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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Tesla, Inc.    TSLA

TESLA, INC.

(TSLA)
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TESLA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/26/2020 | 08:08am EST
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.

In 2020, we have produced 329,980 vehicles and delivered 318,980 vehicles
through the third quarter. We are currently focused on increasing vehicle
production, building new vehicle factories, developing and ramping our battery
cell technology, increasing the affordability of our vehicles, and increasing
our delivery capabilities.

In 2020, we have deployed 1.44 GWh of energy storage products and 119 MW of solar energy systems through the third quarter. We are currently focused on ramping production of energy storage products, improving our Solar Roof installation capabilities, and increasing market share of retrofit solar energy systems.

During the three and nine months ended September 30, 2020, we recognized total revenues of $8.77 billion and $20.79 billion, respectively, representing increases of $2.47 billion and $3.60 billion, respectively, over the same periods ended September 30, 2019. We continue to ramp production to enable increased deliveries and deployments of our products and further revenue growth.


During the three and nine months ended September 30, 2020, our net income
attributable to common stockholders was $331 million and $451 million,
respectively, representing favorable changes of $188 million and $1.42 billion,
respectively, over the same periods ended September 30, 2019. We continue to
focus on operational efficiencies, while we have seen an acceleration of
non-cash stock-based compensation expense due to a rapid increase in our market
capitalization.

We ended the third quarter of 2020 with $14.53 billion in cash and cash
equivalents, representing an increase of $8.26 billion from the end of 2019. Our
cash flows from operating activities during the nine month period ended
September 30, 2020 was $2.92 billion, compared to $980 million during the same
period ended September 30, 2019, and capital expenditures amounted to $2.01
billion during the nine month period ended September 30, 2020, compared to $915
million during the same period ended September 30, 2019. Sustained growth has
allowed our business to fund itself, and we will see a number of
capital-intensive projects in upcoming periods.

Management Opportunities, Challenges and Risks

Impact of COVID-19 Pandemic




There continues to be worldwide impact from the COVID-19 pandemic. While we have
been relatively successful in navigating such impact to date, we have previously
been affected by temporary manufacturing closures, employment and compensation
adjustments, and impediments to administrative activities supporting our product
deliveries and deployments. There are also ongoing related risks to our business
depending on the progression of the pandemic, and recent trends in certain
regions have indicated potential returns to limited or closed government
functions, business activities and person-to-person interactions. Please see the
"Results of Operations" section of this Item below and certain risk factors
described in Part II, Item 1A, Risk Factors in this Quarterly Report on Form
10-Q, particularly the first risk factor included there, for more detailed
descriptions of the impact and risks to our business.

We cannot predict the duration or direction of current global trends from this
pandemic, the sustained impact of which is largely unknown, is rapidly evolving,
and has varied across geographic regions. Ultimately, we 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.


                                       34
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Automotive-Production


The following is a summary of the status of production of each of our 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 and Model X Active

                       Model 3 and Model Y   Active
Gigafactory Shanghai   Model 3               Active
                       Model Y               Constructing manufacturing 

facilities

Gigafactory Berlin     Model Y               Constructing manufacturing 

facilities

                       Model 3               In development
Gigafactory Texas      Model Y               Constructing manufacturing 

facilities

                       Cybertruck            In development
U.S location(s) TBD    Tesla Semi            In development
                       Tesla Roadster        In development




Following a quarterly record for vehicle production in the third quarter of
2020, we are focused on further increasing production rates for Model 3 and
Model Y in the rest of the year to at least the capacity that we have installed.
The next phase of production growth will depend on the construction of
Gigafactory Berlin, Gigafactory Texas and Model Y manufacturing facilities at
Gigafactory Shanghai, each of which is progressing as planned for deliveries
beginning in 2021. Our goal is to continuously decrease production costs and
increase the affordability of our vehicles. To that end, we recently announced
our plans to develop and manufacture our own battery cells, with which we are
targeting lower capital and production costs and longer range. As cell supply is
critical to our business, coupling this strategy with cells from our suppliers
will help us stay ahead of any potential constraints. With these efforts, we
also hope to eventually release a future vehicle that is even more affordable
than our current offerings.

However, these plans are subject to uncertainties inherent in establishing new
manufacturing operations, which may be exacerbated by the number of concurrent
international projects and any future impact from the COVID-19 pandemic.
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 manufacturing are key to our
vehicles' affordability, and have allowed us to recently decrease Model 3 prices
in China. We will also continue to generate demand and brand awareness by
improving our vehicles' functionality, including Autopilot, FSD and software
features, and introducing anticipated future vehicles. We believe that achieving
a quarterly deliveries record in the third quarter of 2020 during an
industry-wide downturn in the current global pandemic was aided by our
undeterred commitment to our roadmap, the flexibility and resiliency of our
operations, and greater consumer awareness of the demonstratively positive
environmental impact from the worldwide reduction in fossil fuel consumption.

While such trends are encouraging signs of future demand for our vehicles and
sustainable energy products, they are relatively recent indicators and 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 pandemic. In addition, improvements to the macroeconomic outlook
may benefit the transportation industry as a whole, making it even more crucial
for us to maintain the momentum that we have gained relative to a growing number
of potential competitors, including in the electric vehicle market.

Automotive-Deliveries and Customer Infrastructure




Our vehicle delivery capability became a bottleneck on our total deliveries as
our production increased to a record level, and we are focused on increasing our
capacity and efficiency in this area. Situating our factories closer to local
markets should mitigate the strain on our deliveries. In any case, as we expand,
we will have to continue to increase and staff our delivery, servicing and
charging infrastructure, maintain our vehicle reliability and optimize our
Supercharger locations to ensure cost-effectiveness and customer satisfaction.


                                       35
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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, particularly for Megapack. For
Powerwall, better availability and growing grid stability concerns drive higher
interest, and cross-selling with our residential solar energy products will
continue to benefit both product lines. We remain committed to increasing our
retrofit solar energy business by offering a low-cost and simplified online
ordering experience. In addition, we are working to improve our installation
capabilities for Solar Roof by on-boarding and training a large number of
installers and reducing the installation time dramatically. 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.

Trends in Cash Flow, Capital Expenditures and Operating Expenses


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
uncertainties in future global market conditions resulting from the COVID-19
pandemic currently makes projections more challenging. We are simultaneously
ramping new products in Model Y and Solar Roof, constructing 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 at the high end of our range of $2.5 to $3.5 billion in 2020
and increase to $4.5 to $6.0 billion in each of the next two fiscal years.

Notwithstanding the capital-intensive projects that are in progress or planned,
our business is now consistently generating cash flow from operations in excess
of our level of capital spend, and in the third quarter of 2020 we also reduced
the use of our working capital credit facilities. We expect our ability to be
self-funding to continue as long as macroeconomic factors support current trends
in our sales. Combined with better working capital management resulting in
shorter days sales outstanding than days payable outstanding, our sales growth
is also facilitating positive cash generation. We also opportunistically
strengthened our liquidity through an at-the-market offering of common stock in
September 2020, with net proceeds to us of approximately $4.97 billion.

Likewise, as long as we see expanding sales, and excluding the impact of
non-cash stock compensation expense attributable to the 2018 CEO Performance
Award as explained below, we expect operating expenses relative to revenues to
decrease as we additionally increase operational efficiency and process
automation.

In March 2018, our stockholders approved the 2018 CEO Performance Award, with
vesting contingent on our Board of Directors' certification of the achievement
of specified market capitalization and operational milestones. We will incur
significant non-cash stock-based compensation expense for each tranche under
this award after the related operational milestone initially becomes probable of
being met, and if later than the grant date, we will also have to record a
cumulative catch-up expense at such time. Such catch-up expense may be material
depending on the length of time elapsed from the grant date. Moreover, as the
expense for a tranche is recorded over the longer of (i) the expected
achievement period of the relevant operational milestone and (ii) only if the
related market capitalization milestone has not been achieved, its expected
achievement period, the achievement of a market capitalization milestone earlier
than expected may accelerate the rate at which such expense is recognized. Upon
vesting of a tranche, all remaining associated expense will be recognized
immediately. During 2020, a number of operational milestones became probable and
a number of tranches vested, including as a result of our market capitalization
increasing rapidly, resulting in the recognition or acceleration of related
expense earlier than anticipated and within a relatively short period of time.
See Note 11, Equity Incentive Plans-2018 CEO Performance Award, to the
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q for further details regarding the stock-based compensation relating to
the 2018 CEO Performance Award. As our market capitalization is unpredictable
and our financial performance improves, it is possible that the
earlier-than-planned recognition of such expenses will continue in the near
term.




Critical Accounting Policies and Estimates


The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S. ("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.

                                       36

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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 residual value guarantee
arrangements, sales return reserves, the collectability of accounts receivable,
inventory valuation, 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, 2019. 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, 2019.



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

Effects of COVID-19

The COVID-19 pandemic has impacted our business and financial results in 2020.


The temporary suspension of production at our factories during the first half of
2020 had caused production limitations that negatively impacted our deliveries
for the first half of 2020. While we have resumed operations at all of our
factories worldwide, our temporary suspension at our factories resulted in idle
capacity charges as we still incurred fixed costs such as depreciation, certain
payroll related expenses, and property taxes. As part of our response strategy
to the business disruptions and uncertainty around macroeconomic conditions
caused by the COVID-19 pandemic, we had instituted cost reduction initiatives
across our business globally to be commensurate to the scope of our operations
while they were scaled back. This included temporary labor cost reduction
measures such as employee furloughs and compensation reductions. Additionally,
we suspended non-critical operating spend and opportunistically renegotiated
supplier and vendor arrangements. As part of various governmental responses to
the pandemic granted to companies globally, we received certain payroll related
benefits which helped to reduce the impact of the COVID-19 pandemic on our
financial results. Such payroll related benefits related to our direct headcount
have been primarily netted against our idle capacity charges disclosed as well
as marginally reduced our operating expenses. The impact of the idle capacity
charges incurred during the first half of 2020 were almost entirely offset by
our cost savings initiatives and payroll related benefits.



Revenues



                                                 Three Months Ended September 30,                 Change                Nine Months Ended September 30,               Change
(Dollars in millions)                              2020                     2019              $            %              2020                  2019              $            %
Automotive sales                             $          7,346         $          5,132     $  2,214           43 %   $        17,150$        13,809$  3,341           24 %
Automotive leasing                                        265                      221           44           20 %               772                   644          128           20 %
Total automotive revenues                               7,611                    5,353        2,258           42 %            17,922                14,453        3,469           24 %
Services and other                                        581                      548           33            6 %             1,628                 1,646          (18 )         -1 %
Total automotive & services
  and other segment revenue                             8,192                    5,901        2,291           39 %            19,550                16,099        3,451           21 %
Energy generation and
  storage segment revenue                                 579                      402          177           44 %             1,242                 1,095          147           13 %
Total revenues                               $          8,771         $          6,303     $  2,468           39 %   $        20,792$        17,194$  3,598           21 %




                                       37
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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, as well as sales of regulatory credits to other automotive
manufacturers. Cash deliveries are vehicles that are not subject to lease
accounting. Our revenue from regulatory credits fluctuates by quarter depending
on when a contract is executed with a buyer and when the credits are delivered.
For example, our revenue from regulatory credit sales in the three months ended
September 30, 2019 was $134 million while it was $397 million in the three
months ended September 30, 2020.

Automotive leasing revenue includes the amortization of revenue for Model S,
Model X, Model 3 and Model Y vehicles under direct operating lease agreements as
well as those sold with resale value guarantees accounted for as operating
leases under lease accounting. We began offering direct leasing for Model 3
vehicles in the second quarter of 2019 and we began offering direct leasing for
Model Y vehicles in the third quarter of 2020. 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,
which we introduced in volume during the third quarter of 2020.

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


Automotive sales revenue increased $2.21 billion, or 43%, in the three months
ended September 30, 2020 as compared to the three months ended September 30,
2019, primarily due to an increase of 41,820 Model 3 and Model Y cash deliveries
at relatively consistent combined average selling prices from production ramping
at both Gigafactory Shanghai and the Fremont Factory. Additionally, we had an
increase of $263 million from additional sales of regulatory credits to $397
million in the three months ended September 30, 2020. These increases were
partially offset by 1,596 fewer Model S and Model X cash deliveries at
relatively consistent combined average selling prices in the three months ended
September 30, 2020 compared to the same period in the prior year.



Automotive sales revenue increased $3.34 billion, or 24%, in the nine months
ended September 30, 2020 as compared to the nine months ended September 30,
2019, primarily due to an increase of 66,685 Model 3 and Model Y cash deliveries
despite production limitations as a result of temporary suspension of production
at the Fremont Factory and Gigafactory Nevada during the first half of 2020. We
were able to increase deliveries year over year from production ramping at both
Gigafactory Shanghai and the Fremont Factory. There was also an increase of $718
million from additional sales of regulatory credits to $1.18 billion in the nine
months ended September 30, 2020. Additionally, due to pricing adjustments we
made to our vehicle offerings during the nine months ended September 30, 2019,
we estimated that there was a greater likelihood that customers would exercise
their buyback options and adjusted our sales return reserve on vehicles
previously sold under our buyback options program which resulted in a reduction
of automotive sales revenue of $555 million. We made further pricing adjustments
that resulted in a similar but smaller reduction of automotive sales revenue of
$72 million during the nine months ended September 30, 2020. These factors
increasing automotive sales revenue were partially offset by a decrease in the
average selling price of Model 3 from inclusion of lower priced China
manufactured Model 3 and an increase in Standard Range variants in our overall
sales mix and 8,841 fewer Model S and Model X cash deliveries at relatively
consistent combined average selling prices in the nine months ended September
30, 2020 compared to the same period in the prior year.

Automotive leasing revenue increased $44 million, or 20%, in the three months
ended September 30, 2020 as compared to the three months ended September 30,
2019, primarily due to the introduction of direct sales-type leasing programs
which we began offering in volume during the third quarter of 2020 and where we
recognize all revenue associated with the sales-type lease upon delivery to the
customer. Additionally, we had an increase in cumulative vehicles under our
direct operating lease program. These increases were partially offset by the
decreases in automotive leasing revenue associated with our resale value
guarantee leasing programs which are accounted for as operating leases as those
portfolios are declining.

Automotive leasing revenue increased $128 million, or 20%, in the nine months
ended September 30, 2020 as compared to the nine months ended September 30,
2019, primarily due to an increase in cumulative vehicles under our direct
operating lease program and the introduction of direct sales-type leasing
programs which we began offering in volume during the third quarter of 2020
where we recognize all revenue associated with the sales-type lease upon
delivery to the customer. These increases were partially offset by the decreases
in automotive leasing revenue associated with our resale value guarantee leasing
programs accounted for as operating leases as those portfolios are declining.

Services and other revenue increased $33 million, or 6%, in the three months
ended September 30, 2020 as compared to the three months ended September 30,
2019, primarily due to an increase in non-warranty maintenance services revenue
as our fleet continues to grow, an increase in retail merchandise revenue and an
increase in the volume of traded-in Tesla vehicles sales at lower average
selling prices. These increases were partially offset by a decrease in the
volume of traded-in non-Tesla vehicle sales at lower average selling prices.

                                       38

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Services and other revenue decreased $18 million, or 1%, in the nine months
ended September 30, 2020 as compared to the nine months ended September 30,
2019, primarily due to a decrease in the volume of used vehicle sales at
increased average selling prices as traded-in Tesla vehicles made up a larger
portion of the overall sales mix, partially offset by an increase in
non-warranty maintenance services revenue as our fleet continues to grow, an
overall increase in retail merchandise revenue and an increase in sales by our
acquired subsidiaries to third party customers due to additional acquired
subsidiaries since 2019.

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 $177 million, or 44%, in the
three months ended September 30, 2020 as compared to the three months ended
September 30, 2019, primarily due to increases in deployments of Megapack,
Powerwall and solar cash and loan jobs, partially offset by reduced average
selling prices on our solar cash and loan jobs as a result of our low cost solar
strategy.

Energy generation and storage revenue increased by $147 million, or 13%, in the
nine months ended September 30, 2020 as compared to the nine months ended
September 30, 2019, primarily due to increases in deployments of Megapack and
Powerwall, partially offset by a decrease in deployments of Powerpack and
reduced average selling prices on our solar cash and loan jobs as a result of
our low cost solar strategy.

Cost of Revenues and Gross Margin




                                           Three Months Ended September 30,                 Change                Nine Months Ended September 30,               Change
(Dollars in millions)                        2020                     2019              $            %              2020                  2019              $            %
Cost of revenues
Automotive sales                       $          5,361         $          4,014     $  1,347           34 %   $        12,774$        11,124$  1,650           15 %
Automotive leasing                                  145                      117           28           24 %               415                   340           75           22 %

Total automotive cost

  of revenues                                     5,506                    4,131        1,375           33 %            13,189                11,464        1,725           15 %
Services and other                                  644                      667          (23 )         -3 %             1,850                 2,096         (246 )        -12 %
Total automotive &

services and other

segment cost of

  revenues                                        6,150                    4,798        1,352           28 %            15,039                13,560        1,479           11 %

Energy generation and

  storage segment                                   558                      314          244           78 %             1,189                   956          233           24 %
Total cost of revenues                 $          6,708         $          5,112     $  1,596           31 %   $        16,228$        14,516$  1,712           12 %

Gross profit total automotive $ 2,105 $ 1,222

                               $         4,733       $         2,989
Gross margin total automotive                        28 %                     23 %                                          26 %                  21 %

Gross profit total automotive &

  services and other segment           $          2,042         $          1,103                               $         4,511       $         2,539

Gross margin total automotive &

  services and other segment                         25 %                     19 %                                          23 %                  16 %

Gross profit energy generation

  and storage segment                  $             21         $             88                               $            53       $           139

Gross margin energy generation

  and storage segment                                 4 %                     22 %                                           4 %                  13 %

Total gross profit                     $          2,063         $          1,191                               $         4,564       $         2,678
Total gross margin                                   24 %                     19 %                                          22 %                  16 %




                                       39
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Automotive & Services and Other Segment


Cost of automotive sales revenue includes direct parts, material and 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 amortization of operating lease
vehicles over the lease term, cost of goods sold associated with direct
sales-type leases which were introduced in volume in the third quarter of 2020,
as well as warranty expenses 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.

Cost of services and other revenue includes costs associated with providing
non-warranty after-sales services, costs to acquire and certify used vehicles,
costs for retail merchandise, and costs to provide vehicle insurance. Cost of
services and other revenue also includes direct parts, material and labor costs,
manufacturing overhead associated with the sales by our acquired subsidiaries to
third party customers.

Cost of automotive sales revenue increased $1.35 billion, or 34%, in the three
months ended September 30, 2020 as compared to the three months ended
September 30, 2019, primarily due to an increase of 41,820 Model 3 and Model Y
cash deliveries, partially offset by a decrease in average Model 3 costs per
unit due to a higher sales mix of lower end trims and lower freight and duty
costs from local production in China. Additionally, there was a decrease of
1,596 Model S and Model X cash deliveries.

Cost of automotive sales revenue increased $1.65 billion, or 15%, in the nine
months ended September 30, 2020 as compared to the nine months ended
September 30, 2019, primarily due to an increase of 66,685 Model 3 and Model Y
cash deliveries. Due to pricing adjustments we made to our vehicle offerings
during the nine months ended September 30, 2019, we estimated that there was a
greater likelihood that customers would exercise their buyback options and if
customers elect to exercise the buyback option, we expect to be able to
subsequently resell the returned vehicles, which resulted in a reduction of cost
of automotive sales revenue of $451 million. We made further pricing adjustments
that resulted in a similar but smaller reduction of cost of automotive sales
revenue of $42 million during the nine months ended September 30, 2020.
Additionally, there was an increase to cost of automotive sales revenue from
idle capacity charges of $213 million as a result of temporary suspension of
production at the Fremont Factory and Gigafactory Nevada during the first half
of 2020. These factors increasing cost of automotive sales revenue were
partially offset by a decrease in average Model 3 costs per unit due to a higher
sales mix of lower end trims, lower freight and duty costs from local production
in China, and additional manufacturing efficiencies in the production of Model 3
in our Fremont Factory, as well as a decrease of 8,841 Model S and Model X cash
deliveries in the nine months ended September 30, 2020 compared to the same
period in the prior year.

Cost of automotive leasing revenue increased $28 million, or 24%, in the three
months ended September 30, 2020 compared to the three months ended September 30,
2019, primarily due to the introduction of direct sales-type leasing programs
which we began offering in volume during the third quarter of 2020 and where we
recognize all revenue associated with the sales-type lease upon delivery to the
customer. Additionally, we had an increase in cumulative vehicles under our
direct operating lease program. These increases were partially offset by the
decreases in cost of automotive leasing revenue associated with our resale value
guarantee leasing programs which are accounted for as operating leases as those
portfolios are declining.

Cost of automotive leasing revenue increased $75 million, or 22%, in the nine
months ended September 30, 2020 as compared to the nine months ended
September 30, 2019, primarily due to an increase in cumulative vehicles under
our direct operating lease program and the introduction of direct sales-type
leasing programs which we began offering in volume during the third quarter of
2020 and where we recognize all revenue associated with the sales-type lease
upon delivery to the customer. These increases were partially offset by the
decreases in automotive lease revenue associated with our resale value guarantee
leasing programs which are accounted for as operating leases as those portfolios
are declining.

Cost of services and other revenue decreased $23 million, or 3%, in the three
months ended September 30, 2020 as compared to the three months ended
September 30, 2019, primarily due to decreased costs of used vehicle sales from
a decrease in the volume of traded-in non-Tesla vehicle sales, partially offset
by increases in non-warranty maintenance services as our fleet continues to grow
and an increase in costs of used vehicle sales from an increase in the volume of
traded-in Tesla vehicles.

Cost of services and other revenue decreased $246 million, or 12%, in the nine
months ended September 30, 2020 as compared to the nine months ended
September 30, 2019, primarily due to decreased costs of used vehicle sales from
lower sales volume, partially offset by increases in non-warranty maintenance
services as our fleet continues to grow, increase in cost of sales by our
acquired subsidiaries to third party customers in line with the increase in
revenue and an increase in costs of retail merchandise as our sales have
increased.

                                       40

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Gross margin for total automotive increased from 23% to 28% in the three months
ended September 30, 2020 as compared to the three months ended September 30,
2019, primarily due to an increase of $263 million in sales of regulatory
credits and an improvement of Model 3 gross margin primarily from lower freight
and duty costs from local production in China, partially offset by a decrease in
average selling prices of Model 3 from inclusion of lower priced China
manufactured Model 3 in our sales mix in the three months ended September 30,
2020.

Gross margin for total automotive increased from 21% to 26% in the nine months
ended September 30, 2020 as compared to the nine months ended September 30,
2019, primarily due to an improvement of Model 3 gross margin primarily from
lower freight and duty costs from local production in China and additional
manufacturing efficiencies in the production of Model 3 in our Fremont Factory,
partially offset by a decrease in average selling prices of Model 3 from
inclusion of lower priced China manufactured Model 3 and an increase in Standard
Range variants in our overall sales mix. Additionally, there was an increase of
$718 million in sales of regulatory credits. These increases were partially
offset by idle capacity charges of $213 million as a result of temporary
suspension of production at the Fremont Factory and Gigafactory Nevada during
the first half of 2020.

Gross margin for total automotive & services and other segment increased from
19% to 25% in the three months ended September 30, 2020 as compared to the three
months ended September 30, 2019, primarily due to the automotive gross margin
impacts discussed above and improved services and other gross margin from
improved used vehicle sales gross margins. Additionally, there was an increase
due to a lower proportion of services and other, which operates at a lower gross
margin than our automotive business, within the segment in the three months
ended September 30, 2020.

Gross margin for total automotive & services and other segment increased from
16% to 23% in the nine months ended September 30, 2020 as compared to the nine
months ended September 30, 2019 primarily due to the automotive gross margin
impacts discussed above and improved services and other gross margin from
improved used vehicle sales gross margins and increased operational efficiencies
in our non-warranty maintenance services business. Additionally, there was an
increase due to a lower proportion of services and other, which operates at a
lower gross margin than our automotive business, within the segment in the nine
months ended September 30, 2020.

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. In
addition, where arrangements are accounted for as operating leases, 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 $244 million, or 78%,
in the three months ended September 30, 2020 as compared to the three months
ended September 30, 2019, primarily due to increases in deployments of Megapack,
Powerwall, solar cash and loan jobs and higher costs from temporary
manufacturing underutilization of our Solar Roof ramp.

Cost of energy generation and storage revenue increased by $233 million, or 24%,
in the nine months ended September 30, 2020 as compared to the nine months ended
September 30, 2019, primarily due to increases in deployments of Megapack and
Powerwall, higher costs from temporary manufacturing underutilization of our
Solar Roof ramp and idle capacity charges of $20 million as a result of
temporary suspension of production at Gigafactory New York during the first half
of 2020. These increases were partially offset by a decrease in deployments of
Powerpack.

Gross margin for energy generation and storage decreased from 22% to 4% in the
three months ended September 30, 2020 as compared to the three months ended
September 30, 2019, primarily due to lower gross margins in our solar cash and
loan business driven by higher costs from temporary manufacturing
underutilization of our Solar Roof ramp and reduced average selling prices on
our solar cash and loan jobs as a result of our low cost solar strategy.

Gross margin for energy generation and storage decreased from 13% to 4% in the
nine months ended September 30, 2020 as compared to the nine months ended
September 30, 2019, primarily due to lower gross margins in our solar cash and
loan business driven by higher costs from temporary manufacturing
underutilization of our Solar Roof ramp and reduced average selling prices on
our solar cash and loan jobs as a result of our low cost solar strategy,
partially offset by an improvement in our energy storage gross margin as a
result of lower material costs.

Research and Development Expense



                                             Three Months Ended September 30,                 Change                  Nine Months Ended September 30,               Change
(Dollars in millions)                         2020                      2019              $            %              2020                      2019             $          %
Research and development                 $           366           $           334     $     32           10 %   $           969           $           998     $  (29 )       -3 %
As a percentage of revenues                            4 %                       5 %                                           5 %                       6 %


                                       41
--------------------------------------------------------------------------------




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 $32 million, or 10%, in the three months ended
September 30, 2020 compared to the three months ended September 30, 2019. The
increase was primarily due to a $10 million increase in expensed materials, an
$8 million increase in employee and labor related expenses and a $7 million
increase in facilities, freight and depreciation.

R&D expenses as a percentage of revenue decreased from 5% to 4% in the three
months ended September 30, 2020 as compared to the three months ended
September 30, 2019. The decrease is primarily from an increase in total revenues
from expanding sales, partially offset by an increase in our R&D expenses as
detailed above.

R&D expenses decreased $29 million, or 3%, in the nine months ended
September 30, 2020 as compared to the nine months ended September 30, 2019. The
decrease was primarily due to a $41 million decrease in employee and labor
related expenses partially offset by an $15 million increase in facilities,
freight and depreciation expenses. The decreases observed were driven by our
continued focus on increasing operational efficiency and process automation and
from our cost savings initiatives as part of our COVID-19 response strategy as
discussed above.

R&D expenses as a percentage of revenue decreased from 6% to 5% in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The decrease is primarily an increase in total revenues from expanding sales and a decrease in our R&D expenses as detailed above.

Selling, General and Administrative Expense



                                               Three Months Ended September 30,                 Change                  Nine Months Ended September 30,               Change
(Dollars in millions)                           2020                      2019              $            %               2020                     2019             $          %
Selling, general and administrative        $           888           $           596     $    292           49 %   $          2,176         $          1,947     $  229         12 %
As a percentage of revenues                             10 %                       9 %                                           10 %                     11 %



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 increased $292 million, or 49%, in the three months ended
September 30, 2020 as compared to the three months ended September 30, 2019. The
increase was primarily due to an increase of $307 million in stock-based
compensation expense, of which $282 million was attributable to the 2018 CEO
Performance Award. We had recorded a $77 million cumulative catch-up expense for
the service provided from the grant date when an additional operational
milestone was considered probable of being met in the third quarter of 2020 and
the remaining unamortized expense of $95 million and $118 million for the second
and third tranches were recognized in the third quarter of 2020 upon vesting as
the second and third market capitalization milestones were achieved (see Note
11, Equity Incentive Plans, to the consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q). The remaining stock-based
compensation expense increase of $25 million attributable to other directors and
employees is primarily related to the issuance of equity awards in the current
year at higher grant date fair values due to our increased share price.
Additionally, there was an increase of $48 million in employee and related
expenses primarily due to headcount increases, partially offset by a reduction
to operating expenses for costs previously incurred of $43 million for the
settlement in part of the securities litigation relating to the SolarCity
acquisition (see Note 12, Commitments and Contingencies-Legal
Proceedings-Securities Litigation Relating to the SolarCity Acquisition, to the
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q).

SG&A expenses as a percentage of revenue increased from 9% to 10% in the three
months ended September 30, 2020 as compared to the three months ended
September 30, 2019. The increase is primarily due to an increase in our SG&A
expenses as detailed above, partially offset by an increase in total revenues
from expanding sales.

                                       42
--------------------------------------------------------------------------------


SG&A expenses increased $229 million, or 12%, in the nine months ended
September 30, 2020 as compared to the nine months ended September 30, 2019. The
increase is primarily due to an increase of $433 million in stock-based
compensation expense, of which $404 million was attributable to the 2018 CEO
Performance Award. We had recorded $156 million cumulative catch-up expense for
the service provided from the grant date when two operational milestones were
considered probable of being met in the nine months ended September 30, 2020 and
the remaining unamortized expense of $235 million for the first three tranches
were recognized in the nine months ended September 30, 2020 upon vesting as the
first three market capitalization milestones were achieved (see Note 11, Equity
Incentive Plans, to the consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q). The remaining stock-based compensation
expense increase of $29 million attributable to other directors and employees is
primarily related to the issuance of equity awards in the current year at higher
grant date fair values due to our increased share price. The increase in
stock-based compensation was partially offset by a decrease of $88 million in
office, information technology and facilities-related expenses and sales and
marketing activities and a decrease of $76 million in employee and related
expenses. The decreases observed were driven by our continued focus on
increasing operational efficiency and process automation and from our cost
savings initiatives as part of our COVID-19 response strategy as discussed
above. Additionally, there was a reduction to operating expenses for costs
previously incurred of $43 million for the settlement in part of the securities
litigation relating to the SolarCity acquisition (see Note 12, Commitments and
Contingencies-Legal Proceedings-Securities Litigation Relating to the SolarCity
Acquisition, to the consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q).

SG&A expenses as a percentage of revenue decreased from 11% to 10% in the nine
months ended September 30, 2020 as compared to the nine months ended
September 30, 2019. The decrease is primarily from an increase in total revenues
from expanding sales, partially offset by an increase in our SG&A expenses as
detailed above.

Restructuring and other



                                                Three Months Ended September 30,                    Change                 Nine Months Ended September 30,                Change
(Dollars in millions)                           2020                        2019             $               %             2020                    2019               $            %
Restructuring and other                     $           -               $           -     $      -     Not meaningful   $        -           $             161     $  (161 )     -100%
As a percentage of revenues                             0 %                         0 %                                          0 %                         1 %




During the first half of 2019, we carried out certain restructuring actions in
order to reduce costs and improve efficiency. As a result, we recognized $50
million of costs primarily related to employee termination expenses and losses
from closing certain stores. These costs were substantially paid by the end of
second quarter of 2019. During the second quarter of 2019, we recognized $47
million in impairment related to IPR&D as we abandoned further development
efforts and $15 million for the related equipment. We also incurred a loss of
$49 million for closing certain facilities. There were no restructuring actions
in the three and nine months ended September 30, 2020.

Interest Expense



                                           Three Months Ended September 30,                Change                 Nine Months Ended September 30,              Change
(Dollars in millions)                        2020                    2019              $            %              2020                    2019             $          %
Interest expense                        $          (163 )       $          (185 )   $     22          -12 %   $          (502 )       $          (515 )   $   13         -3 %
As a percentage of revenues                           2 %                     3 %                                           2 %                     3 %




Interest expense decreased by $22 million, or 12%, in the three months ended
September 30, 2020 as compared to the three months ended September 30, 2019,
primarily due to a decrease in our weighted average interest rate as compared to
the three months ended September 30, 2020.



Interest expense decreased by $13 million, or 3%, in the nine months ended
September 30, 2020 as compared to the nine months ended September 30, 2019,
primarily due to an increase of $12 million in the amount of interest we
capitalized from the consolidated statements of operations to property, plant,
and equipment on the consolidated balance sheets. Increased capitalization
results in lower interest expense. The amount of interest we capitalize is
driven by our construction in progress balance, which increased year-over-year
due to our construction and expansion of multiple factories.

                                       43

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


Other (Expense) Income, Net



                                  Three Months Ended September 30,              Change             Nine Months Ended September 30,              Change
(Dollars in millions)               2020                     2019            $          %               2020                   2019         $           %
Other (expense) income, net   $            (97 )         $          85     $ (182 )     -214 %   $             (166 )         $    70$ (236 )

-337%

As a percentage of revenues                  1 %                     1 %                                          1 %               0 %




Other (expense) 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 (expense) income, net, changed unfavorably by $182 million, in the three
months ended September 30, 2020 as compared to the three months ended
September 30, 2019. Other (expense) income, net, changed unfavorably by $236
million, in the nine months ended September 30, 2020 as compared to the nine
months ended September 30, 2019. The unfavorable changes were primarily due to
unfavorable fluctuations in foreign currency exchange rates compared to the
three and nine months ended September 30, 2019.

Provision for Income Taxes



                                             Three Months Ended September 30,                Change                 Nine Months Ended September 30,              Change
(Dollars in millions)                          2020                     2019             $            %               2020                     2019           $          %
Provision for income taxes               $            186           $          26     $    160          615 %   $            209           $         68     $  141        207 %
Effective tax rate                                     34 %                    15 %                                           27 %                   -8 %




Our provision for income taxes increased by $160 million, or 615%, in the three
months ended September 30, 2020 as compared to the three months ended
September 30, 2019. Our provision for income taxes increased by $141 million, or
207%, in the nine months ended September 30, 2020 as compared to the nine months
ended September 30, 2019. The increases were primarily due to the substantial
increases in taxable profits within our foreign jurisdictions year-over-year.

Our effective tax rate increased from 15% to 34% in the three months ended
September 30, 2020 as compared to the three months ended September 30, 2019. Our
effective tax rate increased from -8% to 27% in the nine months ended September
30, 2020 as compared to the nine months ended September 30, 2019. The increases
were primarily due to substantial pre-tax income in the three and nine months
ended September 30, 2020 as compared to a smaller pre-tax income in the three
months and pre-tax loss for the nine months ended September 30, 2019.

Net Income Attributable to Noncontrolling Interests and Redeemable
Noncontrolling Interests



                                                   Three Months Ended September 30,                  Change                  Nine Months Ended September 30,               Change
(Dollars in millions)                               2020                       2019              $             %               2020                     2019            $          %
Net income attributable to
noncontrolling interests and
  redeemable noncontrolling interests
in subsidiaries                               $             38             $           7     $      31           443 %   $            115           $         60     $    55      92%



Our net income attributable to noncontrolling interests and redeemable noncontrolling interests was related to financing fund arrangements.


Net income attributable to noncontrolling interests and redeemable
noncontrolling interests increased by $31 million, or 443%, in the three months
ended September 30, 2020 as compared to the three months ended September 30,
2019. Net income attributable to noncontrolling interests and redeemable
noncontrolling interests increased by $55 million, or 92%, in the nine months
ended September 30, 2020 as compared to the nine months ended September 30,
2019. The increases were primarily due to lower activities from new financing
fund arrangements.

Liquidity and Capital Resources


As of September 30, 2020, we had $14.53 billion of cash and cash equivalents.
Balances held in foreign currencies had a U.S. dollar equivalent of
$3.85 billion and consisted primarily of euros, Chinese yuan and Canadian
dollars. Our sources of cash are predominantly from our deliveries of vehicles,
sales and installations of our energy storage products and solar energy systems,
proceeds from debt facilities, proceeds from financing funds and proceeds from
equity offerings.

                                       44

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



Our sources of liquidity and cash flows enable us to fund ongoing operations,
research and development projects for new products and technologies including
our announced proprietary battery cells, production at existing manufacturing
facilities, the continued expansion of Gigafactory Nevada and Gigafactory
Shanghai, the construction of Gigafactory Berlin and Gigafactory Texas, the
manufacturing ramp of the Solar Roof at Gigafactory New York, and the continued
expansion of our retail and service locations, body shops, Mobile Service fleet,
Supercharger network, and energy product installation capabilities.

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-Trends in Cash Flow,
Capital Expenditures and Operating Expenses in this Quarterly Report on
Form 10-Q, we currently expect our capital expenditures to be at the high end of
our range of $2.5 to $3.5 billion in 2020 and increase to $4.5 to $6.0 billion
in each of the next two fiscal years.

We expect that the cash we generate from our core operations will generally be
sufficient to cover our future capital expenditures and to pay down our
near-term debt obligations, although we may choose to seek alternative financing
sources. For example, we expect that part of our investment in our future
factories will be funded through indebtedness arranged through local financial
institutions, such as the credit facilities that our local subsidiary has
entered into to support construction and production at Gigafactory Shanghai. See
Note 10, Debt, to the consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q. As always, we continually evaluate our
capital expenditure needs and may decide it is best to raise additional capital
to fund the rapid growth of our business.

We have an agreement to spend or incur $5.0 billion in combined capital,
operational expenses, costs of goods sold and other costs in the State of New
York during the 10-year period beginning April 30, 2018. As we temporarily
suspended most of our manufacturing operations at Gigafactory New York pursuant
to a New York State executive order issued in March 2020 as a result of the
COVID-19 pandemic, we were granted a one-year deferral of our obligation to be
compliant as of April 30, 2020 with our applicable targets under such agreement.
We do not currently expect any issues meeting all applicable future obligations
under this agreement, and we do not believe that we face a significant risk of
default.

We expect that our current sources of liquidity together with our projection of
cash flows from operating activities will provide us with adequate liquidity
over at least the next 12 months, even considering the anticipated increase in
capital expenditures in the next two fiscal years. A large portion of our future
expenditures is to fund our growth, and we can adjust our capital and operating
expenditures by operating segment, including future expansion of our product
offerings, retail and service locations, body shops, Mobile Service fleet, and
Supercharger network. For example, if our near-term manufacturing operations
decrease in scale or ramp more slowly than expected, including due to global
economic conditions and levels of consumer outlook and spend impacting demand in
the worldwide transportation, automotive and energy product industries, the pace
of our capital expenditures may be correspondingly slowed. We may need or want
to raise additional funds in the future, and these funds may not be available to
us when we need or want them, or at all. If we cannot raise additional funds
when we need or want them, our operations and prospects could be negatively
affected.

In addition, we had $2.92 billion of unused committed amounts under our credit
facilities and financing funds as of September 30, 2020, some of which 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, our interests in financing funds or various other
assets; and contributing or selling qualified solar energy systems and the
associated customer contracts or qualified leased vehicles and our interests in
those leases into the financing funds). For details regarding our indebtedness
and financing funds, refer to Note 10, Debt, and Note 13, Variable Interest
Entity Arrangements, to the consolidated financial statements included elsewhere
in this Quarterly Report on Form 10-Q.

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