How Long Before Tesla Runs Out of Juice?

Tesla Motors has drawn a lot of attention for its sleek, high-performing electric cars. Its Roadster has been an enviro-celebrity favorite for several years, and its new Model S sedan is getting great reviews. The company has been trying to scale up to large-scale production since 2009, raising $226 million in the stock market and $465 million in Department of Energy loans. But there are growing concerns that Tesla might run out of cash before it can get into full production. The original plan for the Model S was to produce 5,000 in 2012, but the company recently cut that to 3,000. At that level of production, how long will it be until Tesla uses up its sources of liquidity? Over the last four quarters, Tesla’s internal cash flow deficit was $423 million. That was mainly the result of heavy start-up costs, which caused a $159 million shortfall in cash from operating activities, and from capital spending of $412 million. Unusually, cash flow from working capital was positive. Tesla has hardly any accounts receivable; instead, it charges customers a $5,000 deposit on each car they order. Customer deposits contributed $100 million dollars to cash flow through the last four quarters. How has the company recharged its cash batteries? From two sources: cash reserves and loans. Tesla has drawn $109 million from cash reserves and $298 million from the Department of Energy since June 2011. That left Tesla with $211 million in cash at the end of June 2012. As we noted in an earlier post about Kodak, “cash burn” is commonly defined as “the rate a company uses up...

Developing Problems at Kodak

Kodak’s cash burn was a big concern among analysts in the last months before the firm’s bankruptcy in January of this year. Cash burn is a term that gets thrown around a lot when companies are in trouble, but it’s hard to find a definition for it in books on accounting or financial statement analysis. Accountingglossary.net defines cash burn as “the rate that a company uses up cash” and calculates it as “Total Cash Change / Time Period.” We think that’s a useful approach to analyzing how a company consumes its cash, although we think we have a better way. Our method starts with the company’s Internal Cash Flow. To calculate Internal Cash Flow, start with the company’s cash flow statement and use the values presented there. The formula is: Internal Cash Flow = Cash Flow from Operating Activities + Cash Flow from Investing Activities + All Uses of Cash in Financing Activities. Cash flows with negative values in the cash flow statement have negative values in the formula. Uses of cash in financing activities include debt repayment, dividends, share repurchases, and any other outflow in that part of the cash flow statement. Internal Cash Flow includes all operating and investing sources of cash and all operating, investing, and financing uses of cash. It’s cash flow before external financing, so it excludes cash from borrowings, debt issues, and equity issues. If Internal Cash Flow is negative, the company is not generating enough cash in the period to meet all of its needs. That leaves it with only two ways to plug the cash gap: get financing or use cash...

Coverage Covenant: cash or non-cash?

We welcome your comments and questions.  Here’s a question from one of our readers: “I frequently come across credits that have a substantial amount of non-cash interest expense related to hybrid financial instruments.Specifically, the one I have in mind has subordinated mezzanine financing with warrants attached.  Embedded in the company’s interest expense is “change in fair value of warrant liability” and “amortization of discount and issuance costs on notes payable”. In a few of your recent articles (Comments on Credit and RMA) there is some mention of this kind of debt in relation to subordination agreements etc., but I cannot find a good explanation of how to calculate debt service coverage ratios on firms that have these kinds of instruments. We frequently syndicate our transactions with other traditional commercial banks and in their analysis I’m finding that they don’t exclude non-cash interest expense like this out of their debt service calculations.  Some of the banks are more sophisticated than others, but I get the feeling that a lot of them don’t frequently deal with companies like this. Can you provide any clarity on how one should debt service in a company like this?  I can see cases for both excluding and including the expense, but would really like to get your perspective and see if there is something I’m missing.” Here’s our response: The two non-cash items that we see most often included in interest expense on a company’s income statement are: 1) Amortization of discount and issuance costs (sometimes called deferred or capitalized financing fees) – very common, but typically very small 2) Accrued and capitalized interest on zero...

Borders circles the drain

The Wall Street Journal reported yesterday that Borders Group Inc. was halting payments to some suppliers, and that one publisher had stopped shipping books to Borders.  The end is near.  As we discussed in an earlier post, if trade creditors lose faith in a company, bankruptcy is almost unavoidable.  The term we use is “confidence sensitive cash flows,” which includes, in addition to trade credit, short term borrowings like commercial paper (think Lehman Brothers) and counterparty credit (think Bear Stearns).  Once one supplier stops shipping, they all will stop. Today, the Wall Street Journal reported that two senior executives had resigned (the General Counsel and the Chief Information Officer).  This is another classic early warning sign.  Let the countdown begin...

Top 10 Credit Topics of 2010

Here’s our list of the top 10 topics on the minds of credit professionals in 2010: 10) Risk Management – We’ve written many times this year about risk management, both good and bad.  Whether it was BP and operational risk, suppliers dealing with customer concentration risk (or “Wal-Mart Risk”), or Lehman just not managing risk.  This topic was on our radar in 2010 (and needs to stay there into 2011 and beyond). 9) Games CFOs Play – Aggressive financial reporting (and outright fraud) can happen at any time, but management’s motivation to do it is heightened during an economic downturn when there is pressure to “hit the numbers” (and not breach covenants, etc.). 8 ) Managing High Risk Clients – Sure the recession is over, but many companies are still struggling with high leverage, high competition, low sales growth, and high costs.  Lenders and bondholders will be working with many “high risk” clients well into 2011. 7) Intercreditor Priority – When times are good (think the 2003-07 credit bubble), no one pays much attention to collateral and subordination (or covenants, or any other part of credit documentation for that matter).  The restructurings and bankruptcies of the great recession reminded us how important these issues are.  We fear that the market is already starting to forget these lessons (think covenant lite and second lien!). 6) Cash Flow Analysis – Cash is king.  Real cash, not EBITDA.  Enough said. 5) Liquidity – Many CFOs (and lenders) have learned the hard way that liquidity can be the most important element of financial strategy.  Our favorite analytical tool for looking at liquidity is...