Tesla Just Paid Off a $920 Million Bond With Cash

Challenges still remain, however.

Daniel Sparks
Daniel Sparks
Mar 1, 2019 at 10:31PM
Industrials

Electric-car company Tesla (NASDAQ:TSLA) reportedly just paid off a $920 million convertible bond in cash, according to CNBC. The payment highlights the company's improving financials recently. Tesla is aiming to achieve sustainable profitability and get to the point when it can fund both its current operations and business expansion with regular cash from operations.

In the first half of 2018, Tesla's negative free cash flow and shrinking cash position was a major concern, prompting one prominent analyst covering the stock to predict the automaker would need to raise more cash through debt or equity before the end of last year. But the automaker's fortunes promptly reversed as Tesla became meaningfully profitable in the second half of 2018 and added to its cash reserves.

A Model 3 driving on an open road.

Model 3. Image source: Tesla.

Reducing debt

With its $920 million bond obligation due on March 1, Tesla had no choice but to pay in cash. In order for Tesla to convert senior unsecured notes to stock, shares would have had to trade at around $360 leading up to the due date. But shares have trended between about $290 and $320 over the past month.

Fortunately, Tesla had plenty of cash to pay this $920 million convertible bond. The company's cash position increased by $1.45 billion in the second half of 2018, to $3.7 billion, despite paying off a $230 million convertible bond during the fourth quarter.

"We have sufficient cash on hand to comfortably settle in cash our convertible bond that will mature in March 2019," Tesla said in the letter.

Check out the latest earnings call transcript for Tesla.

Money's still tight

Of course, Tesla's ability to easily pay off a $920 million bond doesn't mean the electric-car maker has totally escaped cash-flow risk. Building cars is a capital-intensive business, requiring $2.24 billion in capital expenditures last year. In addition, management expects capital expenditures to be $2.5 billion in 2019, which will be allocated to the company's battery factory in China, its Model Y and semi-truck programs, and ongoing expansion of its Supercharger and service networks.

Further, Tesla's recent workforce reduction and the company's decision this week to close many of its retail stores and shift sales online show how the automaker continues to butt heads with the cutthroat realities of auto manufacturing.

For Tesla to thrive in 2019 and beyond, the company will need to exercise a high level of financial discipline in both its regular operations and with its capital expenditures.

Combining the company's $920 million bond payment in March and management's forecast to report a loss in its first quarter, Tesla's cash position will likely be squeezed during this period. But Tesla expects to be profitable during the rest of the year.

Beyond Q1, investors should watch to see if Tesla's balance sheet can improve throughout the rest of the year.