TESLA, INC. 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 2021, we have produced 386,759 vehicles and delivered 386,181 vehicles through the second quarter. We are currently focused on increasing vehicle production and capacity, improving and developing battery technologies, improving our FSD and Autopilot capabilities, increasing the affordability and efficiency of our vehicles and expanding our global infrastructure.
In 2021, we have deployed 1.72 GWh of energy storage products and 177 megawatts of solar energy systems through the second 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 solar energy systems.
During the three and six months ended
During the three and six months endedJune 30, 2021 , our net income attributable to common stockholders was$1.14 billion and$1.58 billion , respectively, representing favorable changes of$1.04 billion and$1.46 billion , respectively, over the same periods endedJune 30, 2020 . We continue to focus on operational efficiencies, while we have seen an acceleration of non-cash stock-based compensation expense due to continued increases in our market capitalization and updates to our business outlook. We ended the second quarter of 2021 with$16.23 billion in cash and cash equivalents, representing a decrease of$3.16 billion from the end of 2020. Our cash flows provided by operating activities during the six month period endedJune 30, 2021 was$3.77 billion , representing a favorable change of$3.24 billion compared to our cash flows provided by operating activities during the same period endedJune 30, 2020 of$524 million , and capital expenditures amounted to$2.85 billion during the six month period endedJune 30, 2021 , compared to$1.00 billion during the same period endedJune 30, 2020 . 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
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 affected by temporary manufacturing closures, employment
and compensation adjustments, and impediments to administrative activities
supporting our product deliveries and deployments.
Ultimately, we cannot predict the duration of the COVID-19 pandemic. 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.
31
--------------------------------------------------------------------------------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 Constructing manufacturing facilities
Gigafactory Texas Model Y Constructing manufacturing facilities
Cybertruck In development
TBD Tesla Semi In development
Tesla Roadster In development
Our new version of Model S is in production, and we are focused on commencing
the updated Model X deliveries and ramping all of our production vehicles to
their installed production capacities. 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. The next phase of production
growth will depend on the construction of Gigafactory Berlin and Gigafactory
Texas , each of which is progressing as planned for production beginning in late
2021, 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 and any future impact from events outside of our control such
as 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 procurement and manufacturing are key to our vehicles' affordability, and for example have allowed us to competitively price our vehicles inChina . In addition to opening new factories in 2021, we will also continue to generate demand and brand awareness by improving our vehicles' performance and functionality, including Autopilot, FSD and software features, and introducing anticipated future vehicles. Moreover, we expect to benefit from a recent 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 ofthe United States , and we expect to benefit further from situating additional factories closer to local markets. 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. 32 --------------------------------------------------------------------------------
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, 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 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.
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 in the new Model S and Model X, Model Y and Solar Roof, constructing or 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$4.50 to$6.00 billion in 2021 and each of the next two fiscal years. Given the breadth of our various planned projects in 2021, as we make progress on such projects we expect that our actual spend will be on the higher end of this range in 2021. 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. 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 non-cash stock compensation expense attributable to the 2018 CEO Performance Award 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. InMarch 2018 , our stockholders approved a performance-based stock option award to our CEO (the "2018 CEO Performance Award"), consisting of 12 vesting tranches contingent on the achievement of specified market capitalization and operational milestones. We incur non-cash stock-based compensation expense for each tranche only after the related operational milestone initially becomes probable of being achieved based on a subjective assessment of our future financial performance, and if this happens following the grant date, we record at such time a cumulative catch-up expense that may be significant based on the length of time elapsed from the grant date. Moreover, the remaining expense for that tranche is ratably recorded over the period remaining until the later of (i) the expected achievement of the relevant operational milestone (if it has not yet been achieved) and (ii) the expected achievement of the related market capitalization milestone (if it had not yet been achieved). Upon the achievement of both milestones related to a tranche, all remaining associated expense is recognized immediately. Because the market capitalization milestone achievements were generally expected to occur later than the related expected operational milestone achievements, the achievement of the former earlier than expected may increase the magnitude of any catch-up expense and/or accelerate the rate at which the remaining expense is recognized. Since 2020, several operational milestones have become probable and/or have been achieved and all market capitalization milestones have been achieved, 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. 33 -------------------------------------------------------------------------------- In the first quarter of 2021, we invested an aggregate$1.50 billion in bitcoin and accepted bitcoin as a form of payment for sales of certain of our products in specified regions, subject to applicable laws, and suspended this practice inMay 2021 . 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 six month period endedJune 30, 2021 , we recorded approximately$50 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 accounting principles generally accepted in theU.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. 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, 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 endedDecember 31, 2020 . There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
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
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 chain issues, such as a shortfall of
semiconductor supply.
34
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During 2020, we were also affected by temporary manufacturing closures,
employment and compensation adjustments, and impediments to administrative
activities supporting our product deliveries and deployments. 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
instituted cost reduction initiatives across our business globally to be
commensurate to the scope of our operations while they were scaled back in the
first half of 2020. 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 disclosed
idle capacity charges and they 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 Six Months Ended
June 30, Change June 30, Change
(Dollars in millions) 2021 2020 $ % 2021 2020 $ %
Automotive sales $ 9,874 $ 4,911 $ 4,963 101 % $ 18,579 $ 9,804 $ 8,775 90 %
Automotive leasing 332 268 64 24 % 629 507 122 24 % Total automotive revenues
10,206 5,179 5,027 97 % 19,208 10,311 8,897 86 % Services and other
951 487 464 95 % 1,844 1,047 797 76 % Total automotive & services and other
segment revenue 11,157 5,666 5,491
97 % 21,052 11,358 9,694 85 % Energy generation and storage segment revenue
801 370 431 116 % 1,295 663 632 95 %
Total revenues $ 11,958 $ 6,036 $ 5,922 98 % $ 22,347 $ 12,021 $ 10,326 86 %
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 depending on when a contract is executed with a buyer and when the credits are delivered. 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. 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$4.96 billion , or 101%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , primarily due to an increase of 107,272 Model 3 and Model Y cash deliveries and an increase in the average selling price of Model 3 in the three months endedJune 30, 2021 compared to the same period in the prior year. These increases were partially offset by a decrease from 7,532 fewer Model S and Model X cash deliveries in the three months endedJune 30, 2021 compared to the prior period as we started delivering the new Model S as well as reductions in the average selling price of Model Y due to the regional sales mix compared to the prior period. There was also a decrease of$74 million from sales of regulatory credits to$354 million in the three months endedJune 30, 2021 . Automotive sales revenue increased$8.78 billion , or 90%, in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , primarily due to an increase of 203,736 Model 3 and Model Y cash deliveries year over year from production ramping at both Gigafactory Shanghai and theFremont Factory . There was also an increase of$90 million from additional sales of regulatory credits to$872 million in the six months endedJune 30, 2021 . The increases in automotive sales revenue were partially offset by a decrease from 15,912 fewer Model S and Model X cash deliveries in the six months endedJune 30, 2021 compared to the prior period as we started delivering the new Model S as well as reductions in the average selling price of Model Y due to the regional sales mix compared to the prior period. 35
-------------------------------------------------------------------------------- Automotive leasing revenue increased$64 million , or 24%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . Automotive leasing revenue increased$122 million , or 24%, in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . These increases were 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 have declined. Services and other revenue increased$464 million , or 95%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . Services and other revenue increased$797 million , or 76%, in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . These increases were primarily due to an increase in used vehicle revenue driven by an increase in trade-ins, non-warranty maintenance services revenue as our fleet continues to grow and retail merchandise 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$431 million , or 116%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . Energy generation and storage revenue increased by$632 million , or 95%, in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . These increases were primarily due to increases in deployments of solar cash and loan jobs, Megapack and Powerwall, partially offset by reduced average selling prices on our solar cash and loan jobs as a result of our low cost solar strategy introduced mid-2020.
Cost of Revenues and Gross Margin
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(Dollars in millions) 2021 2020 $ % 2021 2020 $ %
Cost of revenues
Automotive sales $ 7,119 $ 3,714 $ 3,405 92 % $ 13,576 $ 7,413 $ 6,163 83 %
Automotive leasing 188 148 40 27 % 348 270 78 29 %
Total automotive cost of
revenues 7,307 3,862 3,445 89 % 13,924 7,683 6,241 81 %
Services and other 986 558 428 77 % 1,948 1,206 742 62 %
Total automotive & services
and other
segment cost of revenues 8,293 4,420 3,873 88 % 15,872 8,889 6,983 79 %
Energy generation and
storage segment 781 349 432 124 % 1,376 631 745 118 %
Total cost of revenues $ 9,074 $ 4,769 $ 4,305 90 % $ 17,248 $ 9,520 $ 7,728 81 %
Gross profit total
automotive $ 2,899 $ 1,317 $ 5,284 $ 2,628
Gross margin total
automotive 28 % 25 % 28 % 25 %
Gross profit total
automotive & services and
other
segment $ 2,864 $ 1,246 $ 5,180 $ 2,469
Gross margin total
automotive & services and
other
segment 26 % 22 % 25 % 22 %
Gross profit energy
generation and storage
segment $ 20 $ 21 $ (81 ) $ 32
Gross margin energy
generation and storage
segment 2 % 6 % -6 % 5 %
Total gross profit $ 2,884 $ 1,267 $ 5,099 $ 2,501
Total gross margin 24 % 21 % 23 % 21 %
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
and manufacturing overhead associated with the sales by our acquired
subsidiaries to third party customers.
36
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Cost of automotive sales revenue increased $3.41 billion , or 92%, in the three
months ended June 30, 2021 as compared to the three months ended June 30, 2020 ,
primarily due to an increase of 107,272 Model 3 and Model Y cash deliveries and
higher outbound freight and duties in China as Model 3 vehicles manufactured in
Gigafactory Shanghai were exported to other regions offset by a decrease in
combined average Model 3 and Model Y costs per unit due to lower material,
manufacturing, inbound freight and duty costs from localized procurement and
manufacturing in China . There was also reductions in Model Y average costs per
unit as compared to the prior period due to temporary under-utilization of
manufacturing capacity at lower production volumes during our production ramp in
the first half of 2020, in addition to idle capacity charges of $189 million due
to the temporary suspension of production at the Fremont Factory and Gigafactory
Nevada during the three months ended June 30, 2020 . Additionally, there was a
decrease of 7,532 Model S and Model X cash deliveries in the three months ended
June 30, 2021 compared to the prior period as we started delivering the new
Model S.
Cost of automotive sales revenue increased $6.16 billion , or 83%, in the six
months ended June 30, 2021 as compared to the six months ended June 30, 2020 ,
primarily due to an increase of 203,736 Model 3 and Model Y cash deliveries and
higher outbound freight and duties in China as Model 3 vehicles manufactured in
Gigafactory Shanghai were exported to other regions offset by a decrease in
combined average Model 3 and Model Y costs per unit due to lower material,
manufacturing, inbound freight and duty costs from localized procurement and
manufacturing in China . There were also reductions in Model Y average costs per
unit as compared to the prior period due to temporary under-utilization of
manufacturing capacity at lower production volumes during our production ramp in
the first half of 2020, in addition to idle capacity charges of $213 million due
to the temporary suspension of production at the Fremont Factory and Gigafactory
Nevada during the six months ended June 30, 2020 . Additionally, there was a
decrease of 15,912 Model S and Model X cash deliveries in the six months ended
June 30, 2021 compared to the prior period as we started delivering the new
Model S.
Cost of automotive leasing revenue increased $40 million , or 27%, in the three
months ended June 30, 2021 as compared to the three months ended June 30, 2020 .
Cost of automotive leasing revenue increased $78 million , or 29%, in the six
months ended June 30, 2021 as compared to the six months ended June 30, 2020 .
These increases were 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 cost of revenue associated with the sales-type lease
upon delivery to the customer. These increases were also partially offset by the
decreases in cost of automotive lease revenue associated with our resale value
guarantee leasing programs which are accounted for as operating leases as those
portfolios have declined.
Cost of services and other revenue increased $428 million , or 77%, in the three
months ended June 30, 2021 as compared to the three months ended June 30, 2020 .
Cost of services and other revenue increased $742 million , or 62%, in the six
months ended June 30, 2021 as compared to the six months ended June 30, 2020 .
These increases were primarily due to increases in used vehicle cost of revenue
driven by an increase in trade-ins, costs to support our increase in
non-warranty maintenance services revenue and costs of retail merchandise as our
sales have increased.
Gross margin for total automotive increased from 25% to 28% in the three and six
months ended June 30, 2021 as compared to the three and six months ended
June 30, 2020 . There were increases from improvements of Model 3 and Model Y
gross margins primarily from lower material, manufacturing, inbound freight and
duty costs from localized procurement and manufacturing in China offset by
higher outbound freight and duties in China as Model 3 vehicles manufactured in
Gigafactory Shanghai were exported to other regions. There were also reductions
in Model Y average costs per unit as compared to the prior period due to
temporary under-utilization of manufacturing capacity at lower production
volumes during our production ramp in the first half of 2020, in addition to
idle capacity charges of $189 million and $213 million in cost of automotive
sales revenue due to the temporary suspension of production at the Fremont
Factory and Gigafactory Nevada during the three and six months ended June 30,
2020 , respectively. These increases were partially offset by reductions in the
average selling price of Model Y due to the regional sales mix compared to the
prior period, in addition to impacts from sales of regulatory credits as
discussed earlier.
Gross margin for total automotive & services and other segment increased from
22% to 26% in the three months ended June 30, 2021 as compared to the three
months ended June 30, 2020 . Gross margin for total automotive & services and
other segment increased from 22% to 25% in the six months ended June 30, 2021 as
compared to the six months ended June 30, 2020 . These increases were primarily
due to the automotive gross margin impacts discussed above and an improvement in
our services and other gross margin. Additionally, there was a lower proportion
of services and other, which operated at a lower gross margin than our
automotive business, within the segment in the three and six months ended June
30, 2021 as compared to the prior period.
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.
37
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Cost of energy generation and storage revenue increased by $432 million , or
124%, in the three months ended June 30, 2021 as compared to the three months
ended June 30, 2020 . Cost of energy generation and storage revenue increased by
$745 million , or 118%, in the six months ended June 30, 2021 as compared to the
six months ended June 30, 2020 . These increases were primarily due to increases
in deployments of solar cash and loan jobs, Solar Roof, Megapack and Powerwall
and increased service maintenance costs on solar energy systems where we are the
lessor, partially offset by reductions in average costs per unit of Solar Roof
and solar cash and loan jobs as deployments increased. Although our average
costs per unit of Solar Roof improved compared to the prior period, they still
remain significant and contribute disproportionately to our cost of energy
generation and storage revenue.
Gross margin for energy generation and storage decreased from 6% to 2% in the
three months ended June 30, 2021 as compared to the three months ended June 30,
2020 . Gross margin for energy generation and storage decreased from 5% to -6% in
the six months ended June 30, 2021 as compared to the six months ended June 30,
2020 . These decreases were primarily due to a higher proportion of Solar Roof in
our overall energy business which operated at lower gross margins as a result of
temporary manufacturing underutilization during product ramp, increased service
maintenance costs on solar energy systems where we are the lessor and lower
gross margins in our energy storage business as we are ramping Megapack.
Research and Development Expense
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(Dollars in millions) 2021 2020 $ %
2021 2020 $ %
Research and development
5 % 5 % 6 % 5 %
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 $297 million , or 106%, in the three months ended June 30,
2021 as compared to the three months ended June 30, 2020 . The increase was
primarily due to a $135 million increase in employee and labor related expenses
due to an increase in headcount and increased payroll taxes related to
appreciation of our stock price, a $76 million increase in R&D expensed
materials, a $52 million increase in facilities, outside services, freight and
depreciation expenses and a $31 million increase in stock-based compensation
expense. These increases were to support our expanding product roadmap such as
the new versions of Model S and Model X and technologies including our
proprietary battery cells.
R&D expenses as a percentage of revenue stayed consistent at 5% in the three
months ended June 30, 2021 as compared to the three months ended June 30, 2020 .
The is primarily due to the increase in total revenues from expanding sales.
R&D expenses increased $639 million , or 106%, in the six months ended June 30,
2021 as compared to the six months ended June 30, 2020 . The increase was
primarily due to a $282 million increase in employee and labor related expenses
due to an increase in headcount and increased payroll taxes related to
appreciation of our stock price, a $177 million increase in R&D expensed
materials, a $91 million increase in stock-based compensation expense and an $88
million increase in facilities, outside services, freight and depreciation
expense. These increases were to support our expanding product roadmap such as
the new versions of Model S and Model X and technologies including our
proprietary battery cells.
R&D expenses as a percentage of revenue increased from 5% to 6% in the six
months ended June 30, 2021 as compared to the six months ended June 30, 2020 .
The increase is primarily due to the increase in our R&D expenses as detailed
above, partially offset by an increase in total revenues from expanding sales.
Selling, General and Administrative Expense
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(Dollars in millions) 2021 2020 $ % 2021 2020 $ %
Selling, general and
administrative $ 973 $ 661 $ 312 47 % $ 2,029 $ 1,288 $ 741 58 %
As a percentage of
revenues 8 % 11 % 9 % 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.
38
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SG&A expenses increased $312 million , or 47%, in the three months ended June 30,
2021 as compared to the three months ended June 30, 2020 . The increase is
primarily due to an increase of $186 million in employee and labor related
expenses from increased headcount and increased payroll taxes related to
appreciation of our stock price, an $86 million increase in office, information
technology, facilities-related expenses, sales and marketing activities and
other costs. There was also an increase of $40 million in stock-based
compensation expense, of which $9 million was attributable to 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.
SG&A expenses as a percentage of revenue decreased from 11% to 8% in the three
months ended June 30, 2021 as compared to the three months ended June 30, 2020 .
This was driven by the increase in total revenue from expanding sales, despite
an increase in our SG&A expenses as detailed above.
SG&A expenses increased $741 million , or 58%, in the six months ended June 30,
2021 as compared to the six months ended June 30, 2020 . The increase is
primarily due to an increase of $313 million in stock-based compensation
expense, of which $242 million was attributable to the 2018 CEO Performance
Award. The increase in expense under the 2018 CEO Performance Award was
primarily due to an increase in catch-up expense of $160 million recognized in
the six months ended June 30, 2021 , when the operational milestone of annualized
revenue of $55.0 billion and Adjusted EBITDA of $10.0 billion became probable of
being achieved as compared to the six months ended June 30, 2020 . An additional
$82 million was recognized in the six months ended June 30, 2021 as compared to
the six months ended June 30, 2020 , due to operational milestones being achieved
earlier as well as the market capitalization milestones being achieved earlier
than originally forecasted (see Note 11, Equity Incentive Plans, to the
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q). Additionally, there was an increase of $311 million in employee and
labor related expenses from increased headcount and increased payroll taxes
related to appreciation of our stock price, a $117 million increase in office,
information technology, facilities-related expenses, sales and marketing
activities and other costs.
SG&A expenses as a percentage of revenue decreased from 11% to 9% in the six
months ended June 30, 2021 as compared to the six months ended June 30, 2020 .
This was driven by the increase in total revenue from expanding sales, despite
an increase in our SG&A expenses as detailed above.
Restructuring and Other Expense
Three Months Ended Six Months Ended
June 30, Change June 30, Change(Dollars in millions) 2021 2020 $ % 2021 2020 $ % Restructuring and other$ 23 $ -$ 23 Not meaningful$ (78 ) $ -$ (78 ) Not meaningful As a percentage of revenues 0 % 0 % 0 % 0 % During the six months endedJune 30, 2021 we realized gains of$128 million through sales of bitcoin. Also, during the three and six months endedJune 30, 2021 , we recorded$23 million and$50 million , respectively, of impairment losses on bitcoin. See Note 2, Summary of Significant Accounting Policies, and Note 3, Digital Assets, Net, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details. Interest Expense Three Months Ended Six Months Ended June 30, Change June 30, Change (Dollars in millions) 2021 2020 $ % 2021 2020 $ % Interest expense$ (75 ) $ (170 ) $ 95
-56 %
3 % 1 % 3 %
Interest expense decreased by $95 million , or 56%, in the three months ended
June 30, 2021 as compared to the three months ended June 30, 2020 . Interest
expense decreased by $165 million , or 49%, in the six months ended June 30, 2021
as compared to the six months ended June 30, 2020 . These decreases were
primarily due to the adoption of ASU 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity, on January 1, 2021 , whereby
we have de-recognized the remaining debt discounts on the 2022 Notes and 2024
Notes and therefore no longer recognize any amortization of debt discounts as
interest expense, as well as the continued reduction in our overall debt
balance. 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.
39
--------------------------------------------------------------------------------Other Income (Expense), Net
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(Dollars in millions) 2021 2020 $ % 2021 2020 $ %
Other income (expense), net $ 45 $ (15 ) $ 60 -400 % $ 73 $ (69 ) $ 142 -206 %
As a percentage of revenues 0 % 0 % 0 % 1 %
Other income (expense), 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 (expense), net, changed favorably by
Other income (expense), net, changed favorably by$142 million in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , primarily due to favorable fluctuations in foreign currency exchange rates and a$53 million favorable change in the mark-to-market remeasurement of our interest rate swaps.
Provision for Income Taxes
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(Dollars in millions) 2021 2020 $ % 2021 2020 $ %
Provision for income taxes $ 115 $ 21 $ 94 448 % $ 184 $ 23 $ 161 700 %
Effective tax rate 9 % 14 % 10 % 10 %
Our provision for income taxes is $115 million with pre-tax income of $1.29
billion , resulting in quarterly effective tax rate of 9% for the three months
ended June 30, 2021 . The provision for income taxes increased by $94 million ,
compared to $21 million provision for income taxes with pre-tax income of $150
million , resulting in quarterly effective tax rate of 14% for the three months
ended June 30, 2020 . The increase in income taxes was primarily due to the
substantial increase in pre-tax income, combined with changes in forecasted
annual tax rate with mix of jurisdictional earnings.
Our provision for income taxes is $184 million with pre-tax income of $1.83
billion , resulting in year-to-date effective tax rate of 10% for the six months
ended June 30, 2021 . The provision for income taxes increased by $161 million ,
compared to $23 million provision for income taxes with pre-tax income of $220
million , resulting year to date effective tax rate of 10% for the six months
ended June 30, 2020 . The increase in income taxes was primarily due to the
substantial increase in pre-tax income, combined with changes in forecasted
annual tax rate with 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 Six Months Ended
June 30, Change June 30, Change
(Dollars in millions) 2021 2020 $ % 2021 2020 $ %
Net income attributable to
noncontrolling interests
and
redeemable
noncontrolling interests
in subsidiaries $ 36 $ 25 $ 11 44 % $ 62 $ 77 $ (15 ) -19%
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$11 million , or 44%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . The change was primarily due to lower activities from new financing fund arrangements.
Net income attributable to noncontrolling interests and redeemable
noncontrolling interests decreased by
40
--------------------------------------------------------------------------------Liquidity and Capital Resources
We expect to continue to generate net positive operating cash flow as we have done in the last three 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 theFremont Factory , Gigafactory Nevada, Gigafactory Shanghai and Gigafactory New York, the construction of GigafactoryBerlin 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 followingJune 30, 2021 , including to pay down near-term debt obligations, 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-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$4.50 to$6.00 billion in 2021 and in each of the next two fiscal years. Given the breadth of our various planned projects in 2021, as we make progress on such projects we expect that our actual spend will be on the higher end of this range in 2021. In connection with our operations at Gigafactory New York, we have an agreement to spend or incur$5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in theState of New York throughDecember 31, 2029 (pursuant to a deferral of our required timelines to meet such obligations that was granted inApril 2021 subject only to memorialization in writing by us and theSUNY Foundation ). We also have an operating lease arrangement with the local government ofShanghai pursuant to which we are required to spendRMB 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 ofJune 30, 2021 , we and our subsidiaries had outstanding$8.03 billion in aggregate principal amount of indebtedness, of which$1.09 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 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. As ofJune 30, 2021 , we had$16.23 billion of cash and cash equivalents. Balances held in foreign currencies had aU.S. dollar equivalent of$4.87 billion and consisted primarily of Chinese yuan, euros and Canadian dollars. In addition, we had$1.58 billion of unused committed amounts under our credit facilities and financing funds as ofJune 30, 2021 . 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, 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. 41
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In the first quarter of 2021, we invested an aggregate$1.50 billion in bitcoin. In addition, during the three months endedMarch 31, 2021 , we accepted bitcoin as a form of payment for sales of certain of our products in specified regions, subject to applicable laws, and suspended this practice inMay 2021 . We may in the future restart the practice of transacting in digital assets for our products and services. The fair market value of our bitcoin holdings as ofJune 30, 2021 was$1.47 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.
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