Tesla’s third-quarter results blew away expectations. The house of Elon, despite a 12 per cent year-on-year slowdown in revenue growth, reported a net profit of $143m and free cash flow of $371m, smashing through the estimates of Wall Street’s finest.
For the Tesla bears forecasting another loss-making quarter, the results were a headscratcher. But the cynics did point to one line item in the profit and loss statement which also had us confused during our live coverage of the results: $85m of “other income”.
It may not sound like a lot for a company worth $63bn, but this extra income made up 48 per cent of Tesla’s pre-tax profits. A fact that is muddied by disclosures since, and wasn’t widely reported by the media at the time.
So let’s take a closer look at just where Tesla found this spare change.
Tesla only reports its international sales exposure by five key regions, including the amorphous “other” region, which is 29 per cent of its revenues. So it hard to figure out Tesla’s FX exposures from these disclosures alone.
In search for more detailed data, we came across third party research firm EV Volumes, who provide geographic data on all of the electric car manufacturers globally.
Although Tesla is not strictly a car company, as 85 per cent of its sales in the third quarter came from delivering vehicles to customers, we thought EV Volumes’ data would prove sufficient to figure out Tesla’s FX exposures in more granular detail.
The first we did was take EV Volumes’ third quarter delivery numbers and multiplied them by the average selling price for a delivered car over the quarter — $55,080 — to arrive at an estimated revenue figure. We then weighted each currency’s respective move against the dollar relative to where its automotive revenues stemmed from.
For instance, China provided 10.9 per cent of its estimated automotive revenues in the third quarter. As the dollar strengthened 4.19 per cent versus the renminbi July through September, Tesla’s FX exposure to China resulted in a headwind of 0.45 per cent - meaning revenues were effectively lower by that proportion.
We repeated this calculation across all the geographies listed in the data, and here are the results:
So, with an FX headwind of 1.70 per cent for 85 per cent of its revenues, it’s puzzling that Tesla booked $85m of other income from FX related gains.
The most plausible explanation is that Tesla decided to hedge its exposure to foreign currency markets this quarter.
But that wasn’t the case.
Here’s chief financial officer Zach Kirkhorn to explain, from the Q3 conference call:
And finally, on net income — in other income, we saw benefits from foreign exchange which, as I mentioned last quarter, we don't hedge.
So what else could explain the FX move? There’s an explanation, but you wouldn’t find it in the press releases.
The first thing to highlight is that below the “net income” line in the 10-Q, Tesla booked a $114m loss from “foreign currency translation adjustment”:
Which cut its comprehensive post-tax profits from $150m to just $36m. On an earnings-per-share basis, that’s a drop from the headline figure of $0.80 to just $0.20. Unlike the other income figure, this cost was not included in the company’s initial press release which reported the higher than expected profits.
It also seems this pre-tax income did not translate into hard cash, as Tesla’s operating cash flow took a $91m hit from “foreign currency transaction gains” over the quarter. Again, this figure was not in the press release.
So what was the source of the other income? Tesla said in the filing that the $85m of other income consisted “primarily of foreign exchange gains and losses related to our foreign currency-denominated monetary assets and liabilities and changes in the fair values of our fixed-for-floating interest rate swaps.”
Tesla did not respond to a request for comment for this article, so here’s our best guess to explain the bulk of the $85m other income gain. Tesla may have several local subsidiaries — such as its operations in China — where its liabilities currently exceed the value of its assets. In such a situation, a strengthening dollar would reduce the value of these assets and liabilities in equal measure, but as the liabilities are larger it would be beneficial to the company on a non-cash basis.
The question is though, given Tesla booked a minor loss from a weakening dollar in the second quarter — what changed on its local balance sheets in just three short months to provide a much larger effect? The answer perhaps lies in China.
In March, Tesla signed an agreement with Chinese lenders for a 12-month facility of up to $521m for its new Shanghai gigafactory. As the factory has been built at a rapid pace since, perhaps the extra liabilities came from drawing down some of this facility over the quarter to cover construction costs?
The other possibility is that the various fixed income instruments which it holds as part of its FX exposure gained in value. Which is plausible after bond prices rallied during the first part of the quarter.
We may never know. But as Tesla’s record third quarter in 2018 unwound so spectacularly in the ensuing six months, investors might want to take note this time around of not just how the cake tastes, but how it was baked.
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November 19, 2019 at 01:31PM
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Tesla’s mysterious income - FT Alphaville
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