Tesla has announced that it will lay off 7% of its workforce— around 3,000 workers — in order to turn its plan to create a $35,000 Model 3 into a reality in “all markets,” CEO Elon Musk said in a company statement Friday.
Musk laid this all out in a message to employees on Friday, but what he didn’t mention is Tesla’s additional pressure of a $900 million bond payment coming due in March.
The electric car company has only been profitable for three quarters of its 15 year history, one of those quarters being the third quarter of last year. In Q3 Tesla made a profit of $312 million (about 4%), however, that’s with capital expenditures for the company hovering around $2 billion.
In Musk’s letter to employees, he mentioned that in Q4, “preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3 [emphasis ours].”
As of September 30th, 2018 government filings show that Tesla had $2.9 billion in cash or cash equivalents. About $905 million of that was in customer deposits — so Tesla was working with $2 billlion in cash.
Filings also show that the company had current liabilities of $3.6 billion (with total current liabilities of $9.8 billion). The company’s assets came in at $7.9 billion.
In short, Tesla is still cash strapped, as Musk admitted in his letter.
But — as we noted when we wrote about this payment back in Octobe r — this is Wall Street, and numbers like that don’t necessarily mean a company is finished when it has a $50 billion market cap and an illustrious CEO.
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In Q4, the company had to pay out $387 million in debt payments. That, plus saving up for this $920 million payment in March, would shrink Tesla’s cash pile down to under $700 million. Given what Tesla has planned for 2019, that may put the company in a tricky situation.
The company has big plans for the year, including building a factory in Shanghai, rolling out the more affordable version of the Model 3, and developing the Model Y, a crossover vehicle built on the Model 3’s platform.
You also have to remember those pressing liabilities.
In March, just after downgrading Tesla’s credit rating, Moody’s rating agency said the company would have to raise capital to continue operations and pay off debt. It estimated Tesla would blow through $2 billion in cash through the year and remain cash flow negative through 2019.
Tesla’s supporters know it’s going to be a hard road too.
“The whole Tesla story boils down to the number of Model 3s sold and gross margins,” Gene Munster of investment firm Loup Ventures told Business Insider back in October. “If you create a situation where the cash flow goes from negative to positive you can start servicing the debt.”
The Munster plan looks something like this (keep in mind that Tesla needs $1.5 billion in cash on hand to finance its operations):
- Model 3 sales hold, and gross margins hit 15% during Q3 2018. (We got that.)
- If that’s the case, the company stays cash flow neutral but shouldn’t have a problem with its $230 million and $157 million payments.
- The tricky part is Q4 2018, where Tesla would need to increase gross margins to 20% and sell more cars. (This is up in the air, and Musk said Q4 didn’t look as good as Q3 in his letter to employees on Friday.)
- But if it can do that then it can generate $1 billion in cash, according to Munster. Then it starts the new year with $3 billion — enough to pay off its debt.
After the layoffs were announced Tesla’s stock fell 10%. That’s weird on Wall Street where cutting costs is considered cathartic for stock price, so it’s possible investors are taking note of Musk’s admission that profits came in thinner in Q4.
Now, none of this is to say that Tesla won’t get through this — this debt payment is just an illustration of the intense pressure Musk is under. He could potentially negotiate a deal with creditors, handing them heavily discounted stock instead of cash — a pound of flesh instead of cold hard cash.
That would take some sharp negotiating though. As it stands now, creditors can excercise their option to take stock if the stock price is above about $360. Right now it’s hovering around $311, and if Musk’s comment about fourth quarter earnings hold, Tesla will be hard pressed to get the stock up $50 between now and March.