Financial Statement Analysis Nathan Carlesimo Pierre-Louis Terry Alexis Ladasic

Transcription

1 Financial Statement Analysis Nathan Carlesimo Pierre-Lois Terry Alexis Ladasic 1

2 Table of content Strategic and Economic Assessment 3-6 Growth Analysis 7-10 Profitability Analysis Risk Analysis Conclsion

3 1. Strategic and Economic Assessment 3

4 1.1 Overview of SolarCity SolarCity provides homeowners, bsinesses and government organizations with renewable energy SolarCity was fonded on Jly 4, 2006, to symbolize the commitment to becoming independent of fossil fels Cleaner, more affordable alternatives to traditional tility bills As the No. 1 provider of distribted solar in the United States, SolarCity has completed installations in 26 states as well as in Perto Rico and Canada Vertically-integrated services covering modle manfactring, monting hardware, software, sales, installation, financing, monitoring, and maintenance Fonders: Peter and Lyndon Rive based on a sggestion by their cosin, Elon Msk Based in San Mateo (California) SolarCity went pblic on December 2012 at 8$ per share raised $92 million in its initial pblic offering On Agst 1, 2016, SolarCity accepted Tesla Motors' offer of 2.6 billion dollars 4

5 1.2 Share price evoltion Share price evoltion since IPO Fast take-off: share price mltiplied by 8 within the 14 months following the IPO Since the highest vale on 24 Feb 2014 at 84$: share price divided by 4 down to 20$ Share price evoltion Year-to-Date SolarCity lost 61% on YtD basis However flat on a 6m basis Volatile stock price 5 Sorce: yahoo finance

6 1.3 What do we expect to see? Financial statement analysis: Qestions we want to emphasize: High fixed assets copled with a long prodction cycle Probably a high proportion of longterm financing for long-term projects What is the rationale behind the stock price fall and the offer of Tesla? How can SCTY still raise fnds with negative revenes? Improving revenes as the market becomes matre Can we say that SCTY s project is vale creating and profitable? 6

7 2. Growth Analysis 7

8 2.1 Sales growth Net sales grow p at a 4,4% growth rate withot any slowdown since the IPO Net sales dynamic probably de to the enthosiasm for renewable energies Reminder: no direct EBITDA is given by SCTY, we recreated it by adding operating losses and depreciation/amortization EBITDA almost stable: why is the net loss increasing? ($ 000') Growth evoltion Q Q Q Q Q Q Q , , ,000 - (100,000) (200,000) (300,000) (400,000) Net Sales EBITDA Net Loss Linear (Net Sales) Sector comparaison 250, , , ,000 50,000 - Q Q Q Q Q Q Q Net sales (SCTY) 67, , , , , , ,551 Net Sales (SnRn) 49,680 72,690 82,600 99,640 98, , ,030 Net sales (Ameresco) 115, , , , , , ,600 In the sector, SCTY s performances are in line with the sector Even a bit better as they seem to have won market shares especially from Ameresco Competition is fierce on the sector: SCTY needs to be competitive on prices and qality 8

9 2.2 Investment Policy 10,000,000 Total assets Fixed Asset Crrent Asset Being a manfactrer of solar panel, SCTY has obviosly a large part of fixed assets (>80% of total assets) 8,000,000 6,000,000 4,000,000 2,000,000 Looking at the break-down we can clearly identify that systems are costly - Q Q Q Q Q Q Q Goodwill at 475M : interesting to see that it depreciated from 574M (T4-14) overtime while there was Tesla s offer Solar energy systems Fixed assets breakdown T3-16 Property, plant and eqipment - net Well-managed working capital: from almost 600 days they managed to go down to 300 days worth of sale Seems to be de to a better management of inventories Goodwill and intangible assets - net MyPower deferred costs 3% 4% 7% 7% 3% MyPower cstomer notes receivable Other assets 76% Evoltion of the Working Capital 400, , , ,000 - Q Q Q Q Q Q Q Inventory Accont Receivable Acconts Payable WC in Days

10 2.3 Finance Strctre Solar City is increasingly financed by debt compared to eqity Corresponding to the heavy indstry type, on average 81% of this debt is long term This highly strctred debt is becoming a threat for the bsiness 4.0x 4.1x 4.8x 4.7x x x 8.9x Q Q Q Q Q Q Q SG&A ($m) Sales & Marketing ($m) Financial Debt / Operating Debt 87 Prpose of debt: financing the operating cycle losses more than investing It is not a sstainable se of financial debt over time Increasing operating expenses sch as SG&A and Sales & Marketing are worsening the negative EBITDA while creating no explicit vale for the company: It cold be explaining the se of financial debt to keep on with this marketing investment strategy This debt slows down a cash hemorrhage and does not spport investments which cold have contribted in the debt payback Until now, this over-investment in Sales & Marketing did not prove to be an efficient spport of demand 10

11 3. Profitability Analysis 11

12 3.1 Margin Analysis 240% 200% 160% 120% 80% 40% Operating Expenses remain key factor of NOPAT, EBITDA margin. 0% -40% -80% -120% -160% -200% bt Decrease in Opex Margin de to revene rising faster (+197%) than Opex (+75%) since Q Gross margin stable (29.50% avg) with exception of Q1 16 de to combination of weak sales and high D&A. Q Q Q Q Q Q Q Gross Margin Operating Expenses EBITDA Sector Comparison Gross Margin (Snrn) Opex Margin (Snrn) EBITDA Margin (Snrn) 240% 200% 160% 120% 80% 40% 0% -40% -80% -120% -160% -200% -240% In the sector, SCTY s performances paints a mixed pictre with comparables. Q Q Q Q Q Q Q Gross Margin EBITDA Operating Expenses NOPAT Gross margin remains close to indstry benchmark (30-40%) bt Operating expenses remain a considerable headwind to profitability. 12

13 3.2 Retrn on Invested Capital (ROIC) Invested Capital has dobled in past 18 months following several large scale projects ROIC improving, demonstrating scalability edge. NOPAT margin increasing faster than invested capital ROIC still far below estimated conservative WACC of 4.1%, meaning negative economic vale added or vale destrction 3,201 (3.9%) 3,752 (3.5%) 4,454 (4.3%) 5,088 5,737 (3.9%) (3.7%) 6,166 (3.1%) 6,587 (2.8%) Risk: Solar Lease & PPA WACCs have increased considerably since Snedison bankrptcy. Q Q Q Q Q Q Q Invested Capital ($ m) ROIC WACC Q Q Q Q Q Q Q NOPAT Margin (185.5%) (128.8%) (167.5%) (170.3%) (174.2%) (104.5%) (93.1%) Trnover of Capital Employed 2.1% 2.7% 2.6% 2.3% 2.1% 3.0% 3.0% ROIC (3.9%) (3.5%) (4.3%) (3.9%) (3.7%) (3.1%) (2.8%) 13

14 3.3 Retrn on Eqity ROE Sector Comparison (2015) SCTY s ROE has been negative from , except in % 20.00% SCTY Snrn Vivint Solar Snpower Ameresco 22.70% Factors inclde: High capital investments, consistent loss from operations, as well as raising additional eqity capital 10.00% 2.60% 3.69% Leverage effect consistently negative, - (10.00%) (20.00%) Strengths: Relative to a large eqity base, negative ROEs are shrinking Risks: Difficlty raising additional capital on pblic eqity markets. (30.00%) (40.00%) (50.00%) (33.90%) Soltion: Secritization of porftolio of solar systems held on books (effectively selling revene rights) (60.00%) (54.40%) Risk of additional losses with smaller eqity base cold be headwind to improving ROE Q Q Q Q FY 2015 Q Q Q ROIC (3.9%) (3.5%) (4.3%) (3.9%) (12.7%) (3.7%) (3.1%) (2.8%) Net Cost of Debt 1.2% 1.1% 1.6% 1.0% 1.9% 1.3%.9% ROIC - Net Cost of Debt (5.1%) (4.7%) (5.9%) (4.9%) (16.5%) (5.6%) (4.5%) (3.8%) Total Financial Leverage Effect (9.4%) (9.9%) (14.2%) (12.7%) (42.8%) (17.0%) (13.6%) (10.7%) ROE (54.4%) 14

15 3.4 Tax Eqity Partnerships: a Key Sorce of Financing (1/2) 2005: ITC tax credit passed nder Bsh administration, extended several times to % Financing Allows owners of renewable energy systems to recop 30% of cost of systems as tax credit 67% Usefl for companies with large tax brdens who apply it to liabilities with rest carried forward TEP Debt Selected tax eqity investors: As loss making entity, SCTY wold not benefit from credit in time Tax eqity partnerships are a form of strctred finance that allow SCTY to nonetheless exploit the ITC Investor Base: Largest single TEP was $280 mio Google renewable fnd (2011) Pool of sophisticated (instittional) investors Expanding as asset class matres. 15

16 3.4 Tax Eqity Partnerships: a Key Sorce of Financing (2/2) Strctre: Vale of ITC is determined as % of Fair Market Vale of the project (more advantageos than cost valation); Tax Eqity Investor partner receives the ITC, accelerated depreciation benefits, and a share of the cash flow of the nderlying investment; Investor earns after tax IRR 7 to 12%; Risks: SCTY redces its need for debt financing for any given project Complex and Costly sorce of financing; Demanded IRR by Tax eqity investors increases with size of debt tranche at origination; 98% of CF from Lease Payments X% of Capital Lease Solar Panel Consmer Debt (if any) Installation Project Company (SPV) Interest 100% of CF from Lease Payments Capital (<50%) ITC 100% of tax credits 100% of tax credit + 2% of CF from Lease Payments Political: ITC extended to , nclear that Trmp administration will renew/not repeal before then; Withot TEPs, leverage and cost of debt wold increase considerably. SCTY Lender Tax Eqity Investor 16 Is SCTY s model economically viable withot TEPs?

17 4. Risk Analysis 17

18 4.1 Net debt reconciliation As an acconting principle: Capital Employed = Invested Capital Fixed Assets + WC = Eqity + Net Debt In the Solar City case, this eqation only matches when inclding Deferred Revenes in Net Debt Deferred Revenes are not debt 4.4x 4.x which leads to comparing Solar City s leverage depending on its net debt perimeter 3.6x 3.2x 2.8x When withdrawing deferred revenes from net debt, the leverage (1) is 2,8x in Q1 2016, bt reaches 3,7x when taken into accont (leverage 2) 2.4x 2.x 1.6x 1.2x.8x Q Q Q Q Q Q Q Leverage 1 (x) Average US Leverage level Leverage 2 (x) For consistency prposes, the following debt analysis does not inclde deferred revenes, becase we do not consider this item as pre debt, which leads to a less worrying financial sitation for the company Reconciling capital employed and invested capital sggests a mch higher net debt c. $6.4bn in Q vs $4.8bn 18

19 4.2 Debt evoltion (1/2) Solar City s debt has been continosly increasing This leads to an increasing debt service, not financed by the core bsiness Major isse: no capacity of paying it back Operating cycle is destroying vale 30.6% 22.6% 37.5% 26.9% 56.8% % 20.0% Cash reserves are negligible and shrinking compared to the total debt weight No sign of any strategic shift to improve the sitation % 52.1% 54.0% 55.7% 4,1 3,5 3,6 2,9 3,1 2,5 2,5 2,1 56.9% 51.0% 55.1% 5,1 4,6 4,8 4,6 4,7 4,3 Q Q Q Q Q Q Q Net Financial Expenses ($ 000') Financial expenses / Net Sales Debt service is benefitting from decreasing interest rates over the period de to the macro economic conjnctre Q Q Q Q Q Q Q Net Debt ($m) Total Debt ($m) Total Debt in % Total Eqity & Liabilities

20 4.2 Debt evoltion (2/2) Solar City s net debt keeps increasing Crrent portion of short-term debt is the main concern Already way above Net Sales revenes 17.4% 34.6% 39.1% 155.9% 208.4% 142.5% 142.4% ,400,000 1,200,000 1,000,000 It sends a negative signal to investors as they have legitimate concerns abot Solar City s capacity in creating vale Negative EBITDA does not allow an accrate debt analysis based on ratios sch as Debt/EBITDA or Interest Coverage Ratio Q Q Q Q Q Q Q Crrent portion of LT Debt ($m) In % of Net Sales 800, , , ,000 0 Q Q Q Q Q Q Q Solar short-term activity is threatened by debt service reqirements it cannot commit to Crrent Assets ($ 000') Cash & Eqivalents ($ 000') Crrent Liabilities ($ 000') 20

21 4.3 The qestionnable solvency (1/2) This nsstainable sitation triggers an important decrease of Solar City s ratios Compared to the acceptance thresholds of investors for each ratio: 160% An artificially maintained decent crrent ratio with increasing crrent liabilities 120% 80% 40% Becase of a higher crrent portion of a long term debt not focsed on profitable investments Can send a misleading signal to investors who will believe Solar City is investing in long term projects: a positive signal 0% Q Q Q Q Q Q Q A qick ratio significantly below the commonly accepted threshold de to high levels of inventories Crrent ratio Cash ratio Qick ratio threshold Qick ratio Crrent ratio threshold Cash threshold A cash ratio revealing Solar City s incapacity to meet its short-term debt deadlines 21

22 4.3 The qestionnable solvency (2/2) 3.2x Solar City shows clear signs of insolvency The heavy indstry sector does not jstify sch a leverage gap between Solar City and the US average 30% On average, companies nder a 20% solvency ratio are considered nhealthy by investors From Q ntil Q3 2016, Solar City is nder the 20% solvency threshold While still having an increasing debt level 2.8x 2.4x 25% And still having shown no sign of a strategic shift focsing on debt payback 2.x 1.6x 20% In Q1 2016, the ratio reaches its minimm level (17,8%) and shifts p back towards the 20% threshold 1.2x.8x Q Q Q Q Q Q Q % 10% The reslt notably of cost ctting policies (mainly based on redcing the staff) Leverage (x) Solvency ratio (%) Average US Leverage level Solvency threshold 22

23 Conclsion 23

24 Smmary Corporate finance view: Eqity research view: Obstacles to vale creation and profitability of SCTY high net debt high operating expenses Or position: Sell P/E ratio still at -0,28$ at 3Q16 No signs of improvment in the near ftre inability to generate cash over the operating cycle (strctral?) acte reliance on tax credits & exotic forms of financing political risk arond Trmp administration and extension of ITC. Timing of Tesla acqisition may be evidence of qestionable solvency Still: SCTY is brning p cash which cold become a problem for Tesla Motors down the road. 24

25 Risks & Otlook Reglation Favorable Reglatory environment key to low solar energy rates Government incentives: ITC expiry approaching; Favorable caveats (net metering): tilities are gaining grond (PUC rlings in Hawai, Nevada); Strctral SCTY is a de-facto bank with all the risks and none of the benefits Liabilities: Blended cost of debt dobled from 4.5% in 2015 to 8.23% What happens when the Fed actally raises rates? Assets: While banks benefit when rates rise by issing more loans, any attempt by SCTY to raise rates wold shrink cstomer spreads (vs tilities), materially tarnishing the vale proposition; 25

26 Risks & Otlook Strategic Renewal assmptions are key to ftre cash flow projections Is it realistic to assme 100% of cstomers will renew contracts with same panels from 20 years earlier at higher prices? In the words of one analyst: like bying a 1996 compter at a 2016 price. Financial SCTY is company that perpetally brns OCF, FCF and generates grossly negative EBITDA with high net debt and a bsiness model predicated on capital issance needs (massive asset/liability mismatch). ***Small changes in cash flow streams can have large impact on the vale of installations and economic viability of the bsiness.*** 26

27 Thank Yo 27

28 Appendix Overview of Financial Statements Strategic Considerations Tesla Merger Tesla & SolarCity: Overlapping Boards 28

29 Appendix: Overview of the financial statements Balance sheet: Assets 1 Assets ($ 000') Q Q Q Q Q Q Q Q Crrent Assets Cash and cash eqivalents Short-term investments Restricted cash Acconts receivable Rebates receivable - net Inventories Deferred income tax asset Prepaid expenses and other crrent assets Total Crrent Assets Non-Crrent Assets Solar energy systems Property, plant and eqipment - net Of which Bilt-to-sit lease asset nder constrction Goodwill and intangible assets - net MyPower cstomer notes receivable MyPower deferred costs Other assets Total Non-Crrent Assets Total Assets

30 Appendix: Overview of the financial statements Balance sheet: Liabilities 2 Liabilities & Shareholders' Eqity ($ 000') Crrent Liabilities Acconts payable Distribtions payable to noncontrolling interests Accred and other crrent liabilities Cstomer deposits Crrent portion of: Deferred U.S. Treasry grant income Deferred revene Long-term debt Solar bonds Solar bonds issed to related parties Solar asset-backed notes Financing obligation Total Crrent Liabilities Non-Crrent Liabilities Net of crrent portion: Deferred revene Long-term debt Solar bonds Solar bonds issed to related parties Solar asset-backed notes Financing obligation Deferred U.S. Treasry grant income Convertible senior notes Convertible senior notes issed to related parties Long-term deferred tax liability Other liabilities and deferred credits Of which Bilt-to-sit lease liability Total Non-Crrent Liabilities Total liabilities Commitments and contingencies Redeemable noncontrolling interests in sbsidiaries Stockholders' eqity: Common stock Additional paid-in capital Accmlated deficit ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Total stockholders' eqity Noncontrolling interests in sbsidiaries Total eqity Total liabilities and eqity

31 Appendix: Overview of the financial statements Income Statement Pro forma changes PF 2014 PF 2014 PF 2014 PF 2014 PF 2014 PF 2016 PF 2016 PF ($ 000') FY 2014 Q Q Q FY 2015 Q Q Q Revene Operating leases / SES incentives na na na SES & components sales revene Revene from periodic billings na na na na na Operating lease prepayments na na na na na Total revene Cost of revene Operating leases / SES incentives na na na SES & components sales Periodic billings revene na na na na na D&A and Warranty na na na na na Pre-prodction expense na na na na na Total cost of revene Gross profit Operating expenses Sales & marketing General & Administration Pre-prodction expense Restrctring and other R&D Total operating expenses Loss from operations ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Interests and other expenses Interest expense - net Interests expense - recorse debt na na na na na Interest expense - non-recorse debt na na na na na Other int. exp. and amortization na na na na na Other expenses, net (2 058) Total interest and other expenses Loss before income taxes ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Income tax (provision) benefit (626) (20) (482) (3 326) 68 (9) Net loss ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Attribtable to noncontrolling interests ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Attribtable to stockholders (56 034) (21 525) (22 360) (19 073) (58 330) (24 988) (55 489)

32 Appendix: Overview of the financial statements Cash Flow Statement: Operating Activities ($ 000's) FY 2014 Q H M 2015 FY 2015 Q H Q M Operating activities Net loss ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Adjstments to reconcile net loss to cash Disposal of PP&E D&A Non cash interest & other expense (1 592) Stock based compensations Revalations Loss on extingishment of LT debt Deferred income taxes (26 680) 4 6 (102) (527) (585) (1 306) 4 (1 302) Redction in LPT financing obligations (48 837) (10 570) (23 449) (36 431) (48 132) (10 797) (21 065) (16 041) (37 106) Tax benefit from exercized stock options (63 019) (1 983) Change in fair vale of interest rate swaps (2 865) Changes in operating assets and liabilities Restricted cash (17 699) (19 814) (48 650) (25 500) (87 420) (64 430) Acconts receivables 945 (2 883) (11 525) (15 623) (11 049) (6 735) (29 684) (1 430) (31 114) Rebates receivables (9 890) (4 241) (454) Inventories (97 347) (10 107) (62 329) (91 624) ( ) Prepaid expenses and other crrent assets (23 579) (7 695) (15 766) (42 305) (24 485) (16 224) MyPower deferred costs - (47 603) (94 203) ( ) ( ) (23 658) (22 196) 871 (21 325) Other assets (32 019) (10 292) (18 887) (12 769) (70 016) Acconts payable (22 957) (69 725) ( ) ( ) Accred and other liabilities (22 676) (1 125) Cstomer deposits (2 745) (5 279) (5 465) (4 238) Deferred revene (1 293) Net cash sed in operating activities ( ) ( ) ( ) ( ) ( ) ( ) ( ) (36 809) ( ) 32

33 Appendix: Overview of the financial statements Cash Flow Statement: Investing and Financing Activities 2 Investing activities Cost of SES leased and to be leased ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Prchase of PP&E (22 892) (30 497) ( ) ( ) ( ) (19 529) (44 404) (9 041) (53 445) Investments in promissory notes receivables (21 750) - - (1 189) (1 189) Prchases of ST investments ( ) (44 592) (44 592) (44 592) (44 592) Proceeds from sales and matrities of ST invt Acqisition of bsiness, net (9 509) (9 509) Payments for acqisition of noncontrolling interests (450) (13 089) (13 664) - (13 664) Payment for termination of interest rate swaps (4 625) (9 284) (3 419) (12 703) Net cash sed in investing activities ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) 3 Financing activities Investment fnd financing, bank and other borrowings Borrowings nder LT debt Repayment of LT debt ( ) (752) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Solar asset-backed notes: Proceeds from issance (437) Repayments of borrowings (5 932) (5 817) (7 355) (13 859) (15 863) (6 824) (8 569) (53 345) (61 914) Other financing items Net cash provided by financing activity before eqity Of which proceeds from noncontrolling interests Net cash provided by eqity and convertible notes (3 532) (666) (4 198) Of which common stock issance - na na na - na na na na Of which convertible senior notes issance na na na na na na na Net cash provided by financing activities Net (decrease) increase in cash & cash eqivalents (72 697) (57 700) (82 963) ( ) ( ) (20 883) ( ) ( ) Cash & Cash Eqivalents, beginning of period Cash & Cash Eqivalents, end of period

34 Appendix: Strategic Considerations This is a heavy type of indstry, implying high costs of sales (70% of total sales for 2014 and 2015) Hence a profit margin lower than in other sectors (30%) A strategic decision was made by the top exectives to create a demand for the prodcts and foster a pro solar-energy movement, leading to an overshoot of Sales & Marketing expenses From 94% to 110% of sales in 2014 and 2015 respectively, hence reslting in a negative EBITDA for over 3 years Exectives expect their activity to become more profitable when the demand shifts as they predict it will. 34

35 Appendix: Tesla Merger Corporate governance: The top exectives of this firm are Elon Msk's cosins (see appendix) More stable access to short-term debt financing (Tesla loans) Likely enhanced trst of eqity investors in Solar City (implicit bailot garantee?) This hypothesis may also explain the low incentives to plan a debt payback strategy The recent annoncement of Solar City s takeover by Tesla Motors (Elon Msk s firm) was positively received by SolarCity s investors They will benefit from the financial stability of Tesla Motors alongside their crrent cash reserves and their strategic capacity of planning a debt payback 35

36 Appendix: Tesla Merger (cont d) Tesla Motors investors are less enthsiastic abot the acqisition: The distressed company will impact their retrn rates Tesla Motors already sffers from high cash brn rate Additional concerns srronding strategic vale of acqisition. What are Elon Msk s rationales? He consistently emphasized the idea of complementary bsinesses to jstify this operation Even thogh Solar City will negatively impact Tesla s reslts for a prolonged period of time before it becomes a profitable company Are there implicit reasons involving the family links of the two companies top managers? 36

37 Appendix: Overlapping boards 37