Tesla Motors Inc (TSLA)’s Expenditure on its Infinite Mile Warranty Program

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On August 15, Elon Musk wrote a post on Tesla Motors Inc (NASDAQ:TSLA)‘s blog, extending the eight years infinite mile warranty on the drive unit of the Model S. The extension was not only for new cars, but will apply retroactively to all Model S cars previously sold. Chuck Jones, a Forbes contributor, wrote an article recently, elaborating how much will the eight years infinite mile warranty is going to cost Tesla Motors Inc (NASDAQ:TSLA).

In his post, Jones mentioned that Tesla Motors Inc (NASDAQ:TSLA) accrued $2,900 and $2,850 as warranty costs for Model S vehicles built in 2012 and 2013, respectively. He also noted that the company previously charged $4,000 for extending the warranty on the Model S for four more years and 50,000 miles and not all parts of the car were covered under that extended warranty. However, as Musk has also said, there are far less moving parts in a Model S than in a conventional combustion engine car, which is why Jones assumed that drive unit constitutes a major chunk of the $4,000 warranty cost.

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For the sake of calculations, he assumed that Tesla Motors Inc (NASDAQ:TSLA) will need to absorb 20% of the $4,000 extended warranty cost in the long run due to extending its infinite mile warranty on the drive unit of the Model S. He then calculated what would be the one time charge that Tesla Motors Inc (NASDAQ:TSLA) will have to bear due to this extension of the warranty on the 40,000 Model S cars it has already sold. The figure amounts to $32 million before tax and $29.9 million after tax, with the assumption of June quarter tax rate of 6.7%. This would result in a one time drop of $0.21 in the EPS, which Jones believes the shareholders of the company won’t fret about much.

However, Jones  also calculated the EPS drop from future sales that the extension of the warranty on the drive-unit will cause, which will amount to $0.05 EPS drop for every 10,000 Model S’s sold in the future.

Jones highlighted that the extension of the warranty could affect the stock options under the company’s incentive plan. In its June 2013 10-Q filing, Tesla Motors Inc (NASDAQ:TSLA) had reported that the company has 782,500 stock option shares for some of its employees, which is based on four performance-based milestones and one of those milestones is Tesla Motors Inc (NASDAQ:TSLA) getting to 30% margin levels in any of three years. Now, the question is whether the company’s leadership will change anything in the goals it set for the management.

Disclosure: None

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