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. Additionally, we are increasingly focused on products and services based on artificial intelligence, robotics and automation.

In 2022, we have produced 929,910 vehicles and delivered 908,573 vehicles through the third quarter, despite ongoing supply chain and logistics challenges and factory shutdowns. We are currently focused on increasing vehicle production, capacity and delivery capabilities, improving and developing battery technologies, improving our FSD capabilities, increasing the affordability and efficiency of our vehicles, bringing new products to market and expanding our global infrastructure.

In 2022, we have deployed 4.08 GWh of energy storage products and 248 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, 2022, we recognized total revenues of $21.45 billion and $57.14 billion, respectively, representing increases of $7.70 billion and $21.04 billion, respectively, over the same periods ended September 30, 2021. 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, 2022, our net income attributable to common stockholders was $3.29 billion and $8.87 billion, respectively, representing favorable changes of $1.67 billion and $5.67 billion, respectively, over the same periods ended September 30, 2021. We continue to focus on improving our profitability through production and operational efficiencies.

We ended the third quarter of 2022 with $21.11 billion in cash and cash equivalents and marketable securities, representing an increase of $3.40 billion from the end of 2021. Our cash flows provided by operating activities during the nine month period ended September 30, 2022 was $11.45 billion, representing an increase of $4.53 billion compared to $6.91 billion during the same period ended September 30, 2021. Capital expenditures amounted to $5.30 billion during the nine month period ended September 30, 2022, compared to $4.67 billion during the same period ended September 30, 2021. Sustained growth has allowed our business to generally fund itself, and we will continue investing in a number of capital-intensive projects in upcoming periods.

Management Opportunities, Challenges and Risks and 2022 Outlook

Impact of COVID-19 Pandemic

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

In addition, we have experienced and are experiencing varying levels of inflation resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID‐19 pandemic and general global economic conditions. The inflationary impact on our cost structure has contributed to adjustments in our product pricing, despite a continued focus on reducing our manufacturing costs where possible.

Ultimately, we cannot predict the duration of the COVID-19 pandemic or global economic trends. We continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and attempt to optimally 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-Brandenburg		Model Y		Active
Gigafactory Texas		Model Y		Active
		Cybertruck		Tooling
Gigafactory Nevada		Tesla Semi		Early production
TBD		Tesla Roadster		In development
TBD		Robotaxi & Others		In development

We are focused on growing our manufacturing capacity, which includes ramping all of our production vehicles to their installed production capacities as well as increasing production rate and capacity at our current factories. Our 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 ramp at Gigafactory Berlin-Brandenburg and Gigafactory Texas and the upgrade and expansion of Gigafactory Shanghai, 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. For example, in the second quarter of 2022, at Gigafactory Texas, we began delivering to customers some Model Ys with Tesla-made 4680 cells with a structural battery pack. 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 new product and manufacturing technologies we are introducing, the number of concurrent international projects, any industry-wide component constraints which may increase the number of manufacturing and production design workaround solutions required, labor shortages and any future impact from events outside of our control such as the COVID-19 pandemic. For example, spikes in COVID-19 cases in Shanghai resulted in limited production and temporary shutdowns to Gigafactory Shanghai as well as parts of our supply chain in the first and second quarters of 2022. Moreover, we have set 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 our ongoing production ramp in 2022, we will also continue to generate demand and brand awareness by improving our vehicles’ performance and functionality, including through products based on artificial intelligence such as Autopilot and FSD, and other software features, and delivering new vehicles, such as the Tesla Semi in December 2022. Moreover, we expect to continue to benefit from ongoing electrification of the automotive sector and increasing environmental awareness.

However, we operate in a cyclical industry that is sensitive to political and regulatory uncertainty, including with respect to trade and the environment, all of which may also be compounded by any future global impact from the COVID-19 pandemic, inflationary pressures, rising energy prices and increases in interest rates. Moreover, as additional competitors enter the marketplace and help bring the world closer to sustainable transportation, we will have to adjust and continue to execute well to maintain our momentum.

Automotive—Deliveries and Customer Infrastructure

As our production increases, we must work constantly to similarly increase vehicle delivery capability so that it does not become a bottleneck on our total deliveries. In the third quarter of 2022, due to continuing challenges caused by vehicle transportation capacity during peak delivery periods, we began transitioning to a more even regional mix of vehicle builds each week, which led to an increase in cars in transit at the end of the quarter. Increasing the exports of vehicles manufactured at Gigafactory Shanghai has also been effective in mitigating the strain on our deliveries in markets outside of the United States, and we expect to benefit further from situating additional factories closer to local markets, including the recent production launch at Gigafactory Berlin-Brandenburg and Gigafactory Austin. As we expand our manufacturing operations globally, we will also 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 the ramp of our Megafactory in Lathrop, California, but such production is also sensitive to global component constraints, particularly the industry-wide semiconductor shortage. 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 seek 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, including new iterations of our Megapack, ramping manufacturing facilities on three continents and piloting the development and manufacture of new battery cell technologies, and the pace of our capital spend may vary depending on overall priority among projects, the pace at which we meet milestones, production adjustments to and among our various products, increased capital efficiencies and the addition of new projects. Owing and subject to the foregoing as well as the pipeline of announced projects under development, all other continuing infrastructure growth and varying levels of inflation, we currently expect our capital expenditures to be between $6.00 to $8.00 billion in 2022 and each of the next two fiscal years.

Our business has recently been consistently generating cash flow from operations in excess of our level of capital spend, and with better working capital management resulting in shorter days sales outstanding than days payable outstanding, our sales growth is also facilitating positive cash generation. On the other hand, we are likely to see heightened levels of capital expenditures during certain periods depending on the specific pace of our capital-intensive projects and rising material prices and increasing supply chain and labor expenses resulting from changes in global trade conditions and labor availability associated with the COVID-19 pandemic. Overall, we expect our ability to be self-funding to continue as long as macroeconomic factors support current trends in our sales.

Operating Expense Trends

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

In the first quarter of 2021, we invested an aggregate $1.50 billion in bitcoin. 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, 2022, we recorded $170 million of impairment losses resulting from changes to the carrying value of our bitcoin and gains of $64 million on certain conversions of bitcoin into fiat currency by us.

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets which could impact our estimates and assumptions. The estimates used for, but not limited to, determining significant economic incentive for resale value guarantee arrangements, sales return reserves, the collectability of accounts receivable, inventory valuation, warranties, fair value of long-lived assets, goodwill, fair value of financial instruments, fair value and residual value of operating lease vehicles and solar energy systems subject to leases could be impacted. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

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

Recent Accounting Pronouncements

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

Results of Operations

Revenues

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Automotive sales		$	17,785			$	11,393			$	6,392				56	%		$	46,969			$	29,100			$	17,869				61	%
Automotive regulatory credits			286				279				7				3	%			1,309				1,151				158				14	%
Automotive leasing			621				385				236				61	%			1,877				1,014				863				85	%
Total automotive revenues			18,692				12,057				6,635				55	%			50,155				31,265				18,890				60	%
Services and other			1,645				894				751				84	%			4,390				2,738				1,652				60	%
Total automotive & services and other segment revenue			20,337				12,951				7,386				57	%			54,545				34,003				20,542				60	%
Energy generation and storage segment revenue			1,117				806				311				39	%			2,599				2,101				498				24	%
Total revenues		$	21,454			$	13,757			$	7,697				56	%		$	57,144			$	36,104			$	21,040				58	%

Automotive & Services and Other Segment

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

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

Automotive leasing revenue includes the amortization of revenue for vehicles under direct operating lease agreements. Additionally, automotive leasing revenue includes direct sales-type leasing programs where we recognize all revenue associated with the sales-type lease upon delivery to the customer.

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

Automotive sales revenue increased $6.39 billion, or 56%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to an increase of 96,737 Model 3 and Model Y cash deliveries, and an increase of 9,330 Model S and Model X cash deliveries year over year. This was achieved from production ramping of Model Y at Gigafactory Shanghai and the Fremont Factory as well as the start of production at Gigafactory Berlin-Brandenburg and Gigafactory Texas in 2022, at a higher combined average selling price from a higher proportion of Model Y sales. There was also an increase in production of Model X and an increase in the combined average selling price of Model S and Model X with a higher proportion of Model X sales, compared to the prior period as deliveries of the new versions of Model S and Model X began ramping in the second and fourth quarters of 2021, respectively.

Automotive sales revenue increased $17.87 billion, or 61%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to an increase of 253,016 Model 3 and Model Y cash deliveries, and an increase of 32,293 Model S and Model X cash deliveries year over year. This was achieved from production ramping of Model Y at Gigafactory Shanghai and the Fremont Factory as well as the start of production at Gigafactory Berlin-Brandenburg and Gigafactory Texas in 2022, at a higher combined average selling price from a higher proportion of Model Y sales. There was also an increase in production of Model X and an increase in the combined average selling price of Model S and Model X with a higher proportion of Model X sales, compared to the prior period as deliveries of the new versions of Model S and Model X began ramping in the second and fourth quarters of 2021, respectively.

Automotive regulatory credits revenue increased $7 million, or 3%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 primarily due to the regional mix of the credits sold.

Automotive regulatory credits revenue increased $158 million, or 14%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to changes in regulation which entitled us to additional consideration of $288 million in revenue in the first quarter of 2022 for credits sold previously, in the absence of which we had a decrease in automotive regulatory credits revenue driven by lower sales of regulatory credits.

Automotive leasing revenue increased $236 million, or 61%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Automotive leasing revenue increased $863 million, or 85%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The changes for both periods are primarily due to an increase in direct sales-type leasing revenue and an increase in activities under our direct operating lease program.

Services and other revenue increased $751 million, or 84%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Services and other revenue increased $1.65 billion, or 60%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The changes for both periods are primarily due to increase in used vehicle revenue driven by increases in volume and average selling prices of used Tesla and non-Tesla vehicles, paid supercharging revenue, non-warranty maintenance services revenue as our fleet continues to grow, insurance services revenue 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, financing of solar energy generation products, services related to such products and sales of solar energy systems incentives.

Energy generation and storage revenue increased $311 million, or 39%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to an increase in Megapack, Powerwall and solar retrofit deployments.

Energy generation and storage revenue increased $498 million, or 24%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to an increase in Powerwall and Megapack deployments.

Cost of Revenues and Gross Margin

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Cost of revenues
Automotive sales		$	13,099			$	8,150			$	4,949				61	%		$	34,166			$	21,726			$	12,440				57	%
Automotive leasing			381				234				147				63	%			1,157				582				575				99	%
Total automotive cost of revenues			13,480				8,384				5,096				61	%			35,323				22,308				13,015				58	%
Services and other			1,579				910				669				74	%			4,275				2,858				1,417				50	%
Total automotive & services and other segment cost of revenues			15,059				9,294				5,765				62	%			39,598				25,166				14,432				57	%
Energy generation and storage segment			1,013				803				210				26	%			2,470				2,179				291				13	%
Total cost of revenues		$	16,072			$	10,097			$	5,975				59	%		$	42,068			$	27,345			$	14,723				54	%
Gross profit total automotive		$	5,212			$	3,673											$	14,832			$	8,957
Gross margin total automotive			27.9	%			30.5	%											29.6	%			28.6	%
Gross profit total automotive & services and other segment		$	5,278			$	3,657											$	14,947			$	8,837
Gross margin total automotive & services and other segment			26.0	%			28.2	%											27.4	%			26.0	%
Gross profit energy generation and storage segment		$	104			$	3											$	129			$	(78	)
Gross margin energy generation and storage segment			9.3	%			0.4	%											5.0	%			-3.7	%
Total gross profit		$	5,382			$	3,660											$	15,076			$	8,759
Total gross margin			25.1	%			26.6	%											26.4	%			24.3	%

Automotive & Services and Other Segment

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

Cost of automotive leasing revenue includes the depreciation of operating lease vehicles, cost of goods sold associated with direct sales-type leases and warranty expense related to leased vehicles. Cost of automotive leasing revenue also includes vehicle connectivity costs and allocations of electricity and infrastructure costs related to our Supercharger network for vehicles under our leasing programs.

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

Cost of automotive sales revenue increased $4.95 billion, or 61%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, in line with the growth in revenue year over year, as discussed above. Further there was an increase in combined average Model 3 and Model Y costs per unit due to overall rising raw material, commodity, logistics and expedite costs and the ramping up of production at Gigafactory Berlin-Brandenburg and Gigafactory Texas as well as our proprietary battery cells manufacturing during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. These increases were partially offset by a decrease in combined average Model S and Model X costs per unit driven by lower average cost for the new versions of Model S and Model X from ramping up production.

Cost of automotive sales revenue increased $12.44 billion, or 57%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, in line with the growth in revenue year over year, as discussed above. There were also idle capacity charges of $244 million primarily related to the temporary suspension of production at Gigafactory Shanghai as well as the ramping up of production in Gigafactory Texas and our proprietary battery cells manufacturing during the nine months ended September 30, 2022. These increases were partially offset by a decrease in combined average Model S and Model X costs per unit driven by lower average cost for the new versions of Model S and Model X from ramping up production.

Cost of automotive leasing revenue increased $147 million, or 63%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Cost of automotive leasing revenue increased $575 million, or 99%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to an increase in cumulative vehicles under our direct operating lease program and an increase in direct sales-type leasing cost of revenues from more activities in the current year.

Cost of services and other revenue increased $669 million, or 74%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Cost of services and other revenue increased $1.42 billion, or 50%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The change in both periods is primarily due to an increase in used vehicle cost of revenue driven by increases in volume and costs of used Tesla and non-Tesla vehicles, an increase in costs of paid supercharging, increase in non-warranty maintenance services revenue, insurance services and retail merchandise.

Gross margin for total automotive decreased from 30.5% to 27.9% in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This was driven by the changes in automotive sales revenue and cost of automotive sales revenue, as discussed earlier.

Gross margin for total automotive increased from 28.6% to 29.6% in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This was driven by the growth in automotive sales revenue and cost of automotive sales revenue as well as increase from regulatory credits revenue, as discussed earlier.

Gross margin for total automotive & services and other segment decreased from 28.2% to 26.0% in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to the automotive gross margin decrease discussed above and offset by an improvement in our services and other gross margin.

Gross margin for total automotive & services and other segment increased from 26.0% to 27.4% in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to the automotive gross margin increase discussed above and an improvement in our services and other gross margin. Additionally, services and other was a higher percentage of the segment gross margin during the three and nine months ended September 30, 2022 as compared to the prior year.

Energy Generation and Storage Segment

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

Cost of energy generation and storage revenue increased $210 million, or 26%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to increases in deployments of Megapack, Powerwall and solar retrofit deployments.

Cost of energy generation and storage revenue increased $291 million, or 13%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to increases in deployments of Powerwall and Megapack and higher average cost of solar cash and loan deployments due to increased component costs.

Gross margin for energy generation and storage increased from 0.4% to 9.3% in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Gross margin for energy generation and storage increased from -3.7% to 5.0% in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This was driven by the growth in energy generation and storage revenue and cost of energy generation and storage revenue, as discussed above.

Research and Development Expense

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Research and development		$	733			$	611			$	122				20	%		$	2,265			$	1,853			$	412				22	%
As a percentage of revenues			3	%			4	%											4	%			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 $122 million, or 20%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase was primarily due to a $47 million increase in employee and labor related expenses, a $29 million increase in R&D expensed materials, a $24 million increase in facilities, outside services, freight and depreciation expense, and a $19 million increase in stock-based compensation expense. These increases were to support our expanding product roadmap and technologies including our proprietary battery cells.

R&D expenses increased $412 million, or 22%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase was primarily due to a $169 million increase in employee and labor related expenses, a $128 million increase in facilities, outside services, freight and depreciation expense, a $55 million increase in stock-based compensation expense and a $54 million increase in R&D expensed materials. These increases were to support our expanding product roadmap and technologies including our proprietary battery cells and there were additional R&D expenses in the first quarter of 2022 as we were in the pre-production phase at Gigafactory Texas and started production at Gigafactory Berlin-Brandenburg only closer to the end of the first quarter of 2022.

R&D expenses as a percentage of revenue decreased from 4% to 3% in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. R&D expenses as a percentage of revenue decreased from 5% to 4% in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Our R&D expenses have decreased as a proportion of total revenues despite expanding product roadmap and technologies.

Selling, General and Administrative Expense

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Selling, general and administrative		$	961			$	994			$	(33	)			-3	%		$	2,914			$	3,023			$	(109	)			-4	%
As a percentage of revenues			4	%			7	%											5	%			8	%

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

SG&A expenses decreased $33 million, or 3%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This is primarily due to a decrease of $184 million in stock-based compensation expense, most of which is attributable to the lower stock-based compensation expense of $185 million on the 2018 CEO Performance Award. See Note 11*, Equity Incentive Plans*, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This was offset by an increase of $92 million in employee and labor related expenses from increased headcount and an increase of $53 million in office, information technology, facilities-related expenses and sales and marketing activities.

SG&A expenses decreased $109 million, or 4%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This is primarily due to a decrease of $591 million in stock-based compensation expense, most of which is attributable to the lower stock-based compensation expense of $603 million on the 2018 CEO Performance Award. See Note 11, Equity Incentive Plans, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This was offset by an increase of $311 million in employee and labor related expenses from increased headcount and an increase of $172 million in office, information technology, facilities-related expenses, sales and marketing activities and other costs.

SG&A expenses as a percentage of revenue decreased from 7% to 4% in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. SG&A expenses as a percentage of revenue decreased from 8% to 5% in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Our SG&A expenses have decreased as a proportion of total revenues due to operational efficiencies, in addition to the decrease in expenses discussed above.

Restructuring and Other Expense

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Restructuring and other		$	—			$	51			$	(51	)			-100	%		$	142			$	(27	)		$	169			Not meaningful

During the nine months ended September 30, 2022, we recorded $170 million of impairment losses on such digital assets, and $51 million and $101 million during the three and nine months ended September 30, 2021, respectively. During the nine months ended September 30, 2022 and 2021, we realized gains of $64 million and $128 million, respectively, in connection with converting our holdings of digital assets into fiat currency. See Note 3, Digital Assets, Net, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details. We also recorded other expenses of $36 million during the nine months ended September 30, 2022, related to employee terminations in the second quarter.

Interest Income

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Interest income		$	86			$	10			$	76				760	%		$	140			$	31			$	109				352	%

Interest income increased $76 million, or 760%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest income increased $109 million, or 352%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. These increases were due to higher interest earned on cash and cash equivalents balances as of September 30, 2022 compared to September 30, 2021, driven by rising interest rates as well as an increase in our overall cash and cash equivalents balance during the periods presented.

Interest Expense

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Interest expense		$	(53	)		$	(126	)		$	73				-58	%		$	(158	)		$	(300	)		$	142				-47	%

Interest expense decreased $73 million, or 58%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest expense decreased $142 million, or 47%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. These decreases were primarily due to the continued reduction in our overall debt balance offset by lower capitalized interest. See Note 10, Debt, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.

Other (Expense) Income, Net

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Other (expense) income, net		$	(85	)		$	(6	)		$	(79	)			1317	%		$	(1	)		$	67			$	(68	)		Not meaningful

Other (expense) income, net, consists primarily of foreign exchange gains and losses related to our foreign currency-denominated monetary assets and liabilities and changes in the fair values of our fixed-for-floating interest rate swaps. We expect our foreign exchange gains and losses will vary depending upon movements in the underlying exchange rates.

Other (expense) income, net, changed unfavorably by $79 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Other (expense) income, net, changed unfavorably by $68 million in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The change for both periods was primarily due to fluctuations in foreign currency exchange rates.

Provision for Income Taxes

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Provision for income taxes		$	305			$	223			$	82				37	%		$	856			$	407			$	449				110	%
Effective tax rate			8	%			12	%											9	%			11	%

Our provision for income taxes increased by $82 million, or 37%, in the three months ended September 30, 2022 and increased by $449 million, or 110%, in the nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021, primarily due to the increase in our pre-tax income year over year.

Our effective tax rate decreased from 12% to 8% in the three months ended September 30, 2022 and from 11% to 9% in the nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021, primarily due to changes in mix of jurisdictional earnings.

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

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
(Dollars in millions)		2022				2021				$				%				2022				2021				$				%
Net income attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries		$	39			$	41			$	(2	)			-5	%		$	11			$	103			$	(92	)			-89	%

Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased $2 million, or 5%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased by $92 million, or 89%, in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. These changes were due to a decrease in allocations to financing fund investors.

Liquidity and Capital Resources

We expect to continue to generate net positive operating cash flow as we have done in the last four fiscal years. The cash we generate from our core operations enables us to fund ongoing operations and production, our research and development projects for new products and technologies including our proprietary battery cells, additional manufacturing ramps at existing manufacturing facilities such as the Fremont Factory, Gigafactory Nevada, Gigafactory Shanghai and Gigafactory New York, the ramp of Gigafactory Berlin-Brandenburg 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, 2022, as well as in the long-term.

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

Material Cash Requirements

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

As discussed in and subject to the considerations referenced in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management Opportunities, Challenges and Risks and 2022 Outlook—Cash Flow and Capital Expenditure Trends in this Quarterly Report on Form 10-Q, we currently expect our capital expenditures to support our projects globally to be between $6.00 to $8.00 billion in 2022 and each of the next two fiscal years. In connection with our operations at Gigafactory New York, we have an agreement to spend or incur $5.00 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York through December 31, 2029 (pursuant to a deferral of our required timelines to meet such obligations that was granted in April 2021, and which was memorialized in an amendment to our agreement with the SUNY Foundation in August 2021). We also have an operating lease arrangement with the local government of Shanghai pursuant to which we are required to spend RMB 14.08 billion in capital expenditures at Gigafactory Shanghai by the end of 2023. For details regarding these obligations, refer to Note 12, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

As of September 30, 2022, we and our subsidiaries had outstanding $2.41 billion in aggregate principal amount of indebtedness, of which $983 million is scheduled to become due in the succeeding 12 months. For details regarding our indebtedness, refer to Note 10, Debt, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Sources and Conditions of Liquidity

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

As of September 30, 2022, we had $19.53 billion of cash and cash equivalents. Balances held in foreign currencies had a U.S. dollar equivalent of $6.28 billion and consisted primarily of Chinese yuan, euros and Canadian dollars. In addition, we had $2.41 billion of unused committed amounts under our credit facilities as of September 30, 2022. Certain of such unused committed amounts are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient amounts of qualified receivables, inventories, leased vehicles and our interests in those leases, solar energy systems and the associated customer contracts or various other assets). For details regarding our indebtedness, refer to Note 10, Debt to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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. 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. The fair market value of our remaining holdings of digital assets as of September 30, 2022 was $226 million. Additionally, we held short-term marketable securities of $1.58 billion as of September 30, 2022.

Summary of Cash Flows

		Nine Months Ended September 30,
(Dollars in millions)		2022				2021
Net cash provided by operating activities		$	11,446			$	6,912
Net cash used in investing activities		$	(5,842	)		$	(5,952	)
Net cash used in financing activities		$	(3,032	)		$	(3,946	)

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. Our operating cash inflows include cash from vehicle sales and related servicing, 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 $4.53 billion to $11.45 billion during the nine months ended September 30, 2022 from $6.91 billion during the nine months ended September 30, 2021. This increase was primarily due to the increase in net income excluding non-cash expenses, gains and losses of $5.91 billion, offset by the overall increase in net operating assets and liabilities of $1.38 billion. The increase in our net operating assets and liabilities was mainly driven by a larger increase of inventory in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, partially offset by a larger increase of accounts payable and accrued liabilities, to support the ramp up in production at our factories and a larger increase in other non-current assets. Additionally, the increase in our net operating assets and other liabilities was partially offset by a larger increase in other long-term liabilities.

Cash Flows from Investing Activities

Cash flows from investing activities and their variability across each period related primarily to capital expenditures, which were $5.30 billion for the nine months ended September 30, 2022 and $4.67 billion for the nine months ended September 30, 2021, mainly for the expansions of Gigafactory Texas, the Fremont Factory, Gigafactory Berlin-Brandenburg, and Gigafactory Shanghai. We also purchased $1.47 billion of marketable securities in the nine months ended September 30, 2022. Additionally, net cash inflows related to sales of digital assets were $936 million in the nine months ended September 30, 2022.

Cash Flows from Financing Activities

Net cash used in financing activities decreased by $914 million to $3.03 billion during the nine months ended September 30, 2022 from $3.95 billion during the nine months ended September 30, 2021. The decrease was primarily due to a $956 million decrease in repayments of convertible and other debt, net of proceeds from issuances of convertible and other debt. 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.