Tesla Motors
TESLA MOTORS INC (Form: 10-Q, Received: 08/05/2016 17:24:25)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34756

Tesla Motors, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

91-2197729

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3500 Deer Creek Road

Palo Alto, California

 

94304

(Address of principal executive offices)

 

(Zip Code)

(650) 681-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

x

 

 

 

Accelerated filer

 

¨

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

¨

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of July 29, 2016, there were 148,692,605 shares of the registrant’s Common Stock outstanding.

 

 

 

 


 

TESLA MOTORS, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016

INDEX

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

4

 

 

Consolidated Balance Sheets as of June 30, 2016 and December 31, 201 5

 

4

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015

 

5

 

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015

 

6

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 201 5

 

7

 

 

Notes to Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4.

 

Controls and Procedures

 

31

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

32

Item 1A.

 

Risk Factors

 

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

Item 3.

 

Defaults Upon Senior Securities

 

49

Item 4.

 

Mine Safety Disclosures

 

50

Item 5.

 

Other Information

 

50

Item 6.

 

Exhibits

 

50

 

 

 

 

 

SIGNATURES

 

51

 

 

 

 

 


 

Forward-Looking Statements

The discussions in this Quarterly Report on Form 10-Q contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, future profitability, future delivery of automobiles, projected costs, expectations regarding demand and acceptance for our technologies, future acquisitions, growth opportunities and trends in the market in which we operate, prospects, plans and objectives of management and the statements made below under the heading “Management Opportunities, Challenges and Risks.” The words “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “might”, “plans”, “projects”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

 

 

 

 

 


 

P ART I. FINANCIAL INFORMATION

I TEM 1.

FINANCIAL STATEMENTS

Tesla Motors, Inc.

Consolidated Balance Sheets

(in thousands)

(unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,246,301

 

 

$

1,196,908

 

Restricted cash and marketable securities

 

 

24,525

 

 

 

22,628

 

Accounts receivable

 

 

178,594

 

 

 

168,965

 

Inventory

 

 

1,609,607

 

 

 

1,277,838

 

Prepaid expenses and other current assets

 

 

144,678

 

 

 

115,667

 

Total current assets

 

 

5,203,705

 

 

 

2,782,006

 

Operating lease vehicles, net

 

 

2,533,726

 

 

 

1,791,403

 

Property, plant and equipment, net

 

 

3,993,250

 

 

 

3,403,334

 

Restricted cash

 

 

71,621

 

 

 

31,522

 

Other assets

 

 

66,650

 

 

 

59,674

 

Total assets

 

$

11,868,952

 

 

$

8,067,939

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,114,878

 

 

$

916,148

 

Accrued liabilities

 

 

558,212

 

 

 

422,798

 

Deferred revenue

 

 

558,816

 

 

 

423,961

 

Resale value guarantees

 

 

227,838

 

 

 

136,831

 

Customer deposits

 

 

679,834

 

 

 

283,370

 

Current portion of long-term debt and capital leases

 

 

626,826

 

 

 

627,927

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

3,766,404

 

 

 

2,811,035

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases

 

 

2,620,002

 

 

 

2,021,093

 

Deferred revenue

 

 

533,253

 

 

 

446,105

 

Resale value guarantees

 

 

1,779,509

 

 

 

1,293,741

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

612,344

 

 

 

364,976

 

Total liabilities

 

 

9,311,512

 

 

 

6,936,950

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Convertible senior notes (Notes 8)

 

 

37,146

 

 

 

47,285

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock; $0.001 par value; 100,000 shares authorized; no shares issued and

   outstanding

 

 

 

 

 

 

Common stock; $0.001 par value; 2,000,000 shares authorized as of June 30, 2016 and

   December 31, 2015; 148,015 and 131,425 shares issued and outstanding as of

   June 30, 2016 and December 31, 2015

 

 

148

 

 

 

131

 

Additional paid-in capital

 

 

5,383,731

 

 

 

3,409,452

 

Accumulated other comprehensive income (loss)

 

 

34,193

 

 

 

(3,556

)

Accumulated deficit

 

 

(2,897,778

)

 

 

(2,322,323

)

Total stockholders' equity

 

 

2,520,294

 

 

 

1,083,704

 

Total liabilities and stockholders' equity

 

$

11,868,952

 

 

$

8,067,939

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

4

 


 

Tesla Motors, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

2016

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automotive

 

$

1,181,852

 

 

$

878,090

 

$

2,207,916

 

$

1,771,410

 

Services and other

 

 

88,165

 

 

 

76,886

 

 

209,149

 

 

123,446

 

Total revenues

 

 

1,270,017

 

 

 

954,976

 

 

2,417,065

 

 

1,894,856

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automotive

 

 

909,282

 

 

 

666,386

 

 

1,688,598

 

 

1,298,131

 

Services and other

 

 

85,959

 

 

 

75,220

 

 

201,223

 

 

123,282

 

Total cost of revenues

 

 

995,241

 

 

 

741,606

 

 

1,889,821

 

 

1,421,413

 

Gross profit

 

 

274,776

 

 

 

213,370

 

 

527,244

 

 

473,443

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

191,664

 

 

 

181,712

 

 

374,146

 

 

348,866

 

Selling, general and administrative

 

 

321,152

 

 

 

201,846

 

 

639,362

 

 

397,211

 

Total operating expenses

 

 

512,816

 

 

 

383,558

 

 

1,013,508

 

 

746,077

 

Loss from operations

 

 

(238,040

)

 

 

(170,188

)

 

(486,264

)

 

(272,634

)

Interest income

 

 

2,242

 

 

 

247

 

 

3,493

 

 

431

 

Interest expense

 

 

(46,368

)

 

 

(24,352

)

 

(86,993

)

 

(50,926

)

Other income (expense), net

 

 

(7,373

)

 

 

13,233

 

 

1,804

 

 

(9,072

)

Loss before income taxes

 

 

(289,539

)

 

 

(181,060

)

 

(567,960

)

 

(332,201

)

Provision for income taxes

 

 

3,649

 

 

 

3,167

 

 

7,495

 

 

6,207

 

Net loss

 

$

(293,188

)

 

$

(184,227

)

$

(575,455

)

$

(338,408

)

Net loss per share of common stock, basic and diluted

 

$

(2.09

)

 

$

(1.45

)

$

(4.22

)

$

(2.68

)

Weighted average shares used in computing net loss per share

   of common stock, basic and diluted

 

 

139,983

 

 

 

126,689

 

 

136,330

 

 

126,320

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

5

 


 

Tesla Motors, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

2016

 

2015

 

Net loss

 

$

(293,188

)

 

$

(184,227

)

$

(575,455

)

$

(338,408

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain on derivatives and short-term marketable securities, net of tax

 

 

22,928

 

 

 

4

 

 

43,733

 

 

208

 

Foreign currency translation adjustment

 

 

(2,300

)

 

 

1,157

 

 

(5,984

)

 

(14,990

)

Other comprehensive income (loss)

 

 

20,628

 

 

 

1,161

 

 

37,749

 

 

(14,782

)

Comprehensive loss

 

$

(272,560

)

 

$

(183,066

)

$

(537,706

)

$

(353,190

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

6

 


 

Tesla Motors, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(575,455

)

 

$

(338,408

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

339,692

 

 

 

168,501

 

Stock-based compensation

 

 

156,969

 

 

 

86,361

 

Amortization of discount on convertible debt

 

 

41,696

 

 

 

33,712

 

Inventory write-downs

 

 

29,725

 

 

 

15,950

 

Disposal of property and equipment

 

 

11,563

 

 

 

4,991

 

Non-cash interest and other operating activities

 

 

16,167

 

 

 

6,048

 

Foreign currency transaction (gain) loss

 

 

(8,081

)

 

 

16,771

 

Changes in operating assets and liabilities, net of impact of business acquisition

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,426

)

 

 

62,832

 

Inventories and operating lease vehicles

 

 

(1,217,931

)

 

 

(706,220

)

Prepaid expenses and other current assets

 

 

19,494

 

 

 

(3,385

)

Other assets

 

 

(7,447

)

 

 

(8,355

)

Accounts payable and accrued liabilities

 

 

212,949

 

 

 

61,261

 

Deferred revenue

 

 

165,144

 

 

 

116,812

 

Customer deposits

 

 

398,555

 

 

 

19,573

 

Resale value guarantee

 

 

253,710

 

 

 

143,216

 

Other long-term liabilities

 

 

65,407

 

 

 

29,030

 

Net cash used in operating activities

 

 

(99,269

)

 

 

(291,310

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment excluding capital leases, net of sales

 

 

(511,579

)

 

 

(831,225

)

Maturities of short-term marketable securities

 

 

16,667

 

 

 

-

 

Business acquisition

 

 

-

 

 

 

(12,260

)

Increase in other restricted cash

 

 

(58,761

)

 

 

(11,696

)

Net cash used in investing activities

 

 

(553,673

)

 

 

(855,181

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in public offerings

 

 

1,701,734

 

 

 

-

 

Proceeds from issuance of convertible and other debt

 

 

1,108,000

 

 

 

168,246

 

Repayments of other debt

 

 

(578,683

)

 

 

-

 

Collateralized lease borrowing

 

 

384,525

 

 

 

196,535

 

Proceeds from exercise of stock options and other stock issuances

 

 

110,478

 

 

 

58,871

 

Principal payments on capital leases

 

 

(18,270

)

 

 

(13,901

)

Common stock and debt issuance costs

 

 

(15,765

)

 

 

(5,244

)

Net cash provided by financing activities

 

 

2,692,019

 

 

 

404,507

 

Effect of exchange rate changes on cash and cash equivalents

 

 

10,316

 

 

 

(13,056

)

Net increase (decrease) in cash and cash equivalents

 

 

2,049,393

 

 

 

(755,040

)

Cash and cash equivalents at beginning of period

 

 

1,196,908

 

 

 

1,905,713

 

Cash and cash equivalents at end of period

 

$

3,246,301

 

 

$

1,150,673

 

Supplemental noncash investing activities

 

 

 

 

 

 

 

 

Acquisition of property and equipment included in accounts payable and accrued

   liabilities

 

 

324,982

 

 

 

265,970

 

Additionally estimated fair value of facilities under build-to-suit lease

 

 

172,770

 

 

 

40,468

 

 

The accompanying notes are an integral part of these consolidated financial statements.

7

 


 

Tesla Motors, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 - Overview of the Company

Tesla Motors, Inc. (Tesla, we, us or our) was incorporated in the state of Delaware on July 1, 2003. We design, develop, manufacture and sell high-performance fully electric vehicles and energy products. We have wholly-owned subsidiaries in North America, Europe and Asia. The primary purpose of these subsidiaries is to market, manufacture, sell and/or service our vehicles and energy products.

  

 

 

 

Note 2 - Summary of Significant Accounting Policies

Public Offerings

In May 2016, we completed a public offering of common stock and sold a total of 7,915,004 shares of our common stock for total cash proceeds of approximately $1.7 billion, net of underwriting discounts and offering costs.

 

Acquisition

On July 31, 2016, we entered into a definitive agreement to acquire SolarCity Corporation, which designs, finances and installs solar power systems . Pursuant to the definitive agreement, each issued and outstanding share of the common stock of SolarCity would be converted into the right to receive 0.110 (the Exchange Ratio) shares of Tesla common stock. SolarCity options and restricted stock unit awards would be converted into corresponding equity awards in respect of Tesla common stock based on the Exchange Ratio, with the awards retaining the same vesting and other terms and conditions as in effect immediately prior to consummation of the Merger. This acquisition is subject to various closing conditions, including the receipt of the affirmative vote from each company of a majority of non-interested stockholders voting at a meeting of stockholders and certain regulatory approvals.

 

Basis of Consolidation

The consolidated financial statements include the accounts of Tesla and its wholly-owned subsidiaries. Intercompany balances and transactions between consolidated entities have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities and accompanying notes.  Estimates are used for, but not limited to, determining the selling price of products and services in multiple element revenue arrangements and determining the amortization period of these elements , residual value of operating lease vehicles, inventory valuation, warranties, fair value of financial instruments, depreciable lives of property and equipment, inputs used to value stock-based compensation including volatility, expected terms of stock option awards and forfeiture rates, income taxes, and contingencies. Actual results could differ from those estimates.

Unaudited Interim Financial Statements

The accompanying consolidated balance sheet as of June 30, 2016, the consolidated statements of operations and consolidated statements of comprehensive loss for the three and six months ended June 30, 2016 and 2015 and the consolidated statements of cash flows for the six months ended June 30, 2016 and 2015, and other information disclosed in the related notes are unaudited. The consolidated balance sheet as of December 31, 2015, was derived from our audited consolidated financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission.

The accompanying interim consolidated financial statements and related disclosures have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for a fair statement of the results of operations for the periods presented. The consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.

8

 


 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued an accounting update which amends the existing accounting standards for revenue recognition. The new guidance provides a new model to determine when and over what period revenue is recognized. Under this new model, revenue is recognized as goods or services are delivered in an amount that reflects the consideration we expect to collect.  In March 2016, the FASB issued an ASU,  Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which clarifies the principal versus agent guidance in the new revenue recognition standard. In April 2016, the FASB issued an ASU,  Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing , which clarifies the guidance on accounting for licenses of intellectual property and identifying performance obligations in the new revenue recognition standard. In May 2016, the FASB issued an ASU,  Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedient , which clarifies the transition, collectability, noncash consideration and the presentation of sales and other similar taxes in the new revenue recognition standard. The guidance is effective for fiscal years beginning after December 15, 2017; early adoption is permitted for periods beginning after December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method and are evaluating the impact of adopting this guidance.

In April 2015, the FASB issued new authoritative accounting guidance on simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We have retrospectively adopted this standard as of March 31, 2016, and as a result, on the December 31, 2015, consolidated balance sheet we reclassified $9.6 million as a reduction in prepaid expenses and other current assets, along with $15.0 million reduction in other assets, with a corresponding reduction in the aggregate carrying value of the Company’s long term debt liabilities. Similarly, as a result of the change in carrying value of long term debt, $5.2 million was reclassified out of additional paid in capital and into mezzanine equity on the December 31, 2015 consolidated balance sheet.

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016 - 02,  Leases   (Topic 842) . The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation — Stock Compensation (Topic 718): Im provements to Employee Share-Based Payment Accounting” (“ASU  2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabi lities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

Revenue Recognition

We recognize revenue for products and services when: (i) a persuasive evidence of an arrangement exists; (ii) delivery has occurred and there are no uncertainties regarding customer acceptance; (iii) pricing or fees are fixed or determinable; and (iv) collection is reasonably assured.

Vehicle sales include standard features, customer selected options and accessories, and specific other elements that meet the definition of a deliverable under multiple-element accounting guidance including free internet connectivity, free access to our Supercharger network, and free future over the air software updates. These deliverables are valued on a stand-alone basis and we recognize their revenue over our performance period, which is generally the eight-year life of the vehicle, except for internet connectivity which is over the free four year period. If we sell a deliverable separately, we use that pricing to determine its fair value; otherwise, we use our best estimated selling price by considering costs used to develop and deliver the service, third party pricing of similar options, and other information which may be available.

As of June 30, 2016, we had deferred $55.9 million, $66.1 million, $42.0 million, and $3.7 million related to the purchase of vehicle maintenance and service plans, access to our Supercharger network, internet connectivity, and future software updates, respectively. As of December 31, 2015, we had deferred $53.6 million, $49.5 million, $32.4 million, and $2.7 million related to these same performance obligations, respectively.

9

 


 

Resale Value Guarantees and Other Financing Programs

Vehicle sales to customers with a residual value guarantee     

Through June 30, 2016, we offered resale value guarantees or similar buy-back terms to all customers who purchase vehicles and who financed their vehicle through one of our specified commercial banking partners. Subsequent to June 30, 2016, this program is available only in certain international markets.  Under this program, customers have the option of selling their vehicle back to us during the guarantee period for a determined resale value. Guarantee periods generally range from 36 to 39 months.  Although we receive full payment for the vehicle sales price at the time of delivery, we are required to account for these transactions as operating leases.  The amount of sale proceeds equal to the residual value guarantee is deferred until the guarantee expires or is exercised.  The remaining sale proceeds are deferred and recognized on a straight line basis over the stated guarantee period. The guarantee period expires at the earlier of the end of the guarantee period or the pay-off of the initial loan.  We capitalize the cost of these vehicles to operating lease vehicles on our Consolidated Balance Sheets and depreciate their value, less salvage value, to cost of automotive revenue over the same period.  

In cases when a customer retains ownership of a vehicle at the end of the guarantee period, the resale value guarantee liability and any remaining deferred revenue balances related to the vehicle are settled to automotive revenue and the net book value of the leased vehicle is expensed to costs of automotive revenue. In cases when customers return the vehicle back to us during the guarantee period, we purchase the vehicle from the customer in an amount equal to the resale value guarantee and settle any remaining deferred balances to automotive revenue and we reclassify the net book value of the vehicle on our balance sheet to pre-owned vehicle inventory. As of June 30, 2016 and December 31, 2015, $227.8 million and $136.8 million of the guarantees were exercisable by customers within the next twelve months.

Vehicle sales to leasing partners with a residual value guarantee

We also offer residual value guarantees in connection with automobile sales to certain bank leasing partners.  As we have guaranteed the value of these vehicles and as the vehicles are leased to end-customers, we account for these transactions as interest bearing collateralized borrowings as required under ASC 840 - Leases .  Under this program, cash is received for the full price of the vehicle and is recorded within resale value guarantees for the long-term portion and deferred revenue for the current portion.  We accrete the deferred revenue amount to automotive revenue on a straight line basis over the guarantee period and accrue interest expense based on our borrowing rate.  We capitalize vehicles under this program to operating lease vehicles on our Consolidated Balance Sheets and we record depreciation from these vehicles to cost of automotive revenues during the period the vehicle is under a lease arrangement.  Cash received for these vehicles, net of revenue recognized during the period, is classified as collateralized lease borrowings within cash flows from financing activities in our Consolidated Statements of Cash Flows.

At the end of the lease term, we settle our liability in cash by either purchasing the vehicle from the leasing partner for the residual value guarantee amount, or paying a shortfall to the guarantee amount the leasing partner may realize on the sale of the vehicle.  Any remaining balances within deferred revenue and resale value guarantee will be settled to automotive revenue.  In cases where the bank retains ownership of the vehicle after the end of our guarantee period, we expense the net value of the leased vehicle to costs of automotive revenue .  The maximum cash we could be required to pay under this program, should we decide to repurchase all vehicles is $ 597.7 million at June 30, 2016.

As of June 30, 2016 and December 31, 2015, we had $851.9 million and $527.5 million of such borrowings recorded in resale value guarantees and $210.5 million and $120.5 million recorded in deferred revenue liability, respectively.

On a quarterly basis, we assess the estimated market values of vehicles under our resale value guarantee program to determine if we have sustained a loss on any of these contracts. As we accumulate more data related to the resale values of our vehicles or as market conditions change, there may be material changes to their estimated values.

10

 


 

Account activi ty related to our resale value guarantee and similar programs consisted of the following for the periods presented (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2016

 

 

June 30, 2016

 

Operating Lease Vehicles

 

 

 

 

 

 

 

 

Operating lease vehicles—beginning of period

 

$

1,909,310

 

 

$

1,556,529

 

Net increase in operating lease vehicles

 

 

291,036

 

 

 

705,017

 

Depreciation expense recorded in cost of automotive revenues

 

 

(57,568

)

 

 

(102,386

)

Additional depreciation expense recorded in cost of automotive revenues as a result of

   early cancellation of resale value guarantee

 

 

(2,571

)

 

 

(5,657

)

Increases to inventory from vehicles returned under our trade-in program

 

 

(13,626

)

 

 

(26,922

)

Operating lease vehicles—end of period

 

$

2,126,581

 

 

$

2,126,581

 

 

 

 

 

 

 

 

 

 

Deferred Revenue

 

 

 

 

 

 

 

 

Deferred revenue—beginning of period

 

$

800,968

 

 

$

679,132

 

Net increase in deferred revenue from new vehicle deliveries and reclassification of

   collateralized borrowing from long-term to short-term

 

 

165,875

 

 

 

391,639

 

Amortization of deferred revenue and short-term collateralized borrowing recorded in

   automotive revenue

 

 

(108,852

)

 

 

(206,600

)

Additional revenue recorded in automotive revenue as a result of early cancellation of

   resale value guarantee

 

 

(3,424

)

 

 

(6,420

)

Recognition of deferred revenue resulting from return of vehicle under trade-in program

 

 

(2,883

)

 

 

(6,067

)

Deferred revenue—end of period

 

$

851,684

 

 

$

851,684

 

 

 

 

 

 

 

 

 

 

Resale Value Guarantee

 

 

 

 

 

 

 

 

Resale value guarantee liability—beginning of period

 

$

1,775,498

 

 

$

1,430,573

 

Net increase in resale value guarantee

 

 

270,436

 

 

 

651,935

 

Reclassification from long-term to short-term collateralized borrowing

 

 

(23,216

)

 

 

(46,042

)

Additional revenue recorded in automotive revenue as a result of early cancellation of

   resale value guarantee

 

 

(3,318

)

 

 

(5,819

)

Release of resale value guarantee resulting from return of vehicle under trade-in program

 

 

(12,053

)

 

 

(23,300

)

Resale value guarantee liability—end of period

 

$

2,007,347

 

 

$

2,007,347

 

 

Vehicle Leasing Program

We offer a leasing program in the United States, Canada, the UK and Germany. Qualifying customers are permitted to lease a vehicle directly from Tesla for 36 or 48 months. At the end of the lease term, customers have the option of either returning the vehicle to us or purchasing it for a determined residual value. We account for these leasing transactions as operating leases and recognize leasing revenues over the contractual term and record the depreciation of these vehicles to cost of automotive revenues. As of June 30, 2016 and December 31, 2015, we had deferred $42.1 million and $25.8 million of lease-related upfront payments which will be recognized on a straight-line basis over the contractual term of the individual leases. Lease revenues are recorded in automotive revenue and were $23.9 million and $40.6 million for the three and six months ended June 30, 2016. Lease revenues for the three and six months ended June 30, 2015, were $9.3 million and $15.9 million, respectively.

 

  

 

 

  

Warranties

We provide a manufacturer’s warranty on all new and certified pre-owned vehicles, production powertrain components and systems, and energy products we sell.  We accrue a manufacturer’s warranty reserve which includes our best estimate of the projected costs to repair or to replace items under warranty. These estimates are based on actual claims incurred to-date and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected warranty experience may cause material changes to our warranty reserve in the future. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued liabilities, while the remaining amount is classified as long-term within other long-term liabilities.

11

 


 

Accrued warranty activity consisted of the following for the periods presented (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

2016

 

2015

 

Accrued warranty—beginning of period

 

$

198,705

 

 

$

155,301

 

$

180,754

 

$

129,043

 

Warranty costs incurred

 

 

(24,459

)

 

 

(17,287

)

 

(40,163

)

 

(29,073

)

Net changes in liability for pre-existing warranties, including expirations and foreign exchange impact

 

 

3,250

 

 

 

567

 

 

6,634

 

 

11,329

 

Provision for warranty

 

 

38,963

 

 

 

26,014

 

 

69,234

 

 

53,296

 

Accrued warranty—end of period

 

$

216,459

 

 

$

164,595

 

$

216,459

 

$

164,595

 

 

Our warranty reserves do not include projected warranty costs associated with our vehicles subject to lease accounting, as costs to repair these vehicles are expensed as incurred. For the three and six months ended June 30, 2016, warranty costs incurred for vehicles subject to lease accounting were $2.6 million and $5.1 million, and for the three and six months ended June 30, 2015, costs were $2.4 million and $4.2 million. Warranty expense is recorded as a component of cost of automotive revenue.  

Inventory Valuation

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. We record inventory write-downs for excess or obsolete inventories based upon assumptions about current and future demand forecasts. If our inventory on hand is in excess of our future demand forecast, the excess amounts are written off.

We also review inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of our vehicles less the estimated cost to convert inventory on hand into a finished product. After inventory is written-down, a new, lower-cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Should our estimates of future selling prices or production costs change, additional and potentially material increases to this reserve may be required. A small change in our estimates may result in a material charge to our reported financial results.

Concentration of Risk

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, restricted cash and accounts receivable. Our cash equivalents are primarily invested in money market funds with high credit quality financial institutions in the United States. At times, these deposits and securities may be in excess of insured limits. We invest cash not required for use in operations in high credit quality securities based on our investment policy. Our investment policy provides guidelines and limits regarding credit quality, investment concentration, investment type, and maturity that we believe will provide liquidity while reducing risk of loss of capital. Our investments are currently of a short-term nature and include U.S. treasury bills.

As of June 30, 2016 and December 31, 2015, our accounts receivable were derived primarily from amounts to be received from financial institutions and leasing companies offering various financing products to our customers, sales of regulatory credits, as well as the development and sales of powertrain components and systems to automotive original equipment manufacturers (OEMs).   As of June 30, 2016, we have two customers who individually account for 16% and 11% of our accounts receivable, respectively.  

Supply Risk

The majority of our suppliers are currently single source suppliers, despite efforts to qualify and obtain components from multiple sources whenever feasible. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to vehicle design changes, increased costs and delays in vehicle deliveries to our customers, which could hurt our relationships with our customers and result in negative publicity, damage to our brand and a material and adverse effect on our business, prospects, financial condition and operating results.

12

 


 

Stock-Based Compensation

We use the fair value method of accounting for our stock options and restricted stock units (RSUs) granted to employees and our Employee Stock Purchase Plan (ESPP) to measure the cost of employee services received in exchange for the stock-based awards. The fair value of stock options and ESPP are estimated on the grant date and offering date using the Black-Scholes option-pricing model. The fair value of RSUs is measured on the grant date based on the closing fair market value of our common stock. The resulting cost is recognized over the service period, which is generally four years for stock options and RSUs and six months for the ESPP. Stock-based compensation expense is recognized on a straight-line basis, net of estimated forfeitures.

For performance-based awards, stock-based compensation expense is recognized over the expected performance achievement period of individual performance milestones when the achievement of each individual performance milestone becomes probable.

For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the implicit or derived service period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of being met.

Derivative Financial Instruments

In November 2015, we implemented a program to hedge the foreign currency exposure risk related to certain forecasted inventory purchases denominated in Japanese yen.  The derivative instruments we use are foreign currency forward contracts and are designated as cash flow hedges with maturity dates of 12 months or less. We do not enter into derivative contracts for trading or speculative purposes.  

The bank counterparties in all contracts expose Tesla to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Tesla only contracts with counterparties who meet the Company’s minimum requirements under its counterparty risk assessment process. Tesla monitors ratings, credit spreads, and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties. We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. However, we do not have any master netting arrangements in place with collateral features.

Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on derivatives, our available-for-sale marketable securities, and foreign currency translation adjustment that have been excluded from the determination of net loss.

Net Loss per Share of Common Stock

Our basic and diluted net loss per share of common stock is calculated by dividing net loss by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the number of shares underlying outstanding stock options and warrants as well as our convertible senior notes, are not included when their effect is antidilutive.

The following table presents the potential weighted common shares outstanding that were excluded from the computation of diluted net loss per share of common stock for the periods presented.

 

 

 

Three Months Ended June 30,

 

Six Months Ended  June 30,

 

 

 

2016

 

 

2015

 

2016

 

2015

 

Employee share based awards

 

 

11,345,742

 

 

 

14,339,572

 

 

13,538,610

 

 

14,396,259

 

Convertible senior notes

 

 

2,345,823

 

 

 

2,517,573

 

 

2,150,258

 

 

2,301,823

 

Warrants issued May 2013

 

 

998,101

 

 

 

1,177,659

 

 

702,123

 

 

858,019

 

 

Since we expect to settle the principal amount of our outstanding convertible senior notes in cash, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $124.52, $359.87 and $359.87 per share for the convertible senior notes due 2018 (2018 Notes), convertible senior notes due 2019 (2019 Notes), and convertible senior notes due 2021 (2021 Notes).

13

 


 

Income Taxes

There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of June 30, 2016 and December 31, 2015, the aggregate balances of our gross unrecognized tax benefits were $119.7 million and $99.3 million. $115.5 million and $95.7 million of these aggregate balances would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset which is currently offset by a full valuation allowance.

 

 

 

Note 3 - Fair Value of Financial Instruments

The carrying values of our financial instruments including cash equivalents, marketable securities, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short-term nature. As a basis for determining the fair value of certain of our assets and liabilities, we follow a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data which requires us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Our financial assets that are measured at fair value on a recurring basis consist of cash equivalents and marketable securities.

All of our cash equivalents and current restricted cash, which are comprised primarily of money market funds, are classified within Level I of the fair value hierarchy because they are valued using quoted market prices or market prices for identical securities. Our restricted short-term marketable securities are classified within Level I of the fair value hierarchy.

As of June 30, 2016 and December 31, 2015, the fair value hierarchy for our financial assets that are carried at fair value was as follows (in thousands), and unrealized gains (losses) on all financial assets for all periods presented were less than $1.0 million:

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

Fair

Value

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Fair

Value

 

 

Level I

 

 

Level II

 

 

Level   III

 

Money market funds

 

$

2,761,729

 

 

$

2,761,729

 

 

$

 

 

$

 

 

$

297,810

 

 

$

297,810

 

 

$

 

 

$

 

U.S. treasury bills

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

16,664

 

 

 

16,664

 

 

 

 

 

 

 

Total

 

$

2,761,729

 

 

$

2,761,729

 

 

$

 

 

$

 

 

$

314,474

 

 

$

314,474

 

 

$

 

 

$

 

 

As of June 30 , 2016 , the estimated fair value of our 2018 Notes, 2019 Notes, and 2021 Notes was $1.09 billion (par value $646.1 million), $807.3 million (par value $920.0 million), and $1.13 billion (par value $1.38 billion). As of December 31, 2015 the estimated fair value of our 2018 Notes, 2019 Notes, and 2021 Notes was $1.29 billion (par value $659.8 million), $864.8 million (par value $920.0 million), and $1.27 billion (par value $1.38 billion). These fair values represent Level II valuations. When determining the estimated fair value of our long-term debt, we used a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk. As of June 30, 2016, the $678.0 million carrying value of our Credit Agreement liability approximates the fair value of the borrowings based upon the borrowing rate available to us for debt with similar terms and consideration of credit and default risk using Level II inputs.

 

Derivative Financial Instruments

In November 2015, we implemented a program to hedge the foreign currency exposure risk related to certain forecasted inventory purchases denominated in Japanese yen. The derivative instruments we use are foreign currency forward contracts and are designated as cash flow hedges with maturity dates of 12 months or less. We do not enter into derivative contracts for trading or speculative purposes.

We document each hedge relationship and assess its initial effectiveness at the inception of the hedge contract and we measure its ongoing effectiveness on a quarterly basis using regression analysis. During the term of an effective hedge contract, we record gains and losses within accumulated other comprehensive loss. We reclassify these gains or losses to costs of automotive sales in the period the related finished goods inventory is sold or over the depreciation period for those sales accounted for as leases. Although our contracts are considered effective hedges, we may experience small amounts of ineffectiveness due to timing differences between our actual inventory purchases and the settlement date of the related foreign currency forward contracts. Ineffectiveness related to the hedges is immaterial as of June 30, 2016.

 

14

 


 

The net notional amount of these contracts was $212.1 million at June 30, 2016. Outstanding contracts are recognized as either assets or liabilities on the Consolidated Balance Sheet at fai r value within other assets or within accrued liabilities, depending on our net position. The cumulative gain of $51.0 million in accumulated other comprehensive income as of June 30, 2016 is expected to be recognized within cost of automotive revenue in t he next twelve months. The total fair values of foreign currency contracts designated as cash flow hedges as of June 30, 2016 is $38.3 million and was determined using Level II inputs and recorded in prepaid expenses and other current assets on our Consoli dated Balance Sheets. As of June 30, 2016, $1.3 million has been reclassified to costs of automotive sales .

 

 

Note 4 - Inventory

As of June 30, 2016 and December 31, 2015, our inventory consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Raw materials

 

$

436,953

 

 

$

528,935

 

Work in process

 

 

289,307

 

 

 

163,830

 

Finished goods

 

 

754,828

 

 

 

476,512

 

Service parts

 

 

128,519

 

 

 

108,561

 

Total

 

$

1,609,607

 

 

$

1,277,838

 

 

Finished goods inventory includes vehicles in transit to fulfill customer orders, new vehicles available for immediate sale at our retail and service center locations, pre-owned Tesla vehicles, and energy products.

 

 

Note 5 - Property, Plant and Equipment

As of June 30, 2016 and December 31, 2015, our property, plant and equipment consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Machinery, equipment and office furniture

 

$

1,931,100

 

 

$

1,694,910

 

Tooling

 

$

740,008

 

 

 

550,902

 

Leasehold improvements

 

$

389,154

 

 

 

338,392

 

Building and building improvements

 

$

574,603

 

 

 

461,303

 

Land

 

$

60,238

 

 

 

60,234

 

Computer equipment and software

 

$

205,926

 

 

 

175,512

 

Construction in progress

 

$

876,207

 

 

 

693,207

 

 

 

 

4,777,236

 

 

 

3,974,460

 

Less: Accumulated depreciation and amortization

 

 

(783,986

)

 

 

(571,126

)

Total

 

$

3,993,250

 

 

$

3,403,334

 

 

Construction in progress is comprised primarily of tooling and equipment related to the manufacturing of Model S and Model X vehicles, Gigafactory construction, and related capitalized interest. Completed assets are transferred to their respective asset class and depreciation begins when the asset is ready for its intended use. Interest expense on outstanding debt is capitalized during the period of significant capital asset construction. Capitalized interest on construction in progress is included in property, plant and equipment, and is amortized over the life of the related assets. During the three and six months ended June 30, 2016, we capitalized $9.9 million and $19.0 million of interest expense. During the three and six months ended June 30, 2015, we capitalized $12.3 million and $20.6 million of interest expense, respectively.

15

 


 

We are sometimes involved in construction at our leased facilities primarily related to retail stores, service centers, and certain manufacturing facilities. In accordance wit h Accounting Standards Codification 840, Leases , for build-to-suit lease arrangements where we are involved in the construction of structural improvements prior to the commencement of the lease or take some level of construction risk, we are considered the owner of the assets and land during the construction period. Accordingly, upon commencement of our construction activities, we record a construction in progress asset and a corresponding financing liability. Once the construction is completed, if the leas e meets certain “sale-leaseback” criteria, we will remove the asset and related financial obligation from the balance sheet and treat the building lease as an operating lease. If upon completion of construction, the project does not meet the “sale-leasebac k” criteria, the leased property will be treated as a capital lease and included in building and building improvements in the table above. As of June 30, 2016 and December 31, 2015, the table above includes $379.4 million and $206.1 million of build-to-sui t assets. As of June 30, 2016 and December 31, 2015, corresponding financing obligations of $2.4 million and $1.3 million are recorded in accrued liabilities and $380.7 million and $201.3 million are recorded in other long-term liabilities.

 

Depreciation and amortization expense during the three and six months ended June 30, 2016, was $111.9 million and $211.1 million. Depreciation and amortization expense during the three and six months ended June 30, 2015, was $60.8 million and $112.9 million. Total property and equipment assets under capital lease as of June 30, 2016 and December 31, 2015 were $73.9 million and $58.1 million. Accumulated depreciation related to assets under capital lease as of these dates were $31.5 million and $22.7 million.

We have incurred $430.7 million of costs for our Gigafactory as of June 30, 2016.

 

 

Note 6 - Accrued Liabilities

As of June 30, 2016 and December 31, 2015, our accrued liabilities consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Taxes payable

 

$

71,985

 

 

$

101,206

 

Accrued purchases

 

 

266,592

 

 

 

140,540

 

Payroll and related costs

 

 

108,871

 

 

 

86,859

 

Warranty and other

 

 

110,764

 

 

 

94,193

 

Total

 

$

558,212

 

 

$

422,798

 

 

Taxes payable includes Value Added Tax, sales tax, property tax, and income tax payables.  

Accrued purchases reflects liabilities related to the construction of the Gigafactory along with engineering design and testing accruals. As these services are invoiced, this balance will reduce and accounts payable will increase.

 

 

Note 7 - Customer Deposits

Customer deposits include cash payments from customers at the time they place an order for a vehicle and additional payments up to the point of delivery including the fair value of customer trade-in vehicles that are applicable toward a new vehicle purchase. Customer deposit amounts and timing vary depending on the vehicle model and country of delivery. Customer deposits are fully refundable up to the point the vehicle is placed into the production cycle. Customer deposits are included in current liabilities until refunded or until they are applied to a customer’s purchase balance at time of delivery.  

As of June 30, 2016 and December 31, 2015, we held customer deposits of $679.8 million and $283.4 million. The increase is primarily due to Model 3 deposits.

 

 

16

 


 

Note 8 - Convertible and Long-term Debt Obligations

0.25% and 1.25% Convertible Senior Notes and Bond Hedge and Warrant Transactions

In March 2014, we issued $800.0 million principal amount of 0.25% convertible senior notes due 2019 (2019 Notes) and $1.20 billion principal amount of 1.25% convertible senior notes due 2021 (2021 Notes) in a public offering. In April 2014, we issued an additional $120.0 million aggregate principal amount of 2019 Notes and $180.0 million aggregate principal amount of 2021 Notes, pursuant to the exercise in full of the overallotment options of the underwriters of our March 2014 public offering. The total net proceeds from these offerings, after deducting transaction costs, were approximately $905.8 million from 2019 Notes and $1.36 billion from 2021 Notes. We incurred $14.2 million and $21.4 million of debt issuance costs in connection with the 2019 Notes and the 2021 Notes and are amortizing to interest expense using the effective interest method over the contractual terms of these notes. In April 2015, the FASB issued new authoritative accounting guidance on simplifying the presentation of debt issuance costs, which we retrospectively adopted as of March 31, 2016 and reclassified debt issuance costs in connection with the notes to related debt liability. The interest rates are fixed at 0.25% and 1.25% per annum and are payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2014.  

Each $1,000 of principal of these notes is initially convertible into 2.7788 shares of our common stock, which is equivalent to an initial conversion price of approximately $359.87 per share, subject to adjustment upon the occurrence of specified events. Holders of these notes may convert their notes at their option on or after December 1, 2018 for the 2019 Notes and on or after December 1, 2020 for the 2021 Notes. Further, holders of these notes may convert their notes at their option prior to the respective dates above, only under the following circumstances: (1) during any fiscal quarter beginning after the fiscal quarter ending June 30, 2014, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the applicable notes on each applicable trading day; (2) during the five business day period following any five consecutive trading day period in which the trading price for the applicable notes is less than 98% of the average of the closing sale price of our common stock for each day during such five trading day period; or (3) if we make specified distributions to holders of our common stock or if specified corporate transactions occur. Upon conversion of the 2019 Notes, we would pay or deliver as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. Upon conversion of the 2021 Notes, we would pay the holders in cash for the principal amount and, if applicable, shares of our common stock (subject to our right to deliver cash in lieu of all or a portion of such shares of our common stock) based on a daily conversion value. If a fundamental change occurs prior to the maturity date, holders of these notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the applicable maturity date, we will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. During the second quarter of 2016, the closing price of our common stock did not meet or exceed 130% of the applicable conversion price of our 2019 Notes and 2021 Notes on at least 20 of the last 30 consecutive trading days of the quarter; furthermore, no other conditions allowing holders of these notes to convert have been met as of June 30, 2016. Therefore, the 2019 Notes and 2021 Notes are not convertible during the third quarter of 2016 and are classified as long-term debt. Should the closing price conditions be met in the third quarter of 2016 or a future quarter, the 2019 and/or the 2021 Notes will be convertible at their holders’ option during the immediately following quarter. As of June 30, 2016, the if-converted value of the 2019 Notes and 2021 Notes did not exceed the principal value of those notes.

In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with the notes from the respective host debt instrument and initially recorded the conversion option of $188.1 million for the 2019 Notes and $369.4 million for the 2021 Notes in stockholders’ equity. The resulting debt discounts on the 2019 Notes and 2021 Notes are being amortized to interest expense at an effective interest rate of 4.89% and 5.96%, respectively, over the contractual terms of the notes. 

17

 


 

In connection with the offering of these notes in March 2014, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to adjustment for certain specified even ts) a total of approximately 5.6 million shares of our common stock at a price of approximately $359.87 per share. The total cost of the convertible note hedge transactions was $524.7 million. In addition, we sold warrants whereby the holders of the warran ts have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 2.2 million shares of our common stock at a price of $512.66 for the 2019 Notes and a total of approximately 3.3 million shares of our co mmon stock at a price of $560.64 per share for 2021 Notes. We received $338.4 million in cash proceeds from the sale of these warrants. Similarly, in connection with the issuance of additional notes in April 2014, we entered into convertible note hedge tra nsactions and paid an aggregate $78.7 million. In addition, we sold warrants to purchase (subject to adjustment for certain specified events) a total of approximately 0.3 million shares of our common stock at a price of $512.66 per share for the warrants r elating to 2019 Notes, and a total of approximately 0.5 million shares of our common stock at a price of $560.64 per share for the warrants relating to 2021 Notes. We received aggregate proceeds of approximately $50.8 million from the sale of the warrants. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to reduce potential dilution and/or offset potential cash payments upon the conversion of these notes and to effectively increase the overall conversion pric e from $359.87 to $512.66 per share in the case of warrants relating to 2019 Notes and from $359.87 to $560.64 in the case of warrants relating to 2021 Notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balanc e sheet.

 

1.50% Convertible Senior Notes and Bond Hedge and Warrant Transactions

In May 2013, we issued $660.0 million aggregate principal amount of 2018 Notes in a public offering. The net proceeds from the offering, after deducting transaction costs, were approximately $648.0 million. We incurred $12.0 million of debt issuance costs in connection with the issuance of the 2018 Notes and are amortizing to interest expense using the effective interest method over the contractual term of the 2018 Notes. The interest under the 2018 Notes is fixed at 1.50% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2013.

Each $1,000 of principal of the 2018 Notes is initially convertible into 8.0306 shares of our common stock, which is equivalent to an initial conversion price of approximately $124.52 per share, subject to adjustment upon the occurrence of specified events. Holders of the 2018 Notes may convert their 2018 Notes at their option on or after March 1, 2018. Further, holders of the 2018 Notes may convert their 2018 Notes at their option prior to March 1, 2018, only under the following circumstances: (1) during any fiscal quarter beginning after the fiscal quarter ending September 30, 2013, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period following any five consecutive trading day period in which the trading price for the 2018 Notes is less than 98% of the average of the closing sale price of our common stock for each day during such five trading day period; or (3) if we make specified distributions to holders of our common stock or if specified corporate transactions occur. Upon conversion, we would pay the holders in cash for the principal amount of the 2018 Notes and, if applicable, shares of our common stock (subject to our right to deliver cash in lieu of all or a portion of such shares of our common stock) based on a calculated daily conversion value. If a fundamental change occurs prior to the maturity date, holders of the 2018 Notes may require us to repurchase all or a portion of their 2018 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2018 Notes, plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its 2018 Notes in connection with such a corporate event in certain circumstances.

 

In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with the 2018 Notes from the host debt instrument and recorded the conversion option of $82.8 million in stockholders’ equity. The resulting debt discount on the 2018 Notes is being amortized to interest expense at an effective interest rate of 4.29% over the contractual term of the 2018 Notes.

 

In connection with the offering of the 2018 Notes, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to certain specified events) a total of approximately 5.3 million shares of our common stock at a price of approximately $124.52 per share. The cost of the convertible note hedge transactions was $177.5 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to certain specified events) a total of approximately 5.3 million shares of our common stock at a price of $184.48 per share. We received $120.3 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of the 2018 Notes and to effectively increase the overall conversion price from $124.52 to $184.48 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet as of December 31, 2015.

 

18

 


 

Duri ng the first and second quarter of 2016, the closing price of our common stock exceeded 130% of the applicable conversion price of our 2018 Notes on at least 20 of the last 30 consecutive trading days of the   quarter; therefore, holders of 2018 Notes may co nvert their notes during the second and third quarter of 2016. As such, we classified the $608.9 million carrying value of our 2018 Notes as current liabilities and classified $37.1 million, representing the difference   between the aggregate principal of ou r 2018 Notes of $646.1 million and the carrying value of 2018 Notes, as mezzanine equity on our consolidated balance sheet as of June 30, 2016. Should the closing price conditions be met in the third quarter of 2016 or a future quarter, 2018 Notes will be convertible at their holders’ option during the immediately following quarter.

     

    

 

Convertible Senior Notes Carrying Value and Interest Expense

In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with the Notes from the respective host debt instrument and initially recorded the conversion option for the 2018, 2019, and 2021 Notes in stockholders’ equity. The resulting debt discounts on the 2018 Notes, 2019 Notes, and 2021 Notes are being amortized to interest expense at the effective interest rate over the contractual terms of the Notes.

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

2018 Notes

 

 

2019 Notes

 

 

2021 Notes

 

 

2018 Notes

 

 

2019 Notes

 

 

2021 Notes

 

 

 

(in thousands, except years and percentages)

 

Carrying value

 

$

608,931

 

 

$

807,464

 

 

$

1,105,934

 

 

$

612,476

 

 

$

788,004

 

 

$

1,080,867

 

Unamortized discount and issuance costs

 

 

37,146

 

 

 

112,536

 

 

 

274,066

 

 

 

47,285

 

 

 

131,996

 

 

 

299,133

 

Principal amount

 

$

646,077

 

 

$

920,000

 

 

$

1,380,000

 

 

$

659,761

 

 

$

920,000

 

 

$

1,380,000

 

Remaining amortization period (years)

 

 

1.9

 

 

 

2.7

 

 

 

4.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective interest rate on liability component

 

 

4.29

%

 

 

4.89

%

 

 

5.96

%

 

 

 

 

 

 

 

 

 

 

 

 

Initial equity component

 

$

82,800

 

 

$

188,100

 

 

$

369,400

 

 

 

 

 

 

 

 

 

 

 

 

 

If converted, value in excess of par value