filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
65K characters. Original on sec.gov · Markdown
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 624,582 vehicles and delivered 627,572 vehicles through the third 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 3.01 GWh of energy storage products and 260 megawatts of solar energy systems through the third quarter. We are currently focused on ramping production of energy storage products, improving our Solar Roof installation capability and efficiency, and increasing market share of retrofit and new build solar energy systems.
During the three and nine months ended September 30, 2021, we recognized total revenues of $13.76 billion and $36.10 billion, respectively, representing increases of $4.99 billion and $15.31 billion, respectively, over the same periods ended September 30, 2020. We continue to ramp production, build new manufacturing capacity and expand our operations to enable increased deliveries and deployments of our products and further revenue growth.
During the three and nine months ended September 30, 2021, our net income attributable to common stockholders was $1.62 billion and $3.20 billion, respectively, representing increases of $1.29 billion and $2.75 billion, respectively, over the same periods ended September 30, 2020. We continue to focus on improving our profitability through production and operational efficiencies.
We ended the third quarter of 2021 with $16.07 billion in cash and cash equivalents, representing a decrease of $3.32 billion from the end of 2020. Our cash flows provided by operating activities during the nine month period ended September 30, 2021 was $6.91 billion, representing an increase of $3.99 billion compared to our cash flows provided by operating activities during the same period ended September 30, 2020 of $2.92 billion, and capital expenditures amounted to $4.67 billion during the nine month period ended September 30, 2021, compared to $2.01 billion during the same period ended September 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.
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 | ||
| TBD | Tesla Roadster | In development |
Our new versions of Model S and Model X are in production, and we are focused on ramping all of our production vehicles to their installed production capacities as well as increasing capacity at our current factories. Our current production continues to be affected by the industry-wide semiconductor and other component shortages, requiring additional workaround manufacturing and production design solutions to be implemented which may be difficult to sustain. 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 in China. 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 continue 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 of the 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.
Energy Generation and Storage Demand, Production and Deployment
The long-term success of this business is dependent upon increasing margins through greater volumes. We continue to increase the production of our energy storage products to meet high levels of demand, including beginning construction of our Megafactory in Lathrop, California, but such production is also sensitive to global component constraints. For Megapack, energy storage deployments can vary meaningfully quarter to quarter depending on the timing of specific project milestones. For Powerwall, better availability and growing grid stability concerns drive higher customer interest, and we are emphasizing cross-selling with our residential solar energy products. We remain committed to growing our retrofit solar energy business by offering a low-cost and simplified online ordering experience. In addition, we continue to improve our installation capabilities and price efficiencies for Solar Roof by on-boarding and training new installers, as well as collaborating with real estate developers and builders on new homes to reduce installation time and costs. 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, Megapack 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 exceed $6 billion in 2021 and be between $5 to $7 billion in each of the next two fiscal years.
Our business has recently been consistently generating cash flow from operations in excess of our level of capital spend, and with better working capital management resulting in shorter days sales outstanding than days payable outstanding, our sales growth is also facilitating positive cash generation. On the other hand, we are likely to see heightened levels of capital expenditures during certain periods depending on the specific pace of our capital-intensive projects. 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.
In March 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.
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 in May 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 nine month period ended September 30, 2021, we recorded approximately $101 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 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.
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 ended December 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 ended December 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
Revenues
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
| Automotive sales | $ | 11,672 | $ | 7,346 | $ | 4,326 | 59 | % | $ | 30,251 | $ | 17,150 | $ | 13,101 | 76 | % | ||||||||||||||||
| Automotive leasing | 385 | 265 | 120 | 45 | % | 1,014 | 772 | 242 | 31 | % | ||||||||||||||||||||||
| Total automotive revenues | 12,057 | 7,611 | 4,446 | 58 | % | 31,265 | 17,922 | 13,343 | 74 | % | ||||||||||||||||||||||
| Services and other | 894 | 581 | 313 | 54 | % | 2,738 | 1,628 | 1,110 | 68 | % | ||||||||||||||||||||||
| Total automotive & services and other segment revenue | 12,951 | 8,192 | 4,759 | 58 | % | 34,003 | 19,550 | 14,453 | 74 | % | ||||||||||||||||||||||
| Energy generation and storage segment revenue | 806 | 579 | 227 | 39 | % | 2,101 | 1,242 | 859 | 69 | % | ||||||||||||||||||||||
| Total revenues | $ | 13,757 | $ | 8,771 | $ | 4,986 | 57 | % | $ | 36,104 | $ | 20,792 | $ | 15,312 | 74 | % |
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 $4.33 billion, or 59%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to an increase of 101,183 Model 3 and Model Y cash deliveries. This increase was partially offset by a decrease from 5,855 fewer Model S and Model X cash deliveries in the three months ended September 30, 2021 compared to the prior period as deliveries of the new version of Model S only began ramping in the second quarter of 2021. Additionally, there was a reduction in the average selling price of Model Y due to changes in regional sales mix compared to the prior period and a decrease of $118 million from sales of regulatory credits to $279 million in the three months ended September 30, 2021.
Automotive sales revenue increased $13.10 billion, or 76%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to an increase of 304,919 Model 3 and Model Y cash deliveries year over year from production ramping at both Gigafactory Shanghai and the Fremont Factory. The increase in automotive sales revenue was partially offset by a decrease from 21,767 fewer Model S and Model X cash deliveries in the nine months ended September 30, 2021 compared to the prior period as deliveries of the new version of Model S only began ramping in the second quarter of 2021. Additionally, there was a reduction in the average selling price of Model Y due to changes in regional sales mix compared to the prior period and a decrease of $28 million from additional sales of regulatory credits to $1.15 billion in the nine months ended September 30, 2021.
Automotive leasing revenue increased $120 million, or 45%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to increases in cumulative vehicles and purchase options exercised under our direct operating lease program compared to the prior period.
Automotive leasing revenue increased $242 million, or 31%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to an increase in cumulative vehicles under our direct operating lease program, 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 and an increase in purchase options exercised under our direct operating lease program compared to the prior period. These increases were partially offset by the decrease 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 $313 million, or 54%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Services and other revenue increased $1.11 billion, or 68%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. These increases were primarily due to an increase in used vehicle revenue driven by increases in volume and average selling prices of 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 $227 million, or 39%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Energy generation and storage revenue increased by $859 million, or 69%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. These increases were primarily due to increases in deployments of Megapack, solar cash and loan jobs and Powerwall, partially offset by a decrease in Powerpack deployments as we phase out the product following the introduction of Megapack. Additionally, there was a reduction in average selling prices on our solar cash and loan jobs in the nine months ended September 30, 2021 compared to the prior period as a result of our low cost solar strategy introduced mid-2020.
Cost of Revenues and Gross Margin
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||||||||||
| Automotive sales | $ | 8,150 | $ | 5,361 | $ | 2,789 | 52 | % | $ | 21,726 | $ | 12,774 | $ | 8,952 | 70 | % | ||||||||||||||||
| Automotive leasing | 234 | 145 | 89 | 61 | % | 582 | 415 | 167 | 40 | % | ||||||||||||||||||||||
| Total automotive cost of revenues | 8,384 | 5,506 | 2,878 | 52 | % | 22,308 | 13,189 | 9,119 | 69 | % | ||||||||||||||||||||||
| Services and other | 910 | 644 | 266 | 41 | % | 2,858 | 1,850 | 1,008 | 54 | % | ||||||||||||||||||||||
| Total automotive & services and other segment cost of revenues | 9,294 | 6,150 | 3,144 | 51 | % | 25,166 | 15,039 | 10,127 | 67 | % | ||||||||||||||||||||||
| Energy generation and storage segment | 803 | 558 | 245 | 44 | % | 2,179 | 1,189 | 990 | 83 | % | ||||||||||||||||||||||
| Total cost of revenues | $ | 10,097 | $ | 6,708 | $ | 3,389 | 51 | % | $ | 27,345 | $ | 16,228 | $ | 11,117 | 69 | % | ||||||||||||||||
| Gross profit total automotive | $ | 3,673 | $ | 2,105 | $ | 8,957 | $ | 4,733 | ||||||||||||||||||||||||
| Gross margin total automotive | 30 | % | 28 | % | 29 | % | 26 | % | ||||||||||||||||||||||||
| Gross profit total automotive & services and other segment | $ | 3,657 | $ | 2,042 | $ | 8,837 | $ | 4,511 | ||||||||||||||||||||||||
| Gross margin total automotive & services and other segment | 28 | % | 25 | % | 26 | % | 23 | % | ||||||||||||||||||||||||
| Gross profit energy generation and storage segment | $ | 3 | $ | 21 | $ | (78 | ) | $ | 53 | |||||||||||||||||||||||
| Gross margin energy generation and storage segment | 0 | % | 4 | % | -4 | % | 4 | % | ||||||||||||||||||||||||
| Total gross profit | $ | 3,660 | $ | 2,063 | $ | 8,759 | $ | 4,564 | ||||||||||||||||||||||||
| Total gross margin | 27 | % | 24 | % | 24 | % | 22 | % |
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.
Cost of automotive sales revenue increased $2.79 billion, or 52%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to an increase of 101,183 Model 3 and Model Y cash deliveries, partially offset by a decrease in combined average Model 3 and Model Y costs per unit due to changes in regional production mix, as Gigafactory Shanghai has ramped in capacity, despite a higher proportion of Model Y compared to the prior period. Additionally, there was a decrease of 5,855 Model S and Model X cash deliveries in the three months ended September 30, 2021 compared to the prior period.
Cost of automotive sales revenue increased $8.95 billion, or 70%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to an increase of 304,919 Model 3 and Model Y cash deliveries. These increases were partially offset by a decrease of 21,767 Model S and Model X cash deliveries at higher costs per unit due to temporary under-utilization of manufacturing capacity at lower production volumes during our current production ramp of the new version of Model S. Additionally, there was a decrease in combined average Model 3 and Model Y costs per unit due to changes in regional production mix, as Gigafactory Shanghai has ramped in capacity, despite a higher proportion of Model Y compared to the prior period and lower material, manufacturing, inbound freight and duty costs from localized procurement and manufacturing in China.
Cost of automotive leasing revenue increased $89 million, or 61%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to increases in cumulative vehicles and purchase options exercised under our direct operating lease program compared to the prior period.
Cost of automotive leasing revenue increased $167 million, or 40%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to increases in cumulative vehicles and purchase options exercised under our direct operating lease program compared to the prior period 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 partially offset by the decrease in cost of automotive leasing revenue associated with our resale value guarantee leasing programs accounted for as operating leases as those portfolios have declined.
Cost of services and other revenue increased $266 million, or 41%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to increases in costs to support our increase in non-warranty maintenance services revenue, used vehicle cost of revenue driven by increases in volume and values of trade-ins and costs of retail merchandise as our sales have increased.
Cost of services and other revenue increased $1.01 billion, or 54%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to increases in used vehicle cost of revenue driven by increases in volume and values of 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 28% to 30% in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Gross margin for total automotive increased from 26% to 29% in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increases were primarily due to favorable changes in sales and production mix of Model 3 and Model Y as Gigafactory Shanghai has ramped in capacity. The average Model 3 and Model Y costs per unit have decreased significantly due to lower material, manufacturing, inbound freight and duty costs from localized procurement and manufacturing in China. Increased sales in Asia and exporting vehicles manufactured in Gigafactory Shanghai instead of the Fremont Factory to other regions have resulted in higher gross margins for both our Model 3 and Model Y product lines.
Gross margin for total automotive & services and other segment increased from 25% to 28% in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Gross margin for total automotive & services and other segment increased from 23% to 26% in the nine months ended September 30, 2021 as compared to the nine months ended September 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 nine months ended September 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.
Cost of energy generation and storage revenue increased by $245 million, or 44%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. These increases were primarily due to increases in deployments of Megapack, solar cash and loan jobs, Solar Roof and Powerwall, partially offset by a decrease in Powerpack deployments as we phase out the product following the introduction of Megapack.
Cost of energy generation and storage revenue increased by $990 million, or 83%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. These increases were primarily due to increases in deployments of solar cash and loan jobs, Megapack, Solar Roof and Powerwall, partially offset by reductions in average costs per unit of solar cash and loan jobs and Solar Roof as deployments have increased and a decrease in Powerpack deployments as we phase out the product following the introduction of Megapack.
Gross margin for energy generation and storage decreased from 4% to 0% in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, 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, despite gross margin improvements compared to the prior period, partially offset by improved gross margins in our energy storage business.
Gross margin for energy generation and storage decreased from 4% to -4% in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, 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 despite improvements in gross margins compared to the prior period and increased service maintenance costs on solar energy systems where we are the lessor, partially offset by a higher proportion of Powerwall in our overall energy business which operated at higher gross margins.
Research and Development Expense
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
| Research and development | $ | 611 | $ | 366 | $ | 245 | 67 | % | $ | 1,853 | $ | 969 | $ | 884 | 91 | % | ||||||||||||||||
| As a percentage of revenues | 4 | % | 4 | % | 5 | % | 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 $245 million, or 67%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase was primarily due to a $111 million increase in employee and labor related expenses due to an increase in headcount, a $60 million increase in facilities, outside services, freight and depreciation expenses, a $44 million increase in R&D expensed materials, and a $29 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 increased $884 million, or 91%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase was primarily due to a $393 million increase in employee and labor related expenses due to an increase in headcount, a $221 million increase in R&D expensed materials, a $148 million increase in facilities, outside services, freight and depreciation expense and a $120 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 remained consistent at 4% in the three months ended September 30, 2021 and 2020. R&D expenses as a percentage of revenue remained consistent at 5% in the nine months ended September 30, 2021 and 2020. R&D expenses increased proportionately with the increase in total revenues from expanding sales.
Selling, General and Administrative Expense
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
| Selling, general and administrative | $ | 994 | $ | 888 | $ | 106 | 12 | % | $ | 3,023 | $ | 2,176 | $ | 847 | 39 | % | ||||||||||||||||
| As a percentage of revenues | 7 | % | 10 | % | 8 | % | 10 | % |
Selling, general and administrative (“SG&A”) expenses generally consist of personnel and facilities costs related to our stores, marketing, sales, executive, finance, human resources, information technology and legal organizations, as well as fees for professional and contract services and litigation settlements.
SG&A expenses increased $106 million, or 12%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase is primarily due to an increase of $134 million in employee and labor related expenses from increased headcount and a $106 million increase in office, information technology, facilities-related expenses, sales and marketing activities and other costs. The increases were partially offset by a decrease of $134 million in stock-based compensation expense, of which $148 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 and Note 14, Equity Incentive Plans, in our Annual Report on Form 10-K for the year ended December 31, 2020.
SG&A expenses increased $847 million, or 39%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase is primarily due to an increase of $445 million in employee and labor related expenses from increased headcount and a $223 million increase in office, information technology, facilities-related expenses, sales and marketing activities and other costs. Additionally, there was an increase of $179 million in stock-based compensation expense, of which $94 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 and Note 14, Equity Incentive Plans, in our Annual Report on Form 10-K for the year ended December 31, 2020.
SG&A expenses as a percentage of revenue decreased from 10% to 7% in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. SG&A expenses as a percentage of revenue decreased from 10% to 8% in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. This was driven by the increase in total revenues from expanding sales, despite an increase in our SG&A expenses as detailed above.
Restructuring and Other Expense
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
| Restructuring and other | $ | 51 | $ | — | $ | 51 | Not meaningful | $ | (27 | ) | $ | — | $ | (27 | ) | Not meaningful | ||||||||||||
| As a percentage of revenues | 0 | % | 0 | % | 0 | % | 0 | % |
During the three and nine months ended September 30, 2021, we recorded $51 million and $101 million, respectively, of impairment losses on bitcoin. We also realized gains of $128 million in March 2021. 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 September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
| Interest expense | $ | (126 | ) | $ | (163 | ) | $ | 37 | -23 | % | $ | (300 | ) | $ | (502 | ) | $ | 202 | -40 | % | ||||||||||||
| As a percentage of revenues | 1 | % | 2 | % | 1 | % | 2 | % |
Interest expense decreased by $37 million, or 23%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Interest expense decreased by $202 million, or 40%, in the nine months ended September 30, 2021 as compared to the nine months ended September 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. These decreases were partially offset by an extinguishment of debt charge of $60 million related to the redemption of our 5.30% Senior Notes due in 2025.
Other (Expense) Income, Net
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
| Other (expense) income, net | $ | (6 | ) | $ | (97 | ) | $ | 91 | -94 | % | $ | 67 | $ | (166 | ) | $ | 233 | -140 | % | |||||||||||||
| As a percentage of revenues | 0 | % | 1 | % | 0 | % | 1 | % |
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 favorably by $91 million in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to favorable fluctuations in foreign currency exchange rates.
Other (expense) income, net, changed favorably by $233 million in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to favorable fluctuations in foreign currency exchange rates and a $54 million favorable change in the mark-to-market remeasurement of our interest rate swaps.
Provision for Income Taxes
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
| Provision for income taxes | $ | 223 | $ | 186 | $ | 37 | 20 | % | $ | 407 | $ | 209 | $ | 198 | 95 | % | ||||||||||||||||
| Effective tax rate | 12 | % | 34 | % | 11 | % | 27 | % |
Our provision for income taxes increased by $37 million, or 20%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Our provision for income taxes increased by $198 million, or 95%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increases were primarily due to the increases in taxable profits within our foreign jurisdictions year over year.
Our effective tax rate decreased from 34% to 12% in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Our effective tax rate decreased from 27% to 11% in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The decreases were primarily due to growth in pre-tax income and changes in mix of jurisdictional earnings.
See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||
| Net income attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries | $ | 41 | $ | 38 | $ | 3 | 8 | % | $ | 103 | $ | 115 | $ | (12 | ) | -10% |
Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased by $3 million, or 8%, in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased by $12 million, or 10%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Our changes in net income attributable to noncontrolling interests and redeemable noncontrolling interests, which was related to activities in our financing fund arrangements, have been immaterial.
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 the Fremont Factory, Gigafactory Nevada, Gigafactory Shanghai and Gigafactory New York, the construction of Gigafactory Berlin and Gigafactory Texas, and the continued expansion of our retail and service locations, body shops, Mobile Service fleet, Supercharger network and energy product installation capabilities.
In addition, because a large portion of our future expenditures will be to fund our growth, we expect that if needed we will be able to adjust our capital and operating expenditures by operating segment. For example, if our near-term manufacturing operations decrease in scale or ramp more slowly than expected, including due to global economic or business conditions, we may choose to correspondingly slow the pace of our capital expenditures. Finally, we continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund the rapid growth of our business, including through drawdowns on existing or new debt facilities or financing funds. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early.
Accordingly, we believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following September 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 exceed $6 billion in 2021 and be between $5 to $7 billion in each of the next two fiscal years. In connection with our operations at Gigafactory New York, we have an agreement to spend or incur $5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York through December 31, 2029 (pursuant to a deferral of our required timelines to meet such obligations that was granted in April 2021 and which was memorialized in an amendment to our agreement with the SUNY Foundation in August 2021). We also have an operating lease arrangement with the local government of Shanghai pursuant to which we are required to spend RMB 14.08 billion in capital expenditures at Gigafactory Shanghai by the end of 2023. For details regarding these obligations, refer to Note 12, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
As of September 30, 2021, we and our subsidiaries had outstanding $6.70 billion in aggregate principal amount of indebtedness, of which $1.22 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 and proceeds from equity offerings.
As of September 30, 2021, we had $16.07 billion of cash and cash equivalents. Balances held in foreign currencies had a U.S. dollar equivalent of $5.79 billion and consisted primarily of Chinese yuan, euros and Canadian dollars. In addition, we had $475 million of unused committed amounts under our credit facilities as of September 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 or various other assets). For details regarding our indebtedness, refer to Note 10, Debt to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
We continue adapting our investment strategy to meet our liquidity and risk objectives, such as investing in U.S. government and other marketable securities, digital assets and providing product related financing. In the first quarter of 2021, we invested an aggregate $1.50 billion in bitcoin. In addition, during the three months ended March 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 in May 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 of September 30, 2021 was $1.83 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.
Summary of Cash Flows
| Nine Months Ended September 30, | ||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||
| Net cash provided by operating activities | $ | 6,912 | $ | 2,924 | ||||
| Net cash used in investing activities | $ | (5,952 | ) | $ | (2,085 | ) | ||
| Net cash (used in) provided by financing activities | $ | (3,946 | ) | $ | 7,281 |
Cash Flows from Operating Activities
Our cash flows from operating activities are significantly affected by our cash investments to support the growth of our business in areas such as research and development and selling, general and administrative and working capital, especially inventory, which includes vehicles in transit. Our operating cash inflows include cash from vehicle sales, customer lease payments, customer deposits, cash from sales of regulatory credits and energy generation and storage products. These cash inflows are offset by our payments to suppliers for production materials and parts used in our manufacturing process, operating expenses, operating lease payments and interest payments on our financings.
Net cash provided by operating activities increased by $3.99 billion to $6.91 billion during the nine months ended September 30, 2021 from $2.92 billion during the nine months ended September 30, 2020. This increase was primarily due to the increase in net income excluding non-cash expenses and gains of $3.27 billion and the overall decrease in net operating assets and liabilities of $721 million. The decrease in our net operating assets and liabilities was mainly driven by a larger increase in accounts payable and accrued liabilities in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 from ramp up in production at Gigafactory Shanghai and the Fremont Factory and a larger increase in deferred revenue from higher vehicle deliveries. The decrease in our net operating assets and liabilities was partially offset by a larger increase in operating lease vehicles as Model Y direct leasing was introduced in the third quarter of 2020 and a larger increase in other non-current assets.
Cash Flows from Investing Activities
Cash flows from investing activities and their variability across each period related primarily to capital expenditures, which were $4.67 billion for the nine months ended September 30, 2021 and $2.01 billion for the nine months ended September 30, 2020, mainly for construction of Gigafactory Texas and Gigafactory Berlin and production expansion of Gigafactory Shanghai and the Fremont Factory. Additionally, net cash activities related to digital assets were $1.23 billion in the nine months ended September 30, 2021 from purchases of digital assets for $1.50 billion and proceeds from sales of digital assets of $272 million.
Cash Flows from Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2021 was $3.95 billion, which consisted primarily of $5.14 billion of net repayments under our various debt facilities and $311 million principal repayments of our finance leases. These cash outflows were partially offset by $1.22 billion of net borrowings from our Automotive Asset-backed Notes and $445 million of proceeds from exercise of stock options and other stock issuances. See Note 10, Debt to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding our debt obligations.
Net cash provided by financing activities during the nine months ended September 30, 2020 was $7.28 billion, which consisted primarily of $7.28 billion from issuances of common stock, net of issuance costs, $361 million of proceeds from exercise of stock options and other stock issuances and $315 million net borrowings from our Automotive Asset-backed Notes. These cash inflows were partially offset by $248 million principal repayments of our finance leases, collateralized lease repayments of $224 million and $173 million net payments to financing fund investors.
Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK