Tesla 2015 Annual Report Download - page 55

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. We provided
development services to Daimler and Toyota to assist in the development of electric powertrains for the Mercedes Benz B-Class EV and the
Toyota RAV4. During the years ended December 31, 2014, 2013 and 2012, we recognized revenue under these arrangement in the amounts of
$5.6 million, $15.7 million, $27.6 million. We do not expect any significant development services in future periods.
Beginning in the first quarter of 2015, we will change the caption of this to be Services and Other Revenue. This will include other
revenues related to powertrain component sales to Daimler and other OEMs, vehicle service and sales from used Model S cars.
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, 2014, 2013, and 2012 were $2.31 billion, $1.54 billion, and $371.7 million.
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, 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 and charges related to write down of fixed assets no longer in use for the production of
Model S or our powertrain component sales. The increase in cost of automotive sales was driven primarily by the ramp in Model S deliveries.
In the years ended December 31, 2014 and 2013 we recognized $66.1 million and $19.4 million, respectively, in cost of automotive sales
related to vehicle depreciation for cars accounted for as operating leases. For cars accounted for as leases our warranty reserves do not include
projected warranty costs as such actual warranty costs are expensed as incurred. For the years ended December 31, 2014 and 2013, warranty
costs incurred for our lease vehicles were $7.0 million and $1.6 million.
Gross profit for the years ended December 31, 2014, 2013, and 2012 were $881.7 million, $456.3 million and $30.1 million Gross margin
for the years ended December 31, 2014, 2013, and 2012 were 27.6%, 22.7%, and 7.3%. The increase in gross profit from 2013 to 2014 was
primarily due to manufacturing and supply chain efficiencies as well as component cost reductions and higher regulatory credit sales, partially
offset by one-time manufacturing inefficiencies associated with transitioning to our new final assembly line and launch of All-
Wheel Drive Dual
Motor Model S. The increase in gross profit from 2012 to 2013 was primarily due to higher vehicle production volumes, cost reduction efforts
including process efficiencies in manufacturing and supply chain, design improvements, as well as reduction of waste in the supply chain.
Research and Development Expenses
Research and development (R&D) expenses consist primarily of personnel costs for our teams in engineering and research, supply chain,
quality, manufacturing engineering and manufacturing test organizations, prototyping expense, contract and professional services and amortized
equipment expense. Overhead costs related to the Tesla Factory prior to the start of production of Model S are also included in R&D expenses.
Also included in R&D expenses are development services costs that we incur, if any, prior to the finalization of agreements with our
development services customers as reaching a final agreement and revenue recognition is not assured. Development services costs incurred after
the finalization of an agreement are recorded in cost of revenues.
R&D expenses for the year ended December 31, 2014 were $464.7 million, an increase from $232.0 million for the year ended
December 31, 2013. The increase in R&D expenses consisted primarily of an $85.3 million increase in employee compensation expenses, a
$60.7 million increase in expensed materials primarily to support our Model X, dual motor powertrain and right-hand drive Model S
development, a $50.9 million increase in costs related to Model X, dual motor powertrain and right-hand drive Model S engineering, design and
testing activities, a $28.1 million increase in stock-based compensation expense related to increased headcount and increasing values of awards
granted, a $4.1 million increase in office, information technology and facilities-related costs and a $3.3 million increase in shipping charges for
Model X, dual motor powertrain and right-hand drive Model S development.
R&D expenses for the year ended December 31, 2013 were $232.0 million, a decrease from $274.0 million for the year ended
December 31, 2012. R&D expenses decreased due to significant development, prototyping and testing expenses related to the Model S launch in
2012, partially offset by an increase in similar costs in 2013 for Model X and right-hand drive Model S and other programs. The $42.0 million
decrease in R&D expenses during the year ended December 31, 2013 consisted primarily of an $18.2 million decrease in expensed materials, an
$8.5 million decrease in employee compensation expenses, a $7.8 million decrease in costs related to Model S engineering, design and testing
activities, a $6.6 million decrease in shipping charges for Model S prototype materials and a $4.9 million decrease in office, information
technology and facilities-related costs. The decrease was partially offset by a $5.0 million increase in stock-based compensation expense related
to a larger number of outstanding equity awards due to additional headcount and generally an increasing common stock valuation applied to new
grants.
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