Tesla cuts capex to $20bn; working capital drives more of its cash flow recovery

Working capital supplied 45% of the $2.6bn swing from the second quarter, and lower capex 40%. The cut leaves about $7bn to spend between October and December.

Working capital supplied more of Tesla's free cash flow swing than the capex cut did. Capex is capital spending, and the plan now leaves about $7bn for the fourth quarter.

Free cash flow is operating cash flow minus capex. In its Q3 Update, filed on 21 October, Tesla shows $6.3bn of operating cash flow and $4.7bn of capex. That leaves $1.5bn.

A quarter earlier free cash flow was negative $1.1bn, so it improved by $2.6bn. The Associated Press called the result a surprise to analysts who had expected the company to burn cash.

Working capital outweighed the capex cut, by a small margin. The swing has three sources, and none dominates. Working capital supplied 45%, lower capex 40% and better operating cash flow before working capital 14%.

In dollars the swing is $2,623m. Working capital gave $1,187m, lower capex $1,057m and other operating cash flow $379m.

Working capital means changes in what Tesla owes and is owed, such as unpaid supplier bills and cash from customers. It reflects payment timing rather than earnings.

Profit explains little of the swing. Net income attributable to shareholders fell from $1,114m in the second quarter to $787m. It fell 43% from a year earlier, on flat revenue of $28.0bn.

Operating income did rise, from $398m to $718m, a gain of $320m. That is the same order as the $379m of operating cash flow before working capital. The rest of the swing is working capital and lower capex.

How working capital helped

Working capital added $2.6bn to operating cash flow in the third quarter, against $1.4bn in the second. A year earlier the same quarter added $2.1bn, so the inflow is large but not unusual.

Payables and accruals are the largest piece. Accounts payable and accrued liabilities contributed $4.0bn. Deferred revenue, which is cash received for cars not yet delivered, added $1.3bn.

Two items took cash back: prepaid and other assets $1.8bn, and receivables and inventory $0.9bn. That nets to the $2.6bn.

Tesla owes suppliers more. Accounts payable reached $17.2bn, up from $15.3bn at the end of the second quarter.

Without working capital, operating cash flow was $3.7bn. Less $4.7bn of capex, free cash flow before working capital was about negative $1.1bn. That compares with negative $2.5bn in the second quarter.

Payables stretch only until suppliers want their money. Deferred revenue becomes sales once the cars are delivered. Neither repeats on demand.

Free cash flow before working capital improved and is still negative. It rose from negative $2.5bn to negative $1.1bn because capex fell. Over the last twelve months Tesla generated $3.3bn of free cash flow, which is $18.7bn of operating cash flow less $15.4bn of capex.

Tesla shares had a good day, up 3.6% in the regular session, before the results. The AP reported the rise on 21 October, ahead of the call. Over the quarter, cash and short term investments rose by only $1.9bn to $45.4bn.

What the capex cut leaves for Q4

Tesla announced the capex cut on the call. The Q3 Update's outlook section carries no capex figure. The second quarter 10-Q, filed on 23 July, said capex would be "in excess of $25 billion in 2026", driven by AI initiatives such as compute infrastructure and data centres.

On the third quarter call, finance chief Vaibhav Taneja said: "We are revising our CapEx guidance to be approximately $20 billion for the current year as a result of managing our capital deployment efficiently and plan to fund it primarily from our cash flows from operations."

Capex was $2.5bn in the first quarter, $5.8bn in the second and $4.7bn in the third. That is $13.0bn for nine months, so a $20bn year leaves about $7bn for the fourth quarter.

That is 1.5 times the third quarter and 1.2 times the second. It would be the largest quarter of the year. The second half would total about $11.7bn against $8.3bn in the first.

The AP wrote of "doubling capital spending for the quarter to $4.7 billion". That holds only against the third quarter of 2025. Against the second quarter, capex fell 18%. Net property, plant and equipment still rose by $3.3bn to $50.6bn.

Bank credit and the next cash flow test

Tesla also arranged $30bn of bank credit that it says it will not use this year. On 29 September, as its 8-K shows, it signed $30bn of unsecured bank lines. They are a $20bn three year delayed draw term loan, an $8bn five year revolver and a $2bn 364 day revolver.

Tesla says it will fund capex mainly from operating cash flow. That is the line that carries the supplier credit.

Nothing was drawn on the signing date, and the package replaced an undrawn $5bn revolver. Taneja said: "We do not plan to make any draws under any of the new facilities in this calendar year."

The filing gives the purpose as general corporate purposes. Taneja tied the capacity to "the expected growth in CapEx" and said "Our CapEx for the next few years would continue to expand."

Debt and finance leases were $9.5bn at 30 September. Of the debt Tesla breaks out, only $2m was recourse at 30 September, as at 30 June. The other $9,265m was non-recourse. Lenders also set a covenant of at least $5bn of liquidity. The term loan commitment falls to $10bn after a year.

The fourth quarter sets a higher bar. At about $7bn of capex, free cash flow stays positive only if operating cash flow tops $7bn, against $6.3bn in the third quarter. Of that $6.3bn, $2.6bn came from working capital.

Tesla's Form 10-Q for the quarter is due by 9 November, forty days after quarter end for a large accelerated filer. The second quarter's came the day after the update, so it may land this week.

The 10-Q capex sentence will show whether "in excess of $25 billion" now reads about $20 billion, and the payables line will show how much supplier credit was still outstanding at 30 September. The 10-Q will not test the fourth quarter. The fourth quarter update will show whether operating cash flow topped $7bn without another $2.6bn from working capital.