TESLA, INC. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q.
Overview
Our mission is to accelerate the world's transition to sustainable energy. We design, develop, manufacture, lease and sell high-performance fully electric vehicles, solar energy generation systems and energy storage products. We also offer maintenance, installation, operation, financial and other services related to our products.
In 2021, we have produced 180,338 vehicles and delivered 184,877 vehicles through the first quarter. We are currently focused on increasing vehicle production and capacity, improving and developing and battery technologies, increasing the affordability and efficiency of our vehicles, expanding our global infrastructure and introducing our next vehicles.
In 2021, we have deployed 445 GWh of energy storage products and 92 megawatts of solar energy systems through the first quarter. We are currently focused on ramping production of energy storage products, improving our Solar Roof installation capability and efficiency and increasing market share of retrofit solar energy systems. During the three months endedMarch 31, 2021 , we recognized total revenues of$10.39 billion , representing an increase of$4.40 billion over the three months endedMarch 31, 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 months endedMarch 31, 2021 , our net income attributable to common stockholders was$438 million , representing a favorable change of$422 million over the three months endedMarch 31, 2020 . We continue to focus on operational efficiencies, while we have seen an acceleration of non-cash stock-based compensation expense due to a rapid increase in our market capitalization and updates to our business outlook. We ended the first quarter of 2021 with$17.14 billion in cash and cash equivalents, representing a decrease of$2.24 billion from the end of 2020. Our cash flows provided by operating activities during the three month period endedMarch 31, 2021 was$1.64 billion , representing a favorable change of$2.08 billion compared to our cash flows used in operating activities during the period endedMarch 31, 2020 of$440 million , and capital expenditures amounted to$1.35 billion during the three month period endedMarch 31, 2021 , compared to$455 million during the same period endedMarch 31, 2020 . Sustained growth has allowed our business to generally fund itself, but we will continue 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 microchip 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.
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--------------------------------------------------------------------------------Automotive-Production
The following is a summary of the status of production of each of our announced vehicle models in production and under development, as of the date of this Quarterly Report on Form 10-Q:
Production Location Vehicle Model(s) Production Status
Fremont Factory Model S / Model X Active
Model 3 / Model Y Active
Gigafactory Shanghai Model 3 / Model Y Active
Gigafactory Berlin Model Y Constructing manufacturing facilities
Gigafactory Texas Model Y Constructing manufacturing facilities
Cybertruck In development
TBD Tesla Semi In development
Tesla Roadster In development
We installed and tested the manufacturing equipment for our new versions of
Model S and Model X in the first quarter of 2021 and we are in the early stages
of ramping production. We are focused on ramping these models and Model Y to at
least their installed production capacities. We have also worked to increase
localization at Gigafactory Shanghai by introducing drive unit manufacturing and
Model Y one-piece casting there. 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 and deliveries beginning in late 2021,
and where we will also 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 at new factories, we expect to pioneer there 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 and any future impact from events outside of
our control such as the COVID-19 pandemic and any industry-wide component
constraints. Moreover, we must meet ambitious technological targets with our
plans for battery cells as well as for iterative manufacturing and design
improvements for our vehicles with each new factory.
Automotive-Demand and Sales
Our cost reduction efforts and additional localized procurement and manufacturing are key to our vehicles' affordability, and for example have allowed us to competitively price our vehicles inChina . In addition to opening new factories in 2021, we will also continue to generate demand and brand awareness by improving our vehicles' performance and functionality, including Autopilot, FSD and software features, and introducing anticipated future vehicles. Moreover, we expect to benefit from 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, and we expect to benefit further from situating additional factories closer to local markets. In any case, as we expand, we will have to continue to increase and staff our delivery, servicing and charging infrastructure, maintain our vehicle reliability and optimize our Supercharger locations to ensure cost-effectiveness and customer satisfaction. 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. For Powerwall, better
availability and growing grid stability concerns drive higher interest, and we
are emphasizing cross-selling with our residential solar energy products. We
remain committed to increasing our retrofit solar energy business by offering a
low-cost and simplified online ordering experience. In addition, we continue to
improve our installation capabilities for Solar Roof by on-boarding and training
a large number of installers and reducing the installation time dramatically. As
these product lines grow, we will have to maintain adequate battery cell supply
for our energy storage products and hire additional personnel, particularly
skilled electricians to support the ramp of Solar Roof.
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--------------------------------------------------------------------------------Cash Flow and Capital Expenditure Trends
Our capital expenditures are typically difficult to project beyond the short term given the number and breadth of our core projects at any given time, and may further be impacted by uncertainties in future global market conditions. We are simultaneously ramping new products in the new Model S and Model X, Model Y and Solar Roof, constructing or ramping manufacturing facilities on three continents and piloting the development and manufacture of new battery cell technologies, and the pace of our capital spend may vary depending on overall priority among projects, the pace at which we meet milestones, production adjustments to and among our various products, increased capital efficiencies and the addition of new projects. Owing and subject to the foregoing as well as the pipeline of announced projects under development and all other continuing infrastructure growth, we currently expect our capital expenditures to be$4.50 to$6.00 billion in 2021 and each of the next two fiscal years. 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 recently, 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 additionally increase operational efficiency and process automation. InMarch 2018 , our stockholders approved a performance-based stock option award to our CEO (the "2018 CEO Performance Award"), consisting of 12 vesting tranches contingent on the achievement of specified market capitalization and operational milestones. We incur non-cash stock-based compensation expense for each tranche only after the related operational milestone initially becomes probable of being achieved based on a subjective assessment of our future financial performance, and if this happens following the grant date, we record at such time a cumulative catch-up expense that may be significant based on the length of time elapsed from the grant date. Moreover, the remaining expense for that tranche is ratably recorded over the period remaining until the later of (i) the expected achievement of the relevant operational milestone (if it has not yet been achieved) and (ii) the expected achievement of the related market capitalization milestone (if it has 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 except one 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 began accepting bitcoin as a form of payment for certain of our products in specified regions, subject to applicable laws. 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. As we generally intend to hold these assets long-term, these charges may negatively impact our profitability in the periods in which such impairments occur even if the overall market values of these assets increase. For example, in the first quarter of 2021, we recorded approximately$27 million of impairment losses resulting from changes to the carrying value of our bitcoin and gains of$128 million on certain sales of bitcoin by us.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in theU.S. ("GAAP"). The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected. 31 -------------------------------------------------------------------------------- Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. The estimates used for, but not limited to, determining significant economic incentive for resale value guarantee arrangements, sales return reserves, the collectability of accounts receivable, inventory valuation, fair value of long-lived assets, goodwill, fair value of financial instruments, fair value and residual value of operating lease vehicles and solar energy systems subject to leases could be impacted. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Results of Operations
Effects of COVID-19
Beginning in the first quarter of 2021, there has been a trend in many parts of
the world of increasing availability and administration of vaccines against
COVID-19, as well as an easing of restrictions on social, business, travel and
government activities and functions. On the other hand, infection rates and
regulations continue to fluctuate in various regions and there are ongoing
global impacts resulting from the pandemic, including challenges and increases
in costs for logistics and supply chain issues, such as a shortfall of microchip
supply.
During 2020, we were also affected by temporary manufacturing closures,
employment and compensation adjustments, and impediments to administrative
activities supporting our product deliveries and deployments. Our temporary
suspension at our factories resulted in idle capacity charges as we still
incurred fixed costs such as depreciation, certain payroll related expenses and
property taxes. As part of our response strategy to the business disruptions and
uncertainty around macroeconomic conditions caused by the COVID-19 pandemic, we
instituted cost reduction initiatives across our business globally to be
commensurate to the scope of our operations while they were scaled back in the
first half of 2020. Additionally, we suspended non-critical operating spend and
opportunistically renegotiated supplier and vendor arrangements. As part of
various governmental responses to the pandemic granted to companies globally, we
received certain payroll related benefits which helped to reduce the impact of
the COVID-19 pandemic on our financial results. Such payroll related benefits
related to our direct headcount have been primarily netted against our disclosed
idle capacity charges and they marginally reduced our operating expenses. The
impact of the idle capacity charges incurred during the first half of 2020 were
almost entirely offset by our cost savings initiatives and payroll related
benefits.
Revenues
Three Months Ended March 31 , Change(Dollars in millions) 2021 2020 $ % Automotive sales $ 8,705$ 4,893 $ 3,812 78 % Automotive leasing 297 239 58 24 % Total automotive revenues 9,002 5,132 3,870 75 % Services and other 893 560 333 59 %
Total automotive & services and other
segment revenue 9,895 5,692 4,203 74 % Energy generation and storage segment revenue 494 293 201 69 % Total revenues$ 10,389 $ 5,985 $ 4,404 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.
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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$3.81 billion , or 78%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to an increase of 96,464 Model 3 and Model Y cash deliveries year over year from production ramping at both Gigafactory Shanghai and theFremont Factory . There was also an increase of$164 million from additional sales of regulatory credits to$518 million in the three months endedMarch 31, 2021 . The increases in automotive sales revenue were partially offset by a decrease from 8,380 fewer Model S and Model X cash deliveries at a slightly lower combined average selling price in the three months endedMarch 31, 2021 compared to the prior period as we phase out the inventory of older models to get ready for the introduction of the updated versions. Additionally, there was a decrease in the combined average selling price of Model 3 and Model Y primarily due to a higher proportion ofStandard Range variants in our sales mix compared to the prior period. Automotive leasing revenue increased$58 million , or 24%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to an increase in cumulative vehicles under our direct operating lease program and the introduction of direct sales-type leasing programs which we began offering in volume during the third quarter of 2020 where we recognize all revenue associated with the sales-type lease upon delivery to the customer. These increases were partially offset by the decreases in automotive leasing revenue associated with our resale value guarantee leasing programs accounted for as operating leases as those portfolios have declined. Services and other revenue increased$333 million , or 59%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to increases in used vehicle revenue driven by an increase in trade-ins, non-warranty maintenance services revenue as our fleet continues to grow and retail merchandise revenue.
Energy Generation and Storage Segment
Energy generation and storage revenue includes sales and leasing of solar energy generation and energy storage products, services related to such products and sales of solar energy systems incentives. Energy generation and storage revenue increased by$201 million , or 69%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to increases in deployments of solar cash and loan jobs, Powerwall and Megapack, partially offset by reduced average selling prices on our solar cash and loan jobs as a result of our low cost solar strategy introduced mid-2020.
Cost of Revenues and Gross Margin
Three Months Ended March 31, Change
(Dollars in millions) 2021 2020 $ %
Cost of revenues
Automotive sales $ 6,457 $ 3,699 $ 2,758 75 %
Automotive leasing 160 122 38 31 %
Total automotive cost of revenues 6,617 3,821 2,796 73 %
Services and other 962 648 314 48 %
Total automotive & services and other
segment cost of revenues 7,579 4,469 3,110 70 % Energy generation and storage segment 595 282 313 111 % Total cost of revenues$ 8,174 $ 4,751 $ 3,423 72 % Gross profit total automotive$ 2,385 $ 1,311 Gross margin total automotive 26 % 26 % Gross profit total automotive & services and other segment$ 2,316 $ 1,223 Gross margin total automotive & services and other segment 23 % 21 % Gross profit energy generation and storage segment$ (101 ) $ 11 Gross margin energy generation and storage segment -20 % 4 % Total gross profit$ 2,215 $ 1,234 Total gross margin 21 % 21 % 33
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Automotive & Services and Other Segment
Cost of automotive sales revenue includes direct parts, material and labor costs, manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistic costs, vehicle connectivity costs, allocations of electricity and infrastructure costs related to our Supercharger network and reserves for estimated warranty expenses. Cost of automotive sales revenues also includes adjustments to warranty expense and charges to write down the carrying value of our inventory when it exceeds its estimated net realizable value and to provide for obsolete and on-hand inventory in excess of forecasted demand. Cost of automotive leasing revenue includes the amortization of operating lease vehicles over the lease term, cost of goods sold associated with direct sales-type leases which were introduced in volume in the third quarter of 2020, as well as warranty expenses related to leased vehicles. Cost of automotive leasing revenue also includes vehicle connectivity costs and allocations of electricity and infrastructure costs related to our Supercharger network for vehicles under our leasing programs. Cost of services and other revenue includes costs associated with providing non-warranty after-sales services, costs to acquire and certify used vehicles, costs for retail merchandise, and costs to provide vehicle insurance. Cost of services and other revenue also includes direct parts, material and labor costs and manufacturing overhead associated with the sales by our acquired subsidiaries to third party customers. Cost of automotive sales revenue increased$2.76 billion , or 75%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to an increase of 96,464 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 lower material, manufacturing, freight and duty costs from localized procurement and manufacturing inChina , a higher sales mix ofStandard Range trims and reductions in Model Y average costs per unit as compared to the prior period due to temporary under-utilization of manufacturing capacity at lower production volumes during our production ramp in the first half of 2020. Additionally, there was a decrease of 8,380 Model S and Model X cash deliveries in the three months endedMarch 31, 2021 compared to the prior period. Cost of automotive leasing revenue increased$38 million , or 31%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to an increase in cumulative vehicles under our direct operating lease program and the introduction of direct sales-type leasing programs which we began offering in volume during the third quarter of 2020 where we recognize all cost of revenue associated with the sales-type lease upon delivery to the customer. These increases were partially offset by the decreases in cost of automotive lease revenue associated with our resale value guarantee leasing programs which are accounted for as operating leases as those portfolios have declined. Cost of services and other revenue increased$314 million , or 48%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to increases in used vehicle cost of revenue driven by an increase in trade-ins, costs to support our increase in non-warranty maintenance services revenue and costs of retail merchandise as our sales have increased. Gross margin for total automotive remained relatively consistent at 26% in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . There were increases from improvements of Model Y and Model 3 gross margins primarily from lower material, manufacturing, freight and duty costs from localized procurement and manufacturing inChina and reductions in Model Y average costs per unit as compared to the prior period due to temporary under-utilization of manufacturing capacity at lower production volumes during our production ramp in the first half of 2020. Additionally, there was a positive impact from an increase of$164 million in sales of regulatory credits. These increases were partially offset by a decrease in the combined average selling price of Model 3 and Model Y due to a higher proportion ofStandard Range variants in our sales mix compared to the prior period. Gross margin for total automotive & services and other segment increased from 21% to 23% in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , 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 months endedMarch 31, 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.
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Cost of energy generation and storage revenue increased by $313 million , or
111%, in the three months ended March 31, 2021 as compared to the three months
ended March 31, 2020 , primarily due to increases in deployments of solar cash
and loan jobs, Solar Roof, Powerwall and Megapack and increased service
maintenance costs on solar energy systems where we are the lessor, partially
offset by reductions in average costs per unit of Solar Roof and solar cash and
loan jobs from improved overhead utilization as deployments increased. Although
our average costs per unit of Solar Roof improved compared to the prior period,
they still remain significant and contribute disproportionately to our cost of
energy generation and storage revenue.
Gross margin for energy generation and storage decreased from 4% to -20% in the
three months ended March 31, 2021 as compared to the three months ended
March 31, 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, increased service
maintenance costs on solar energy systems where we are the lessor and lower
gross margins in our energy storage business as we are ramping Megapack.
Research and Development Expense
Three Months Ended March 31, Change
(Dollars in millions) 2021 2020 $ %
Research and development $ 666 $ 324 $ 342 106 %
As a percentage of revenues 6 % 5 %
Research and development ("R&D") expenses consist primarily of personnel costs
for our teams in engineering and research, manufacturing engineering and
manufacturing test organizations, prototyping expense, contract and professional
services and amortized equipment expense.
R&D expenses increased $342 million , or 106%, in the three months ended
March 31, 2021 as compared to the three months ended March 31, 2020 . The
increase was primarily due to an $147 million increase in employee and labor
related expenses due to an increase in headcount and increased payroll taxes
related to appreciation of our stock price, a $122 million increase in R&D
expensed materials and outside services and a $60 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 increased from 5% to 6% in the three
months ended March 31, 2021 as compared to the three months ended March 31,
2020 . The increase is primarily due to the increase in our R&D expenses as
detailed above, partially offset by an increase in total revenues from expanding
sales.
Selling, General and Administrative Expense
Three Months Ended March 31, Change
(Dollars in millions) 2021 2020 $ %
Selling, general and administrative $ 1,056 $ 627 $ 429 68 %
As a percentage of revenues 10 % 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$429 million , or 68%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . The increase is primarily due to an increase of$273 million in stock-based compensation expense, of which$233 million was attributable to the 2018 CEO Performance Award. We recorded stock-based compensation expense of$299 million in the three months endedMarch 31, 2021 for the 2018 CEO Performance Award compared to$66 million in the prior period. The increase in expense under the 2018 CEO Performance Award was due to the catch-up expense of$116 million recognized in the three months endedMarch 31, 2021 when the operational milestone of annualized revenue of$55.0 billion became probable of being achieved as well as the acceleration of the expense related to the fifth and sixth tranches as their market capitalization milestones were achieved earlier than originally forecasted due to rapid appreciation of our stock price since 2020 (see Note 11, Equity Incentive Plans, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Additionally, there was an increase of$125 million in employee and labor related expenses from increased headcount and increased payroll taxes related to appreciation of our stock price. SG&A expenses as a percentage of revenue remained relatively consistent at 10% in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . There was a favorable impact from the increase in total revenue from expanding sales, partially offset by an increase in our SG&A expenses as detailed above. 35
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Restructuring and Other Expense
Three Months Ended March 31, Change
(Dollars in millions) 2021 2020 $ %
Restructuring and other $ (101 ) $ - $ (101 ) Not meaningful
As a percentage of revenues -1 % 0 %
During the three months ended March 31, 2021 , we realized gains of $128 million
through sales of bitcoin and also recorded $27 million of impairment losses. 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 March 31, Change
(Dollars in millions) 2021 2020 $ %
Interest expense $ (99 ) $ (169 ) $ 70 -41 %
As a percentage of revenues 1 % 3 %
Interest expense decreased by $70 million , or 41%, in the three months ended
March 31, 2021 as compared to the three months ended March 31, 2020 , 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.
Other Income (Expense), Net
Three Months Ended March 31, Change
(Dollars in millions) 2021 2020 $ %
Other income (expense), net
0 % 1 %
Other income (expense), net, consists primarily of foreign exchange gains and
losses related to our foreign currency-denominated monetary assets and
liabilities and changes in the fair values of our fixed-for-floating interest
rate swaps. We expect our foreign exchange gains and losses will vary depending
upon movements in the underlying exchange rates.
Other income (expense), net, changed favorably by $82 million in the three
months ended March 31, 2021 as compared to the three months ended March 31,
2020 , primarily due to a $60 million favorable change in the mark-to-market
remeasurement of our interest rate swaps and favorable fluctuations in foreign
currency exchange rates.
Provision for Income Taxes
Three Months Ended March 31, Change
(Dollars in millions) 2021 2020 $ %
Provision for income taxes $ 69 $ 2 $ 67 3350 %
Effective tax rate 13 % 3 %
Our provision for income taxes is $69 million with pre-tax income of $533
million for the three months ended March 31, 2021 . The provision for income
taxes increased by $67 million , compared to $2 million provision for income
taxes with pre-tax income of $70 million for the three months ended March 31,
2020 . The increase was primarily due to the substantial increases in taxable
profits in our foreign jurisdictions year-over-year.
Our effective tax rate increased from 3% to 13% in the three months ended
March 31, 2021 as compared to the three months ended March 31, 2020 , primarily
due to substantial pre-tax income in the three months ended March 31, 2021 as
compared to a small pre-tax income for the three months ended March 31, 2020 .
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.
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Net Income Attributable to Noncontrolling Interests and Redeemable
Noncontrolling Interests
Three Months Ended March 31, Change
(Dollars in millions) 2021 2020 $ %
Net income attributable to noncontrolling
interests and
redeemable noncontrolling interests in
subsidiaries $ 26 $ 52 $ (26 ) -50%
Our net income attributable to noncontrolling interests and redeemable noncontrolling interests was related to financing fund arrangements.
Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased by$26 million , or 50%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . The change was primarily due to lower activities from new financing fund arrangements offset by a decrease in distributions 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 three fiscal years. The cash we generate from our core operations enables us to fund ongoing operations and production, our research and development projects for new products and technologies including our proprietary battery cells, additional manufacturing ramps at existing manufacturing facilities such as theFremont Factory , Gigafactory Nevada, Gigafactory Shanghai and Gigafactory New York, the construction of GigafactoryBerlin and Gigafactory Texas, and the continued expansion of our retail and service locations, body shops, Mobile Service fleet, Supercharger network and energy product installation capabilities. In addition, because a large portion of our future expenditures will be to fund our growth, we expect that if needed we will be able to adjust our capital and operating expenditures by operating segment. For example, if our near-term manufacturing operations decrease in scale or ramp more slowly than expected, including due to global economic or business conditions, we may choose to correspondingly slow the pace of our capital expenditures. Finally, we continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund the rapid growth of our business, including through drawdowns on existing or new debt facilities or financing funds. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early.
Accordingly, we believe that our current sources of funds will provide us with
adequate liquidity during the 12-month period following
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 II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Management Opportunities, Challenges and Risks-Cash Flow and Capital Expenditure Trends in this Quarterly Report on Form 10-Q, we currently expect our capital expenditures to support our projects globally to be$4.50 to$6.00 billion in 2021 and in each of the next two fiscal years. In connection with our operations at Gigafactory Buffalo, we have an agreement to spend or incur$5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in theState of New York throughDecember 31, 2029 (pursuant to a deferral of our required timelines to meet such obligations that was granted inApril 2021 subject only to memorialization in writing by us and theSUNY Foundation ). We also have an operating lease arrangement with the local government ofShanghai pursuant to which we are required to spendRMB 14.08 billion in capital expenditures at Gigafactory Shanghai by the end of 2023. For details regarding these obligations, refer to Note 12, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. As ofMarch 31, 2021 , we and our subsidiaries had outstanding$9.52 billion in aggregate principal amount of indebtedness, of which$1.43 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. 37 --------------------------------------------------------------------------------
Sources and Conditions of Liquidity
Our sources to fund our material cash requirements are predominantly from our deliveries of vehicles, sales and installations of our energy storage products and solar energy systems, proceeds from debt facilities, proceeds from financing funds and proceeds from equity offerings. As ofMarch 31, 2021 , we had$17.14 billion of cash and cash equivalents. Balances held in foreign currencies had aU.S. dollar equivalent of$7.79 billion and consisted primarily of euros, Chinese yuan and Canadian dollars. In addition, we had$2.15 billion of unused committed amounts under our credit facilities and financing funds as ofMarch 31, 2021 , net of amounts formerly available under the Fixed Asset Facility that was paid off and terminated inApril 2021 . Certain of such unused committed amounts are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient amounts of qualified receivables, inventories, leased vehicles and our interests in those leases, solar energy systems and the associated customer contracts, our interests in financing funds or various other assets; and contributing or selling qualified solar energy systems and the associated customer contracts or qualified leased vehicles and our interests in those leases into the financing funds). For details regarding our indebtedness and financing funds, refer to Note 10, Debt, and Note 13, Variable Interest Entity Arrangements to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. In the first quarter of 2021, we invested an aggregate$1.50 billion in bitcoin and began accepting bitcoin as a form of payment for our products in certain regions, subject to applicable laws. In the first quarter of 2021, we also sold an aggregate$272 million in bitcoin. Net of such sales, the fair market value of our bitcoin holdings as ofMarch 31, 2021 was$2.48 billion . Based on our trading activity to date, we believe bitcoin is highly liquid, although we generally intend to hold our bitcoin long-term regardless of the manner of acquisition. However, digital assets may be subject to volatile market prices, which may be unfavorable at the times when we may want or need to liquidate them.
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