Accounting Policies:

• Revenue Recognition:

– Tesla Motors recognizes revenue when:

• Persuasive evidence of an arrangement exists.

• Deliveries have occurred and there are no uncertainties regarding customer acceptance

• Fees are fixed or determinable

• Collection is reasonably assured

• Tesla recognizes revenue from the following sources:

• Automotive sales

• Regulatory credit sales

• Development services

• Marketable Securities

Marketable securities are comprised of commercial paper and corporate debt and are all designated as available-for-sale and reported at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive loss which is included within stockholders’ equity.

Accounting Policies

• Marketable Securities Marketable securities are comprised of commercial paper and corporate debt and are all designated as available-for-sale and reported at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive loss which is included within stockholders’ equity. • Inventory and Inventory Valuation Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. • Property, Plant and Equipment Property, plant and equipment are recognized at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets • Cash and Cash Equivalents All highly liquid investments with an original or remaining maturity of three months or less at the date of purchase are considered to be cash equivalents.

Accounting Policies

• Notes to financial statements:

– Overview of the Company

– Summary of significant accounting policies

– Balance Sheet Components

– Fair Value of Financial Instruments

– Reservation Payments

– Convertible Preferred Stock

– Convertible Preferred Stock Warrants

– Department of Energy Loan Facility

– Common Stock

– Equity Incentive Plans

– Information about Geographic Areas

– Strategic Partnerships

– Commitments and Contingencies

– Subsequent Events

– Quarterly Results of Operation

– Restatement of Unaudited Condensed Consolidated Financial Statements

Financial Analysis Liquidity Ratios

Ratio Liquidity Ratios

2012 2011 Toyota Motor Corp. (2012)

Working Capital ($, in thousands) -14340 181499 -

Current Ratio 0.97 1.95 -

Receivable turnover

22.72 25.14 8.76

Average days’ sales uncollected 16.07 days 14.52 days 41.67 days

Inventory turnover 2.41 2.99 10.79

Average days’ inventory on hand 151.45 days 122.07 days 33.82 days

Operating cycle 167.52 days 136.59 days 75.49 days

Payables turnover 2.13 3.35 7.81

Average days’ payables 171.36 days 108.96 days 46.73 days

• Toyota Motors has been used to benchmark Tesla’s Liquidity Ratios • The formulas and working for the ratio’s above are shown in

Appendix A on slide number.

Financial Analysis Liquidity Ratios

• Working Capital and Current Ratio have significantly decreased from 2011, primarily due to 440% increase in accounts payable.

• The Receivable’s turnover and Average days’ sales uncollected has decreased from 2011, but is still relatively higher than an industry benchmark – Toyota Motors

• Tesla’s Inventory Turnover and Average days’ inventory on hand has decreased and is extremely low when compared to the benchmark. This is primarily because Tesla Motors planned to greatly increase production in 2012-13 and had built up large inventory reserves in order to meet these needs.

Financial Analysis Liquidity Ratios

• Tesla’s Operating Cycle has increased and is significantly higher than the industry benchmark. We can expect the operating cycle to decrease in 2013 because of large increases in sales and consequently, cost of goods sold.

• Tesla has a much lower payables turnover and higher average days payable than the industry benchmark. This is primarily due to Tesla’s strong negotiation power with its suppliers and uses them as a form of financing.

Financial Analysis Profitability Ratios

Ratio Profitability Ratios

2012 2011

Profit Margin -96% -124%

Asset Turnover 0.45 0.37

Return on Assets -43% -46%

Return on Equity -227% -118.00%

• The formulas and working for the ratio’s above are shown in Appendix B.

• Tesla Motors profit margin has increased from 2011 however, it is still operating at loss. This is predicted to change from the boost in revenues when they start recognizing revenue from cars sold in early in early 2013.

Financial Analysis Profitability Ratios

• Asset Turnover also increased in 2012 but is also comparatively low, Tesla needs to increase its asset management efficiency

• Return on Assets also increased but is still negative and needs to be improved. This will happen when Tesla posts a net profit.

• Return on Equity decreased primarily because of the increase in net loss and the decrease in stockholders equity.

Financial Analysis Market Strength Ratios

Ratio Market Strength Ratios

2012 2011

Price/Earnings per share -9.18 -11.29

Dividend Yield N/A N/A

• The formulas and working for the ratio’s above are shown in Appendix C.

• Price/Earnings per share has increased from 2011. This increase happened even with a decrease in net income and is testament to Tesla’s stock’s impressive performance.

• Dividend Yield is not applicable as Tesla has not declared dividends.

Financial Analysis Solvency Ratio

Ratio Solvency Ratios

2012 2011

Debt to Equity 4.24 1.55

Financing Gap 3.84 days -27.63 days

• The formulas and working for the ratio’s above are shown in Appendix C.

• The Debt to Equity ratio increased in 2012 primarily because of a decrease in share holders equity and a very significant increase in total liabilities.

• There was a significant financing gap in 2011, which was not present in 2012.

Industry Situation & Company Plans

• The automotive industry is in its best shape since the 2008 recession and most industry analysts have a positive outlook on the future of the industry.

• Tesla Motors began as a disruptor to the incumbent players of the automotive market. However, most industry analysts are tagging Tesla as a game changer, especially if it can deliver on its promise of a $35,000 electric car. Tesla plans to use the proceeds from the Model S to produce the $35,000 Model X, which is a cross between a SUV and a minivan.

• CEO, Elon Musk, envisions a day where there will be extremely high levels of adoption of electric cars but believes this is about four years away when technology to extend the range of the cars exists. Musk’s main objective for Tesla has always been an affordable mass-market electric car.

Industry Situation & Company Plans

• Tesla Motors had its first ever profitable quarter this Spring and its stock price has increased by 500% since June 2010. The company has moved from strength to strength as the sales of its flagship Model S continue to grow. Its direct competitors, such as Fisker, have faded away and Tesla is dominant in the electric car market.

• In addition to its supercharger network, a free network of charging stations across the USA, Tesla just introduced a battery swapping system. Battery swapping allows customers to swap their battery for $60 at half the time it takes to refuel a car, instead of waiting for it to charge.

• Currently, Tesla is locked in a battle with auto dealers, who are attempting to prevent Tesla from directly selling to customers. However, as with previous conflicts, with the New York Times and TopGear, a swift and effective response from Elon Musk can be expected.

• Further information on this can be read in the links provided in Appendix D.

Appendix A – Liquidity Ratios

Ratio

Liquidity Ratios

Formula 2012 2011

Working Capital ($, in thousands)

Current Assets-Current Liabilities 524768-539108 372838-191339

Current Ratio Current Assets/ Current Liabilities 524768/ 539108 372838/ 191339

Receivable turnover Net Credit Sales/ Average Accounts

Receivable 413256/

((26842+9539)/2) 204242/

((9539+6710)/2)

Average days’ sales uncollected

365/ Accounts Recievable Turnover 365/ 22.72 365/ 25.14

Inventory turnover Cost of Goods Sold/ Average

Inventory 383189/

((268504+50082)/2) 142647/

((45182+50082)/2)

Average days’ inventory on hand

365/ Inventory Turnover 365/ 2.41 365/2.99

Operating cycle Average days' inventory on hand +

Average days' sales uncollected 16.07+151.45 14.52+122.07

Payables turnover Cost of Goods Sold/ Average

Accounts Payable 383189/

((303382+56141)/2) 142647/

((56141+28951)/2)

Average days’ payables 365/ Payables turnover 365/2.13 365/3.35

Appendix B – Profitability Ratios

Ratio Profitability Ratios

Formula 2012 2011

Profit Margin Net Income/Revenue (-396213) / 413256 (-254411)/ 204242

Asset Turnover Net Sales/Average

Total Assets 413256/ ((1114190+713448)/2)

204242/ ((386082+713448)/2)

Return on Assets Net Income/Average

Total Assets (-396213)/ ((1114190+713448)/2)

(-254411)/ ((1114190+713448)/2)

Return on Equity Net Income/ Average Shareholders Equity

(-396213)/ ((124700+224045)/2)

(-254411)/ ((224045+207048)/2)

Appendix C – Market Strength and Solvency Ratios

Ratio Market Strength Ratios

Formula 2012 2011

Price/ Earnings per share

Market Price per Share/ (Net Loss per Share) 33.87/(-3.69) 28.56/(-2.53)

Dividend Yield Dividends per Share/

(Market Price per Share) N/A N/A

Ratio Solvency Ratios

Formula 2012 2011

Debt to Equity Average Total

Liabilities/Average Shareholders' Equity

(989490+489403) / (124700+224045)

(489403+179034) / (224045+207048)

Financing Gap Average Days Payables-

Operating Cycle 171.36-167.52 108.96-136.59

Appendix D – Website Links

– http://online.wsj.com/article/SB10001424127887324049504578541902814606098.html

– http://www.bloomberg.com/news/2013-06-21/tesla-adding-model-s-battery-swap-for-faster-refuels-credits.html

– http://www.forbes.com/companies/tesla-motors/financial/TSLA/

– http://www.mercurynews.com/business/ci_23516828/tesla-motors-speeds-next-level

– http://www.bloomberg.com/news/2013-06-24/tesla-takeover-turns-tenuous-given-valuation-real-m-a.html