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TESLA, INC.

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TESLA, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

04/25/2022 | 06:06am EDT
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes included elsewhere in
this Quarterly Report on Form 10-Q.

Overview


Our mission is to accelerate the world's transition to sustainable energy. We
design, develop, manufacture, lease and sell high-performance fully electric
vehicles, solar energy generation systems and energy storage products. We also
offer maintenance, installation, operation, financial and other services related
to our products. Additionally, we are increasingly focused on products and
services based on artificial intelligence, robotics and automation.

In 2022, we have produced 305,407 vehicles and delivered 310,048 vehicles
through the first quarter, despite ongoing supply chain challenges and factory
shutdowns. We are currently focused on increasing vehicle production and
capacity, improving and developing battery technologies, improving our FSD
capabilities, increasing the affordability and efficiency of our vehicles and
expanding our global infrastructure.

In 2022, we have deployed 846 MWh of energy storage products and 48 megawatts of
solar energy systems through the first quarter. We are currently focused on
ramping production of energy storage products, improving our Solar Roof
installation capability and efficiency, and increasing market share of retrofit
and new build solar energy systems.

During the three months ended March 31, 2022, we recognized total revenues of $18.76 billion, representing a $8.37 billion increase compared to the prior year. We continue to ramp production, build new manufacturing capacity and expand our operations to enable increased deliveries and deployments of our products and further revenue growth.


During the three months ended March 31, 2022, our net income attributable to
common stockholders was $3.32 billion, representing a favorable change of $2.88
billion, compared to the prior year. We continue to focus on improving our
profitability through production and operational efficiencies.

We ended the first quarter of 2022 with $18.01 billion in cash and cash
equivalents and marketable securities, representing an increase of $306 million
from the end of 2021. Our cash flows provided by operating activities during the
three month period ended March 31, 2022 was $4.00 billion, representing an
increase of $2.35 billion compared to $1.64 billion during the same period ended
March 31, 2021. Capital expenditures amounted to $1.77 billion during the three
month period ended March 31, 2022, compared to $1.35 billion during the same
period ended March 31, 2021. Sustained growth has allowed our business to
generally fund itself, but we will continue investing in a number of
capital-intensive projects in upcoming periods.

Management Opportunities, Challenges and Risks and 2022 Outlook

Impact of COVID-19 Pandemic


Beginning in the first quarter of 2021, there has been a trend in many parts of
the world of increasing availability and administration of vaccines against
COVID-19, as well as an easing of restrictions on social, business, travel and
government activities and functions. On the other hand, infection rates and
regulations continue to fluctuate in various regions and there are ongoing
global impacts resulting from the pandemic, including challenges and increases
in costs for logistics and supply chains, such as increased port congestion,
intermittent supplier delays and a shortfall of semiconductor supply. We have
also previously been, and are being, affected by temporary manufacturing
closures, employment and compensation adjustments, and impediments to
administrative activities supporting our product deliveries and deployments.

In addition, we have experienced and are experiencing varying levels of
inflation resulting in part from various supply chain disruptions, increased
shipping and transportation costs, increased raw material and labor costs and
other disruptions caused by the COVID­19 pandemic and general global economic
conditions. The inflationary impact on our cost structure has contributed to
adjustments in our product pricing, despite a continued focus on reducing our
manufacturing costs where possible.

Ultimately, we cannot predict the duration of the COVID-19 pandemic or global
economic trends. We will continue to monitor macroeconomic conditions to remain
flexible and to optimize and evolve our business as appropriate, and we will
have to accurately project demand and infrastructure requirements globally and
deploy our production, workforce and other resources accordingly.
                                       28
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Automotive-Production

The following is a summary of the status of production of each of our announced vehicle models in production and under development, as of the date of this Quarterly Report on Form 10-Q:

Production Location    Vehicle Model(s)    Production Status
Fremont Factory        Model S / Model X   Active
                       Model 3 / Model Y   Active
Gigafactory Shanghai   Model 3 / Model Y   Active
Gigafactory Berlin     Model Y             Active
Gigafactory Texas      Model Y             Active
                       Cybertruck          In development
TBD                    Tesla Semi          In development
TBD                    Tesla Roadster      In development



We are focused on growing our manufacturing capacity, which includes ramping all
of our production vehicles to their installed production capacities as well as
increasing capacity at our current factories. Our current production continues
to be affected by the industry-wide semiconductor and other component shortages,
requiring additional workaround manufacturing and production design solutions to
be implemented which may be difficult to sustain. Production at Gigafactory
Berlin started in March 2022 and we began Model Y deliveries from Gigafactory
Texas in April 2022, which incorporated our 4680 in-house made cells. The next
phase of production growth will depend on the ramp at Gigafactory Berlin and
Gigafactory Texas, as well as our ability to add to our available sources of
battery cell supply by manufacturing our own cells that we are developing to
have high-volume output, lower capital and production costs and longer range.
Consistent with our approach of innovating manufacturing techniques at our new
factories, we expect as well to pioneer new methods related to the mass
production of these cells and our unique structural battery pack concept. Our
goals are to improve vehicle performance, decrease production costs and increase
affordability.

However, these plans are subject to uncertainties inherent in establishing and
ramping manufacturing operations, which may be exacerbated by the number of
concurrent international projects, any industry-wide component constraints which
may increase the number of manufacturing and production design workaround
solutions required, labor shortages and any future impact from events outside of
our control such as the COVID-19 pandemic. For example, recent spikes in
COVID-19 cases in Shanghai resulted in temporary shutdowns to Gigafactory
Shanghai as well as parts of our supply chain. Moreover, we must meet ambitious
technological targets with our plans for battery cells as well as for iterative
manufacturing and design improvements for our vehicles with each new factory.

Automotive-Demand and Sales


Our cost reduction efforts and additional localized procurement and
manufacturing are key to our vehicles' affordability, and for example, have
allowed us to competitively price our vehicles in China. In addition to ramping
production in 2022, we will also continue to generate demand and brand awareness
by improving our vehicles' performance and functionality, including through
products based on artificial intelligence such as Autopilot and FSD, and other
software features. Moreover, we expect to continue to benefit from a spike in
demand in the automotive industry generally, as well as ongoing electrification
of the automotive sector and increasing environmental awareness.

However, we operate in a cyclical industry that is sensitive to trade,
environmental and political uncertainty, all of which may also be compounded by
any future global impact from the COVID-19 pandemic. Moreover, as additional
competitors enter the marketplace and help bring the world closer to sustainable
transportation, we will have to continue to execute well to maintain our
momentum.

Automotive-Deliveries and Customer Infrastructure


As our deliveries increase, we must work constantly to prevent our vehicle
delivery capability from becoming a bottleneck on our total deliveries.
Increasing the exports of vehicles manufactured at Gigafactory Shanghai has been
effective in mitigating the strain on our deliveries in markets outside of the
United States, and we expect to benefit further from situating additional
factories closer to local markets, including the recent production launch at
Gigafactory Berlin. As we expand our manufacturing operations globally, we will
have to continue to increase and staff our delivery, servicing and charging
infrastructure accordingly, maintain our vehicle reliability and optimize our
Supercharger locations to ensure cost effectiveness and customer satisfaction.
In particular, we remain focused on increasing the capability and efficiency of
our servicing operations.
                                       29
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Energy Generation and Storage Demand, Production and Deployment


The long-term success of this business is dependent upon increasing margins
through greater volumes. We continue to increase the production of our energy
storage products to meet high levels of demand, including construction of our
Megafactory in Lathrop, California, but such production is also sensitive to
global component constraints. For Megapack, energy storage deployments can vary
meaningfully quarter to quarter depending on the timing of specific project
milestones. For Powerwall, better availability and growing grid stability
concerns drive higher customer interest, and we are emphasizing cross-selling
with our residential solar energy products. We remain committed to growing our
retrofit solar energy business by offering a low-cost and simplified online
ordering experience. In addition, we continue to improve our installation
capabilities and price efficiencies for Solar Roof by on-boarding and training
new installers, as well as collaborating with real estate developers and
builders on new homes to reduce installation time and costs. In the first
quarter of 2022, however, such growth to our solar business was impeded by
import delays on certain solar components. As these product lines grow, we will
have to maintain adequate battery cell supply for our energy storage products
and hire additional personnel, particularly skilled electricians, to support the
ramp of Solar Roof.

Cash Flow and Capital Expenditure Trends


Our capital expenditures are typically difficult to project beyond the
short-term given the number and breadth of our core projects at any given time,
and may further be impacted by uncertainties in future global market conditions.
We are simultaneously ramping new products, including new iterations of our
Megapack, ramping manufacturing facilities on three continents and piloting the
development and manufacture of new battery cell technologies, and the pace of
our capital spend may vary depending on overall priority among projects, the
pace at which we meet milestones, production adjustments to and among our
various products, increased capital efficiencies and the addition of new
projects. Owing and subject to the foregoing as well as the pipeline of
announced projects under development and all other continuing infrastructure
growth, we currently expect our capital expenditures to be between $5.00 to
$7.00 billion in 2022 and each of the next two fiscal years.

Our business has recently been consistently generating cash flow from operations
in excess of our level of capital spend, and with better working capital
management resulting in shorter days sales outstanding than days payable
outstanding, our sales growth is also facilitating positive cash generation. On
the other hand, we are likely to see heightened levels of capital expenditures
during certain periods depending on the specific pace of our capital-intensive
projects and rising material prices and increasing supply chain and labor
expenses resulting from changes in global trade conditions and labor
availability associated with the COVID-19 pandemic. Moreover, as our stock price
has significantly increased, we have seen higher levels of early conversions of
"in-the-money" convertible senior notes, which obligates us to deliver cash and
or shares pursuant to the terms of those notes. Overall, we expect our ability
to be self-funding to continue as long as macroeconomic factors support current
trends in our sales.

Operating Expense Trends

As long as we see expanding sales, and excluding the potential impact of
macroeconomic conditions including increased labor costs and impairment charges
on certain assets as explained below, we generally expect operating expenses
relative to revenues to decrease as we continue to increase operational
efficiency and process automation. We expect operating expenses to grow in 2022
as we are expanding our operations globally.

In the first quarter of 2021, we invested an aggregate $1.50 billion in bitcoin.
We believe in the long-term potential of digital assets both as an investment
and also as a liquid alternative to cash. As with any investment and consistent
with how we manage fiat-based cash and cash-equivalent accounts, we may increase
or decrease our holdings of digital assets at any time based on the needs of the
business and our view of market and environmental conditions. Digital assets are
considered indefinite-lived intangible assets under applicable accounting rules.
Accordingly, any decrease in their fair values below our carrying values for
such assets at any time subsequent to their acquisition will require us to
recognize impairment charges, whereas we may make no upward revisions for any
market price increases until a sale. For any digital assets held now or in the
future, these charges may negatively impact our profitability in the periods in
which such impairments occur even if the overall market values of these assets
increase. For example, in the first quarter of 2021, we recorded approximately
$27 million of impairment losses resulting from changes to the carrying value of
our bitcoin and gains of $128 million on certain sales of bitcoin by us.

Critical Accounting Policies and Estimates


The consolidated financial statements are prepared in accordance with GAAP. The
preparation of the consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses and related disclosures. We base our
estimates on historical experience, as appropriate, and on various other
assumptions that we believe to be reasonable under the circumstances. Changes in
the accounting estimates are reasonably likely to occur from period to period.
Accordingly, actual results could differ significantly from the estimates made
by our management. We evaluate our estimates and assumptions on an ongoing
basis. To the extent that there are material differences between these estimates
and actual results, our future financial statement presentation, financial
condition, results of operations and cash flows may be affected.
                                       30
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Due to the COVID-19 pandemic, there has been uncertainty and disruption in the
global economy and financial markets. The estimates used for, but not limited
to, determining significant economic incentive for resale value guarantee
arrangements, sales return reserves, the collectability of accounts receivable,
inventory valuation, warranties, fair value of long-lived assets, goodwill, fair
value of financial instruments, fair value and residual value of operating lease
vehicles and solar energy systems subject to leases could be impacted. We have
assessed the impact and are not aware of any specific events or circumstances
that required an update to our estimates and assumptions or materially affected
the carrying value of our assets or liabilities as of the date of issuance of
this Quarterly Report on Form 10-Q. These estimates may change as new events
occur and additional information is obtained. Actual results could differ
materially from these estimates under different assumptions or conditions.

For a description of our critical accounting policies and estimates, refer to
Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report
on Form 10-K for the year ended December 31, 2021. There have been no material
changes to our critical accounting policies and estimates since our Annual
Report on Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements


See Note 2, Summary of Significant Accounting Policies, to the consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Results of Operations

Revenues

                                                  Three Months Ended
                                                       March 31,                 Change
(Dollars in millions)                              2022          2021          $          %
Automotive sales                                $   15,514     $  8,187     $ 7,327        89 %
Automotive regulatory credits                          679          518         161        31 %
Automotive leasing                                     668          297         371       125 %
Total automotive revenues                           16,861        9,002       7,859        87 %
Services and other                                   1,279          893         386        43 %
Total automotive & services and other
  segment revenue                                   18,140        9,895       8,245        83 %
Energy generation and storage segment revenue          616          494         122        25 %
Total revenues                                  $   18,756     $ 10,389     $ 8,367        81 %



Automotive & Services and Other Segment


Automotive sales revenue includes revenues related to cash deliveries of new
Model S, Model X, Model 3, and Model Y vehicles, including access to our
Supercharger network, internet connectivity, FSD features and over-the-air
software updates. These deliveries are vehicles that are not subject to lease
accounting.

Automotive regulatory credits includes sales of regulatory credits to other
automotive manufacturers. Our revenue from automotive regulatory credits is
directly related to our new vehicle production, sales and pricing negotiated
with our customers. We monetize them proactively as new vehicles are sold based
on standing arrangements with buyers of such credits, typically as close as
possible to the production and delivery of the vehicle or changes in regulation
impacting the credits.

Automotive leasing revenue includes the amortization of revenue for vehicles
under direct operating lease agreements as well as those sold with resale value
guarantees accounted for as operating leases under lease accounting.
Additionally, automotive leasing revenue includes direct sales-type leasing
programs where we recognize all revenue associated with the sales-type lease
upon delivery to the customer.

Services and other revenue consists of non-warranty after-sales vehicle services, paid supercharging, sales of used vehicles, retail merchandise, sales by our acquired subsidiaries to third party customers and vehicle insurance revenue.


Automotive sales revenue increased $7.33 billion, or 89%, in the three months
ended March 31, 2022 as compared to the three months ended March 31, 2021,
primarily due to an increase of 111,915 Model 3 and Model Y cash deliveries, and
an increase of 10,305 Model S and Model X cash deliveries year over year. This
was achieved from production ramping at both Gigafactory Shanghai and the
Fremont Factory at a higher combined average selling price from a higher
proportion of Model Y sales offset by regional sales mix. There was also an
increase in the average selling price of Model S and Model X compared to the
prior period as deliveries of the new versions of Model S and Model X only began
ramping in the second and fourth quarters of 2021, respectively.
                                       31
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Automotive regulatory credits revenue increased $161 million, or 31%, in the
three months ended March 31, 2022 as compared to the three months ended March
31, 2021, primarily due to changes in regulation which entitled us to additional
consideration of $288 million in revenue for credits sold previously, in the
absence of which we had a decrease in automotive regulatory credits revenue
driven by lower sales of regulatory credits.

Automotive leasing revenue increased $371 million, or 125%, in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to an increase in direct sales-type leasing revenue and an increase in cumulative vehicles under our direct operating lease program.


Services and other revenue increased $386 million, or 43%, in the three months
ended March 31, 2022 as compared to the three months ended March 31, 2021,
primarily due to non-warranty maintenance services revenue as our fleet
continues to grow, increase in used vehicle revenue driven by increases in
volume and average selling prices of used vehicles, retail merchandise revenue
and insurance services revenue.

Energy Generation and Storage Segment

Energy generation and storage revenue includes sales, and leasing of solar energy generation and energy storage products, services related to such products and sales of solar energy systems incentives.


Energy generation and storage revenue increased by $122 million, or 25%, in the
three months ended March 31, 2022 as compared to the three months ended March
31, 2021, primarily due to an increase in deployments of Powerwall and Megapack.
This was partially offset by a decrease in solar cash and loan deployments
driven by constraints in importing certain components.

Cost of Revenues and Gross Margin

                                              Three Months Ended
                                                   March 31,                     Change
(Dollars in millions)                         2022           2021            $             %
Cost of revenues
Automotive sales                           $    10,914     $   6,457     $   4,457            69 %
Automotive leasing                                 408           160           248           155 %
Total automotive cost of revenues               11,322         6,617         4,705            71 %
Services and other                               1,286           962           324            34 %

Total automotive & services and other

  segment cost of revenues                      12,608         7,579         5,029            66 %
Energy generation and storage segment              688           595            93            16 %
Total cost of revenues                     $    13,296     $   8,174     $   5,122            63 %

Gross profit total automotive              $     5,539     $   2,385
Gross margin total automotive                     32.9 %        26.5 %

Gross profit total automotive & services
and other
  segment                                  $     5,532     $   2,316
Gross margin total automotive & services
and other
  segment                                         30.5 %        23.4 %

Gross profit energy generation and
storage segment                            $       (72 )   $    (101 )
Gross margin energy generation and
storage segment                                  -11.7 %       -20.4 %

Total gross profit                         $     5,460     $   2,215
Total gross margin                                29.1 %        21.3 %


Automotive & Services and Other Segment


Cost of automotive sales revenue includes direct and indirect materials, labor
costs, manufacturing overhead, including depreciation costs of tooling and
machinery, shipping and logistic costs, vehicle connectivity costs, allocations
of electricity and infrastructure costs related to our Supercharger network and
reserves for estimated warranty expenses. Cost of automotive sales revenues also
includes adjustments to warranty expense and charges to write down the carrying
value of our inventory when it exceeds its estimated net realizable value and to
provide for obsolete and on-hand inventory in excess of forecasted demand.

Cost of automotive leasing revenue includes the depreciation of operating lease
vehicles, cost of goods sold associated with direct sales-type leases and
warranty expense related to leased vehicles. Cost of automotive leasing revenue
also includes vehicle connectivity costs and allocations of electricity and
infrastructure costs related to our Supercharger network for vehicles under our
leasing programs.
                                       32
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Cost of services and other revenue includes costs associated with providing
non-warranty after-sales services, costs of paid supercharging, cost of used
vehicles including refurbishment costs, costs for retail merchandise, and costs
to provide vehicle insurance. Cost of services and other revenue also includes
direct parts, material and labor costs and manufacturing overhead associated
with the sales by our acquired subsidiaries to third party customers.

Cost of automotive sales revenue increased $4.46 billion, or 69%, in the three
months ended March 31, 2022 as compared to the three months ended March 31,
2021, primarily due to an increase of 111,915 Model 3 and Model Y cash
deliveries, and an increase of 10,305 Model S and Model X cash deliveries year
over year. These increases were partially offset by a decrease in combined
average Model 3 and Model Y costs per unit due to changes in regional production
mix as Gigafactory Shanghai ramped in capacity, where costs are lower from
localized procurement and manufacturing in China as well as decrease in combined
average Model S and Model X costs per unit driven by lower average cost for the
new versions of Model S and Model X from ramping up production.

Cost of automotive leasing revenue increased $248 million, or 155%, in the three
months ended March 31, 2022 as compared to the three months ended March 31,
2021, primarily due to an increase in direct sales-type leasing cost of revenues
from more sales in the current year and an increase in cumulative vehicles under
our direct operating lease program.

Cost of services and other revenue increased $324 million, or 34%, in the three
months ended March 31, 2022 as compared to the three months ended March 31,
2021, primarily due to an increase in costs to support our increase in
non-warranty maintenance services revenue, an increase in costs of retail
merchandise and insurance services as our sales have increased and an increase
in used vehicle cost of revenue driven by increases in volume and costs of
non-Tesla used vehicles.

Gross margin for total automotive increased from 26.5% in the three months ended
March 31, 2021 to 32.9% in the three months ended March 31, 2022. The increase
was primarily due to favorable changes in sales and production mix of Model Y as
Gigafactory Shanghai ramped in capacity. The average Model 3 and Model Y costs
per unit have decreased due to localized procurement and manufacturing in China
despite rising raw material, commodity, logistics and expedite costs. There was
also an increase in overall Model S and Model X cash deliveries at a lower
combined average cost per unit year over year, as well as an increase of $161
million in sales of regulatory credits, which have negligible incremental costs
associated with them.

Gross margin for total automotive & services and other segment increased from
23.4% in the three months ended March 31, 2021 to 30.5% in the three months
ended March 31, 2022, primarily due to the automotive gross margin impacts
discussed above and an improvement in our services and other gross margin.
Additionally, services and other was a lower percentage of the segment during
the three months ended March 31, 2022 compared to the prior year.

Energy Generation and Storage Segment


Cost of energy generation and storage revenue includes direct and indirect
material and labor costs, warehouse rent, freight, warranty expense, other
overhead costs and amortization of certain acquired intangible assets. Cost of
energy generation and storage revenue also includes charges to write down the
carrying value of our inventory when it exceeds its estimated net realizable
value and to provide for obsolete and on-hand inventory in excess of forecasted
demand. In agreements for solar energy system and PPAs where we are the lessor,
the cost of revenue is primarily comprised of depreciation of the cost of leased
solar energy systems, maintenance costs associated with those systems and
amortization of any initial direct costs.

Cost of energy generation and storage revenue increased by $93 million, or 16%,
in the three months ended March 31, 2022 as compared to the three months ended
March 31, 2021, primarily due to increases in deployments of Powerwall and
Megapack, partially offset by a decrease in solar cash and loan costs as
deployments have decreased and reductions in average costs per unit of Solar
Roof.

Gross margin for energy generation and storage increased from -20.4% in the
three months ended March 31, 2021 to -11.7% in the three months ended March 31,
2022, primarily due to higher deployments of Powerwall which operated at a
higher gross margin as well as an improvement in Solar Roof gross margin due to
reductions in average costs per unit. These increases were partially offset by a
decrease from lower solar cash and loan deployments.
                                       33
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Research and Development Expense

                                 Three Months Ended
                                      March 31,                 Change
(Dollars in millions)           2022            2021          $        %
Research and development      $     865       $     666     $ 199       30 %
As a percentage of revenues           5 %             6 %



Research and development ("R&D") expenses consist primarily of personnel costs
for our teams in engineering and research, manufacturing engineering and
manufacturing test organizations, prototyping expense, contract and professional
services and amortized equipment expense.

R&D expenses increased $199 million, or 30%, in the three months ended March 31,
2022 as compared to the three months ended March 31, 2021. The increase was
primarily due to a $90 million increase in facilities, outside services, freight
and depreciation expense, a $75 million increase in employee and labor related
expenses due to an increase in headcount, an $18 million increase in stock-based
compensation expense, and a $13 million increase in R&D expensed materials.
These increases were to support our expanding product roadmap and technologies
including our proprietary battery cells, and there were additional R&D expenses
as we were in the pre-production phase at Gigafactory Texas and started
production at Gigafactory Berlin only closer to the end of the current quarter.

R&D expenses as a percentage of revenue decreased from 6% in the three months
ended March 31, 2021 to 5% in the three months ended March 31, 2022. Our R&D
expenses have decreased as a proportion of total revenues despite expanding
product roadmap and technologies.

Selling, General and Administrative Expense

                                        Three Months Ended
                                             March 31,                Change
(Dollars in millions)                   2022           2021         $        %

Selling, general and administrative $ 992 $ 1,056 $ (64 )

  -6 %
As a percentage of revenues                  5 %           10 %


Selling, general and administrative ("SG&A") expenses generally consist of personnel and facilities costs related to our stores, marketing, sales, executive, finance, human resources, information technology and legal organizations, as well as fees for professional and contract services and litigation settlements.


SG&A expenses decreased $64 million, or 6%, in the three months ended March 31,
2022 as compared to the three months ended March 31, 2021. This is primarily due
to a decrease of $242 million in stock-based compensation expense, most of which
is attributable to the lower stock-based compensation expense of $251 million on
the 2018 CEO Performance Award. See Note 11, Equity Incentive Plans, to the
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q. This was offset by an increase of $110 million in employee and labor
related expenses from increased headcount and an increase of $68 million in
office, information technology, facilities-related expenses, sales and marketing
activities and other costs.

SG&A expenses as a percentage of revenue decreased from 10% in the three months
ended March 31, 2021 to 5% in the three months ended March 31, 2022. Our SG&A
expenses have decreased as a proportion of total revenues due to operational
efficiencies.

Restructuring and Other Expense

                                Three Months Ended
                                     March 31,                     Change
(Dollars in millions)         2022           2021           $             %
Restructuring and other       $   0       $      (101 )   $ 101     Not meaningful
As a percentage of revenues       0 %              -1 %



During the three months ended March 31, 2021, we realized gains of $128 million
in connection with selling a portion of our holdings of bitcoin and recorded $27
million of impairment losses. During the three months ended March 31, 2022, we
did not record any impairment loss on bitcoin. See Note 3, Digital Assets, Net,
to the consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q for further details.
                                       34
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Interest Expense

                                 Three Months Ended
                                      March 31,                 Change
(Dollars in millions)           2022            2021         $         %
Interest expense              $     (61 )     $     (99 )   $ 38       -38 %
As a percentage of revenues           0 %             1 %



Interest expense decreased by $38 million, or 38%, in the three months ended
March 31, 2022 as compared to the three months ended March 31, 2021, primarily
due to the continued reduction in our overall debt balance. See Note 10, Debt,
to the consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q for further details.

Other Income, Net

                                 Three Months Ended
                                     March 31,                 Change
(Dollars in millions)           2022             2021       $         %
Other income, net             $      56         $   28     $ 28       100 %
As a percentage of revenues           0 %            0 %



Other income, net, consists 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. We
expect our foreign exchange gains and losses will vary depending upon movements
in the underlying exchange rates.

Other income, net, changed favorably by $28 million in the three months ended
March 31, 2022 as compared to the three months ended March 31, 2021, primarily
due to favorable fluctuations in foreign currency exchange rates and offset by a
$10 million decrease in gain on our interest rate swaps which were settled in
the current period.

Provision for Income Taxes

                               Three Months Ended
                                    March 31,                Change
(Dollars in millions)          2022           2021         $         %
Provision for income taxes   $     346       $    69     $ 277       401 %
Effective tax rate                  10 %          13 %


Our provision for income taxes increased by $277 million, or 401%, in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to the increase in our pre-tax income year over year.


Our effective tax rate decreased from 13% to 10% in the three months ended March
31, 2022 as compared to the three months ended March 31, 2021, primarily due to
changes in mix of jurisdictional earnings.

See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.


Net Income Attributable to Noncontrolling Interests and Redeemable
Noncontrolling Interests

                                              Three Months Ended
                                                   March 31,                         Change
(Dollars in millions)                        2022             2021            $               %
Net (loss) income attributable to
noncontrolling interests and
  redeemable noncontrolling interests
in subsidiaries                           $      (38 )     $       26     $     (64 )   Not meaningful


Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased by $64 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 due to a decrease in allocations to financing fund investors.

                                       35
--------------------------------------------------------------------------------

Liquidity and Capital Resources


We expect to continue to generate net positive operating cash flow as we have
done in the last four fiscal years. The cash we generate from our core
operations enables us to fund ongoing operations and production, our research
and development projects for new products and technologies including our
proprietary battery cells, additional manufacturing ramps at existing
manufacturing facilities such as the Fremont Factory, Gigafactory Nevada,
Gigafactory Shanghai and Gigafactory New York, the ramp of Gigafactory Berlin
and Gigafactory Texas and the continued expansion of our retail and service
locations, body shops, Mobile Service fleet, Supercharger network and energy
product installation capabilities.

In addition, because a large portion of our future expenditures will be to fund
our growth, we expect that if needed we will be able to adjust our capital and
operating expenditures by operating segment. For example, if our near-term
manufacturing operations decrease in scale or ramp more slowly than expected,
including due to global economic or business conditions, we may choose to
correspondingly slow the pace of our capital expenditures. Finally, we
continually evaluate our cash needs and may decide it is best to raise
additional capital or seek alternative financing sources to fund the rapid
growth of our business, including through drawdowns on existing or new debt
facilities or financing funds. Conversely, we may also from time to time
determine that it is in our best interests to voluntarily repay certain
indebtedness early.

Accordingly, we believe that our current sources of funds will provide us with
adequate liquidity during the 12-month period following March 31, 2022, as well
as in the long-term.

See the sections below for more details regarding the material requirements for cash in our business and our sources of liquidity to meet such needs.

Material Cash Requirements


From time to time in the ordinary course of business, we enter into agreements
with vendors for the purchase of components and raw materials to be used in the
manufacture of our products. However, due to contractual terms, variability in
the precise growth curves of our development and production ramps, and
opportunities to renegotiate pricing, we generally do not have binding and
enforceable purchase orders under such contracts beyond the short-term, and the
timing and magnitude of purchase orders beyond such period is difficult to
accurately project.

As discussed in and subject to the considerations referenced in Part I, Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Management Opportunities, Challenges and Risks and 2022 Outlook-Cash
Flow and Capital Expenditure Trends in this Quarterly Report on Form 10-Q, we
currently expect our capital expenditures to support our projects globally to be
between $5.00 to $7.00 billion in 2022 and each of the next two fiscal years. In
connection with our operations at Gigafactory New York, we have an agreement to
spend or incur $5.00 billion in combined capital, operational expenses, costs of
goods sold and other costs in the State of New York through December 31, 2029
(pursuant to a deferral of our required timelines to meet such obligations that
was granted in April 2021 and which was memorialized in an amendment to our
agreement with the SUNY Foundation in August 2021). We also have an operating
lease arrangement with the local government of Shanghai pursuant to which we are
required to spend RMB 14.08 billion in capital expenditures at Gigafactory
Shanghai by the end of 2023. For details regarding these obligations, refer to
Note 12, Commitments and Contingencies, to the consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.

As of March 31, 2022, we and our subsidiaries had outstanding $3.45 billion in
aggregate principal amount of indebtedness, of which $1.17 billion is scheduled
to become due in the succeeding 12 months. For details regarding our
indebtedness, refer to Note 10, Debt, to the consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.

Sources and Conditions of Liquidity


Our sources to fund our material cash requirements are predominantly from our
deliveries and servicing of new and used vehicles, sales and installations of
our energy storage products and solar energy systems, proceeds from debt
facilities and proceeds from equity offerings, when applicable.

As of March 31, 2022, we had $17.51 billion of cash and cash equivalents.
Balances held in foreign currencies had a U.S. dollar equivalent of $6.84
billion and consisted primarily of Chinese yuan, euros and Canadian dollars. In
addition, we had $2.36 billion of unused committed amounts under our credit
facilities as of March 31, 2022. Certain of such unused committed amounts are
subject to satisfying specified conditions prior to draw-down (such as pledging
to our lenders sufficient amounts of qualified receivables, inventories, leased
vehicles and our interests in those leases, solar energy systems and the
associated customer contracts or various other assets). For details regarding
our indebtedness, refer to Note 10, Debt to the consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
                                       36

--------------------------------------------------------------------------------



We continue adapting our investment strategy to meet our liquidity and risk
objectives, such as investing in U.S. government and other marketable
securities, digital assets and providing product related financing. In the first
quarter of 2021, we invested an aggregate $1.50 billion in digital assets. The
fair market value of such digital assets held as of March 31, 2022 was $1.96
billion. We believe in the long-term potential of digital assets both as an
investment and also as a liquid alternative to cash. As with any investment and
consistent with how we manage fiat-based cash and cash equivalent accounts, we
may increase or decrease our holdings of digital assets at any time based on the
needs of the business and our view of market and environmental conditions.
However, digital assets may be subject to volatile market prices, which may be
unfavorable at the times when we may want or need to liquidate them.
Additionally, we held short-term marketable securities of $508 million as of
March 31, 2022.

© Edgar Online, source Glimpses

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