Tesla 2014 Annual Report Download - page 79

Download and view the complete annual report

Please find page 79 of the 2014 Tesla annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 148

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148

Table of Contents
the Daimler Smart fortwo and A-Class EV programs was substantially completed as of December 31, 2011. During the three months ended
March 31, 2012, we began supplying powertrain systems to Toyota under the RAV4 EV supply and services agreement and recognized $29.1
million for the year ended December 31, 2012.
Development Services
Development services represent arrangements where we develop electric vehicle powertrain components and systems for other automotive
manufacturers, including the design and development of battery packs, drive units and chargers to meet customers’ specifications.
Development services revenue for the year ended December 31, 2013 was $15.7 million, a decrease from $27.6 million for the year ended
December 31, 2012. Development services revenue for the year ended December 31, 2012 was $27.6 million, a decrease from $55.7 million for
the year ended December 31, 2011.
During the fourth quarter of 2011, Daimler engaged us to assist with the development of a full electric powertrain for a Daimler Mercedes-
Benz B-Class EV vehicle. In 2012, we received two purchase orders from Daimler to begin development work and also entered into a separate
development agreement under which we would complete various milestones and deliver prototype samples. During the years ended
December 31, 2013 and 2012, we recognized a total $15.7 million and $15.9 million in development services revenue, respectively, related to
this program.
In July 2010, we entered into an agreement with Toyota to initiate development of an electric powertrain for the Toyota RAV4. Under this
Phase 0 development agreement, prototypes were made by us by combining the Toyota RAV4 model with a Tesla electric powertrain. In
October 2010, we entered into a Phase 1 contract services agreement with Toyota for the development of a validated powertrain system,
including a battery pack, power electronics module, motor, gearbox and associated software, which would be integrated into an electric vehicle
version of the Toyota RAV4. During the year ended December 31, 2011, we completed various milestones and delivered several samples under
the Phase 1 agreement and delivered all development services under the Phase 0 agreement. During the three months ended March 31, 2012, we
completed our remaining milestones and delivered samples under the Phase 1 agreement. Development services revenue under these
arrangements with Toyota for the years ended December 31, 2012 and 2011 was $10.7 million and $55.0 million, respectively.
Cost of Revenues and Gross Profit
Cost of revenues includes cost of automotive sales and costs related to our development services.
Cost of automotive sales for the year ended December 31, 2013 was $1.54 billion, an increase from $371.7 million for the year ended
December 31, 2012. Cost of automotive sales includes direct parts, material and labor costs, manufacturing overhead, including amortized
tooling costs, royalty fees, shipping and logistic costs and reserves for estimated warranty expenses. Cost of automotive sales 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. The increase in cost of automotive sales was driven primarily
by Model S deliveries, including the commencement of European deliveries in August 2013, as well as deliveries of electric powertrain
component and systems to Toyota under the Toyota RAV4 EV supply and services agreement.
In April 2013, we began offering a resale value guarantee to all customers who purchased a Model S in the United States and financed their
vehicle and vehicle options through one of our specified commercial banking partners, and in October 2013, we introduced this program in
Canada. Under the program, we capitalize the cost of Model S into operating lease vehicles and depreciate the respective operating lease vehicles
less expected salvage value to cost of automotive sales on a straight-line basis, over the contractual term of the guarantee
78