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FORD MOTOR CO - Quarter Report: 2019 September (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019

or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  __________ to __________
Commission file number 1-3950

Ford Motor Company
(Exact name of Registrant as specified in its charter)
Delaware
 
38-0549190
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
 
One American Road
 
 
Dearborn,
Michigan
 
48126
(Address of principal executive offices)
 
(Zip code)

313-322-3000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
F
 
New York Stock Exchange
6.200% Notes due June 1, 2059
 
FPRB
 
New York Stock Exchange


Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  
Large Accelerated Filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of October 18, 2019, Ford had outstanding 3,894,044,919 shares of Common Stock and 70,852,076 shares of Class B Stock.

Exhibit Index begins on page
 


 


FORD MOTOR COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2019
 
Table of Contents
 
Page
 
Part I - Financial Information
 
 
Item 1
Financial Statements
 
 
Consolidated Statement of Cash Flows
 
 
Consolidated Income Statement
 
 
Consolidated Statement of Comprehensive Income
 
 
Consolidated Balance Sheet
 
 
Consolidated Statement of Equity
 
 
Notes to the Financial Statements
 
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Results of Operations
 
 
Automotive Segment
 
 
Mobility Segment
 
 
Ford Credit Segment
 
 
Corporate Other
 
 
Interest on Debt
 
 
Taxes
 
 
Liquidity and Capital Resources
 
 
Credit Ratings
 
 
Outlook
 
 
Cautionary Note on Forward-Looking Statements
 
 
Non-GAAP Financial Measure Reconciliations
 
 
Supplemental Information
 
 
Critical Accounting Estimates
 
 
Accounting Standards Issued But Not Yet Adopted
 
Item 3
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4
Controls and Procedures
 
 
 
 
 
 
Part II - Other Information
 
 
Item 1
Legal Proceedings
 
Item 1A
Risk Factors
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 6
Exhibits
 
 
Signature
 


i


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
 
For the periods ended September 30,
 
2018
 
2019
 
First Nine Months
 
(unaudited)
Cash flows from operating activities
 
 
 
Net income
$
3,807

 
$
1,756

Depreciation and tooling amortization
6,930

 
7,310

Other amortization
(626
)
 
(891
)
Held-for-sale impairment charges

 
799

Provision for credit and insurance losses
367

 
292

Pension and other post-retirement employee benefits (“OPEB”) expense/(income)
(387
)
 
401

Equity investment (earnings)/losses in excess of dividends received
15

 
73

Foreign currency adjustments
476

 
49

Net (gain)/loss on changes in investments in affiliates
(44
)
 
(46
)
Stock compensation
199

 
238

Provision for deferred income taxes
(82
)
 
(403
)
Decrease/(Increase) in finance receivables (wholesale and other)
746

 
2,792

Decrease/(Increase) in accounts receivable and other assets
(2,126
)
 
(1,023
)
Decrease/(Increase) in inventory
(2,360
)
 
(1,790
)
Increase/(Decrease) in accounts payable and accrued and other liabilities
6,786

 
5,226

Other
(36
)
 
(44
)
Net cash provided by/(used in) operating activities
13,665

 
14,739

 
 
 
 
Cash flows from investing activities
 
 
 
Capital spending
(5,669
)
 
(5,358
)
Acquisitions of finance receivables and operating leases
(48,227
)
 
(41,142
)
Collections of finance receivables and operating leases
38,418

 
37,854

Purchases of marketable securities and other investments
(14,547
)
 
(12,367
)
Sales and maturities of marketable securities and other investments
17,341

 
12,532

Settlements of derivatives
290

 
163

Other
(201
)
 
(53
)
Net cash provided by/(used in) investing activities
(12,595
)
 
(8,371
)
 
 
 
 
Cash flows from financing activities
 
 
 
Cash payments for dividends and dividend equivalents
(2,308
)
 
(1,794
)
Purchases of common stock
(164
)
 
(237
)
Net changes in short-term debt
(1,268
)
 
(1,094
)
Proceeds from issuance of long-term debt
37,211

 
35,705

Principal payments on long-term debt
(33,935
)
 
(34,847
)
Other
(184
)
 
(173
)
Net cash provided by/(used in) financing activities
(648
)
 
(2,440
)
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(305
)
 
(154
)
 
 
 
 
Net increase/(decrease) in cash, cash equivalents, and restricted cash
$
117

 
$
3,774

 
 
 
 
Cash, cash equivalents, and restricted cash at beginning of period (Note 7)
$
18,638

 
$
16,907

Net increase/(decrease) in cash, cash equivalents, and restricted cash
117

 
3,774

Cash, cash equivalents, and restricted cash at end of period (Note 7)
$
18,755

 
$
20,681


The accompanying notes are part of the consolidated financial statements.

1

Item 1. Financial Statements (continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(in millions, except per share amounts)
 
For the periods ended September 30,
 
2018
 
2019
 
2018
 
2019
 
Third Quarter
 
First Nine Months
 
(unaudited)
Revenues
 
 
 
 
 
 
 
Automotive
$
34,660

 
$
33,931

 
$
109,577

 
$
106,928

Ford Credit
2,998

 
3,045

 
8,950

 
9,231

Mobility
8

 
14

 
18

 
26

Total revenues (Note 3)
37,666

 
36,990


118,545


116,185

 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Cost of sales
31,568

 
32,282

 
100,515

 
99,881

Selling, administrative, and other expenses
2,882

 
2,601

 
8,407

 
8,169

Ford Credit interest, operating, and other expenses
2,352

 
2,368

 
7,052

 
7,104

Total costs and expenses
36,802

 
37,251

 
115,974

 
115,154

Operating income/(loss)
864

 
(261
)
 
2,571

 
1,031

 
 
 
 
 
 
 
 
Interest expense on Automotive debt
328

 
262

 
890

 
723

Interest expense on Other debt
15

 
14

 
43

 
42

 
 
 
 
 
 
 
 
Other income/(loss), net (Note 4)
605

 
534

 
2,472

 
1,434

Equity in net income of affiliated companies
(32
)
 
(16
)
 
252

 
96

Income/(Loss) before income taxes
1,094

 
(19
)

4,362


1,796

Provision for/(Benefit from) income taxes
101


(442
)

555


40

Net income
993

 
423

 
3,807

 
1,756

Less: Income/(Loss) attributable to noncontrolling interests
2


(2
)

14


37

Net income attributable to Ford Motor Company
$
991


$
425


$
3,793


$
1,719

 
 
 
 
 
 
 
 
EARNINGS PER SHARE ATTRIBUTABLE TO FORD MOTOR COMPANY COMMON AND CLASS B STOCK (Note 6)
Basic income
$
0.25

 
$
0.11

 
$
0.95

 
$
0.43

Diluted income
0.25

 
0.11

 
0.95

 
0.43

 
 
 
 
 
 
 
 
Weighted-average shares used in computation of earnings per share
 
 
 
 
 
 
 
Basic shares
3,976

3,970

3,976

3,976
Diluted shares
4,000
 
4,007
 
3,999
 
4,006

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
 
For the periods ended September 30,
 
2018
 
2019
 
2018
 
2019
 
Third Quarter
 
First Nine Months
 
(unaudited)
Net income
$
993

 
$
423

 
$
3,807

 
$
1,756

Other comprehensive income/(loss), net of tax (Note 22)
 
 
 
 
 
 
 
Foreign currency translation
(134
)
 
(360
)
 
(434
)
 
(244
)
Marketable securities
(2
)
 
8

 
(57
)
 
130

Derivative instruments
(103
)
 
(69
)
 
(18
)
 
(398
)
Pension and other postretirement benefits
13

 
15

 
38

 
36

Total other comprehensive income/(loss), net of tax
(226
)
 
(406
)
 
(471
)
 
(476
)
Comprehensive income
767

 
17

 
3,336

 
1,280

Less: Comprehensive income/(loss) attributable to noncontrolling interests
1

 
(2
)
 
13

 
37

Comprehensive income attributable to Ford Motor Company
$
766

 
$
19

 
$
3,323

 
$
1,243


The accompanying notes are part of the consolidated financial statements.

2

Item 1. Financial Statements (continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
 
December 31,
2018
 
September 30,
2019
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents (Note 7)
$
16,718

 
$
20,523

Marketable securities (Note 7)
17,233

 
16,808

Ford Credit finance receivables, net (Note 8)
54,353

 
51,183

Trade and other receivables, less allowances of $94 and $60
11,195

 
10,621

Inventories (Note 10)
11,220

 
12,451

Assets of held-for-sale operations (Note 21)

 
812

Other assets
3,930

 
3,356

Total current assets
114,649

 
115,754

 
 
 
 
Ford Credit finance receivables, net (Note 8)
55,544

 
53,530

Net investment in operating leases (Note 11)
29,119

 
29,452

Net property
36,178

 
35,404

Equity in net assets of affiliated companies
2,709

 
2,623

Deferred income taxes
10,412

 
10,677

Other assets
7,929

 
10,717

Total assets
$
256,540

 
$
258,157

 
 
 
 
LIABILITIES
 
 
 
Payables
$
21,520

 
$
22,228

Other liabilities and deferred revenue (Note 14)
20,556

 
21,731

Automotive debt payable within one year (Note 17)
2,314

 
1,622

Ford Credit debt payable within one year (Note 17)
51,179

 
52,852

Other debt payable within one year (Note 17)

 
130

Liabilities of held-for-sale operations (Note 21)

 
524

Total current liabilities
95,569

 
99,087

 
 
 
 
Other liabilities and deferred revenue (Note 14)
23,588

 
23,729

Automotive long-term debt (Note 17)
11,233

 
12,615

Ford Credit long-term debt (Note 17)
88,887

 
86,422

Other long-term debt (Note 17)
600

 
470

Deferred income taxes
597

 
447

Total liabilities
220,474

 
222,770

 
 
 
 
Redeemable noncontrolling interest (Note 20)
100

 

 
 
 
 
EQUITY
 
 
 
Common Stock, par value $.01 per share (4,011 million shares issued of 6 billion authorized)
40

 
40

Class B Stock, par value $.01 per share (71 million shares issued of 530 million authorized)
1

 
1

Capital in excess of par value of stock
22,006

 
22,179

Retained earnings
22,668

 
22,590

Accumulated other comprehensive income/(loss) (Note 22)
(7,366
)
 
(7,842
)
Treasury stock
(1,417
)
 
(1,619
)
Total equity attributable to Ford Motor Company
35,932

 
35,349

Equity attributable to noncontrolling interests
34

 
38

Total equity
35,966

 
35,387

Total liabilities and equity
$
256,540

 
$
258,157

The following table includes assets to be used to settle liabilities of the consolidated variable interest entities (“VIEs”). These assets and liabilities are included in the consolidated balance sheet above.
 
December 31,
2018
 
September 30,
2019
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
2,728

 
$
2,660

Ford Credit finance receivables, net
58,662

 
56,546

Net investment in operating leases
16,332

 
12,671

Other assets
27

 
6

LIABILITIES
 
 
 
Other liabilities and deferred revenue
$
24

 
$
49

Debt
53,269

 
50,981


The accompanying notes are part of the consolidated financial statements.

3

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
(in millions, unaudited)
 
Equity Attributable to Ford Motor Company
 
 
 
 
 
Capital Stock
 
Cap. In Excess of Par Value of Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss) (Note 22)
 
Treasury Stock
 
Total
 
Equity Attributable to Non-controlling Interests
 
Total
Equity
Balance at December 31, 2017
$
41

 
$
21,843

 
$
21,906

 
$
(6,959
)
 
$
(1,253
)
 
$
35,578

 
$
28

 
$
35,606

Net income

 

 
1,736

 

 

 
1,736

 
9

 
1,745

Other comprehensive income/(loss), net

 

 

 
290

 

 
290

 
(1
)
 
289

Common stock issued (a)

 
(2
)
 

 

 

 
(2
)
 

 
(2
)
Treasury stock/other 

 

 

 

 
(89
)
 
(89
)
 

 
(89
)
Cash dividends declared ($0.28 per share) (b)

 

 
(1,113
)
 

 

 
(1,113
)
 

 
(1,113
)
Balance at March 31, 2018
$
41

 
$
21,841

 
$
22,529

 
$
(6,669
)
 
$
(1,342
)
 
$
36,400

 
$
36

 
$
36,436

Net income

 

 
1,066

 

 

 
1,066

 
3

 
1,069

Other comprehensive income/(loss), net

 

 

 
(535
)
 

 
(535
)
 
1

 
(534
)
Common stock issued (a)

 
112

 

 

 

 
112

 

 
112

Treasury stock/other 

 

 

 

 

 

 

 

Dividends and dividend equivalents declared ($0.15 per share) (b)

 

 
(602
)
 

 

 
(602
)
 
(12
)
 
(614
)
Balance at June 30, 2018
$
41

 
$
21,953

 
$
22,993

 
$
(7,204
)
 
$
(1,342
)
 
$
36,441

 
$
28

 
$
36,469

Net income

 

 
991

 

 

 
991

 
2

 
993

Other comprehensive income/(loss), net

 

 

 
(225
)
 

 
(225
)
 
(1
)
 
(226
)
Common stock issued (a)

 
58

 

 

 

 
58

 

 
58

Treasury stock/other 

 

 

 

 
(75
)
 
(75
)
 

 
(75
)
Dividends and dividend equivalents declared ($0.15 per share) (b)

 

 
(600
)
 

 

 
(600
)
 

 
(600
)
Balance at September 30, 2018
$
41

 
$
22,011

 
$
23,384

 
$
(7,429
)
 
$
(1,417
)
 
$
36,590

 
$
29

 
$
36,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
41

 
$
22,006

 
$
22,668

 
$
(7,366
)
 
$
(1,417
)
 
$
35,932

 
$
34

 
$
35,966

Adoption of accounting standards

 

 
13

 

 

 
13

 

 
13

Net income

 

 
1,146

 

 

 
1,146

 
37

 
1,183

Other comprehensive income/(loss), net

 

 

 
(135
)
 

 
(135
)
 

 
(135
)
Common stock issued (a)

 
20

 

 

 

 
20

 

 
20

Treasury stock/other 

 

 

 

 
23

 
23

 
(35
)
 
(12
)
Dividends and dividend equivalents declared ($0.15 per share) (b)

 

 
(601
)
 

 

 
(601
)
 

 
(601
)
Balance at March 31, 2019
$
41

 
$
22,026

 
$
23,226

 
$
(7,501
)
 
$
(1,394
)
 
$
36,398

 
$
36

 
$
36,434

Net income

 

 
148

 

 

 
148

 
2

 
150

Other comprehensive income/(loss), net

 

 

 
65

 

 
65

 

 
65

Common stock issued (a)

 
85

 

 

 

 
85

 

 
85

Treasury stock/other 

 

 

 

 
6

 
6

 
1

 
7

Dividends and dividend equivalents declared ($0.15 per share) (b)

 

 
(605
)
 

 

 
(605
)
 

 
(605
)
Balance at June 30, 2019
$
41


$
22,111


$
22,769


$
(7,436
)
 
$
(1,388
)
 
$
36,097

 
$
39

 
$
36,136

Net income




425






425


(2
)

423

Other comprehensive income/(loss), net

 

 

 
(406
)
 

 
(406
)
 

 
(406
)
Common stock issued (a)

 
68

 

 

 

 
68

 

 
68

Treasury stock/other 

 

 

 

 
(231
)
 
(231
)
 
1

 
(230
)
Dividends and dividend equivalents declared ($0.15 per share) (b)

 

 
(604
)
 

 

 
(604
)
 

 
(604
)
Balance at September 30, 2019
$
41

 
$
22,179

 
$
22,590

 
$
(7,842
)
 
$
(1,619
)
 
$
35,349

 
$
38

 
$
35,387

__________
(a)
Includes impacts of share-based compensation.
(b)
Dividends and dividend equivalents declared for Common and Class B Stock.

The accompanying notes are part of the consolidated financial statements.

4

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

Table of Contents
Footnote
 
Page
Note 1
Presentation
Note 2
New Accounting Standards
Note 3
Revenue
Note 4
Other Income/(Loss)
Note 5
Income Taxes
Note 6
Capital Stock and Earnings Per Share
Note 7
Cash, Cash Equivalents, and Marketable Securities
Note 8
Ford Credit Finance Receivables
Note 9
Ford Credit Allowance for Credit Losses
Note 10
Inventories
Note 11
Net Investment in Operating Leases
Note 12
Other Investments
Note 13
Goodwill
Note 14
Other Liabilities and Deferred Revenue
Note 15
Retirement Benefits
Note 16
Lease Commitments
Note 17
Debt
Note 18
Derivative Financial Instruments and Hedging Activities
Note 19
Employee Separation Actions and Exit and Disposal Activities
Note 20
Redeemable Noncontrolling Interest
Note 21
Held-for-Sale Operations
Note 22
Accumulated Other Comprehensive Income/(Loss)
Note 23
Commitments and Contingencies
Note 24
Segment Information

5

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  PRESENTATION

For purposes of this report, “Ford,” the “Company,” “we,” “our,” “us,” or similar references mean Ford Motor Company, our consolidated subsidiaries, and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise. We also make reference to Ford Motor Credit Company LLC, herein referenced to as Ford Credit. Our financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X.

In the opinion of management, these unaudited financial statements reflect a fair statement of our results of operations and financial condition for the periods, and at the dates, presented.  The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.  Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K Report”). We reclassified certain prior year amounts in our consolidated financial statements to conform to the current year presentation.

Change in Accounting

As of January 1, 2019, we changed our accounting method for reporting early termination losses related to customer defaults on Ford Credit’s operating leases. Previously, we presented the early termination loss reserve on operating leases due to customer default events as part of the allowance for credit losses within Net investment in operating leases. We now consider the effects of operating lease early terminations when determining depreciation estimates, which are included as part of accumulated depreciation within Net investment in operating leases. We believe this change in accounting method is preferable as the characterization of these changes is better reflected as depreciation.

We have retrospectively applied this change in accounting method to all prior periods. At December 31, 2018, this reclassification increased accumulated depreciation and decreased allowance for credit losses by $78 million within Net investment in operating leases. This change had no impact on our consolidated income statement, consolidated balance sheet or Net cash provided by/(used in) operating activities in the consolidated statement of cash flows for the interim periods presented.

6

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 2. NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

Accounting Standards Update (“ASU”) 2016-02, Leases.  On January 1, 2019, we adopted Accounting Standards Codification 842 and all the related amendments (“new lease standard”) using the modified retrospective method. We recognized the cumulative effect of initially applying the new lease standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods. We do not expect the adoption of the new lease standard to have a material impact to our net income on an ongoing basis.

The new lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts or land easements entered into prior to adoption are leases or contain leases.

The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2019, for the adoption of ASU 2016-02, Leases, was as follows (in millions):
 
 
Balance at December 31, 2018
 
Adjustments due to ASU 2016-02
 
Balance at
January 1, 2019
Balance sheet
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Other assets, current
 
$
3,930

 
$
(8
)
 
$
3,922

Other assets, non-current
 
7,929

 
1,324

 
9,253

Deferred income taxes
 
10,412

 
(4
)
 
10,408

Liabilities
 
 
 
 
 
 
Other liabilities and deferred revenue, current
 
20,556

 
316

 
20,872

Other liabilities and deferred revenue, non-current
 
23,588

 
983

 
24,571

Equity
 
 
 
 
 
 
Retained earnings
 
22,668

 
13

 
22,681



We also adopted the following ASUs during 2019, none of which had a material impact to our financial statements or financial statement disclosures:
ASU
 
Effective Date
2018-17
Targeted Improvements to Related Party Guidance for Variable Interest Entities
 
January 1, 2019
2018-16
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
 
January 1, 2019
2018-13
Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
 
January 1, 2019
2018-08
Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
 
January 1, 2019
2018-07
Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting
 
January 1, 2019
2018-02
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (a)
 
January 1, 2019
__________
(a) Ford did not elect to reclassify the income tax effects of the Tax Cuts and Jobs Act from Accumulated other comprehensive income/(loss) to Retained earnings.


7

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 2. NEW ACCOUNTING STANDARDS (Continued)

Accounting Standards Issued But Not Yet Adopted

The Company considers the applicability and impact of all ASUs.  ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.

ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which replaces the current incurred loss impairment method with a method that reflects expected credit losses. We will adopt the new standard and the related amendments on January 1, 2020. Based on our current loan portfolio and forecasts of future macroeconomic conditions, we estimate that the allowance for credit losses reported in Ford Credit finance receivables, net on our consolidated balance sheet will increase by about $200 million at adoption. We will record the cumulative effect of initially applying the new standard as an adjustment to the opening balance of Retained earnings.  The increase is primarily for our consumer loan portfolio as it will cover expected credit losses over the full remaining expected life of the loans.

8

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. REVENUE

The following table disaggregates our revenue by major source for the periods ended September 30 (in millions):
 
Third Quarter 2018
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
33,352

 
$

 
$

 
$
33,352

Used vehicles
620

 

 

 
620

Extended service contracts
333

 

 

 
333

Other revenue
201

 
8

 
53

 
262

Revenues from sales and services
34,506

 
8

 
53

 
34,567

 
 
 
 
 
 
 
 
Leasing income
154

 

 
1,463

 
1,617

Financing income

 

 
1,443

 
1,443

Insurance income

 

 
39

 
39

Total revenues
$
34,660

 
$
8

 
$
2,998

 
$
37,666

 
 
 
 
 
 
 
 
 
Third Quarter 2019
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
32,609

 
$

 
$

 
$
32,609

Used vehicles
647

 

 

 
647

Extended service contracts
347

 

 

 
347

Other revenue
183

 
14

 
55

 
252

Revenues from sales and services
33,786

 
14

 
55

 
33,855

 
 
 
 
 
 
 
 
Leasing income
145

 

 
1,480

 
1,625

Financing income

 

 
1,472

 
1,472

Insurance income

 

 
38

 
38

Total revenues
$
33,931

 
$
14

 
$
3,045

 
$
36,990

 
 
 
 
 
 
 
 
 
First Nine Months 2018
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
105,338

 
$

 
$

 
$
105,338

Used vehicles
2,203

 

 

 
2,203

Extended service contracts
990

 

 

 
990

Other revenue
630

 
18

 
166

 
814

Revenues from sales and services
109,161

 
18

 
166

 
109,345

 
 
 
 
 
 
 
 
Leasing income
416

 

 
4,321

 
4,737

Financing income

 

 
4,340

 
4,340

Insurance income

 

 
123

 
123

Total revenues
$
109,577

 
$
18

 
$
8,950

 
$
118,545

 
 
 
 
 
 
 
 
 
First Nine Months 2019
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
102,420

 
$

 
$

 
$
102,420

Used vehicles
2,509

 

 

 
2,509

Extended service contracts
1,028

 

 

 
1,028

Other revenue
615

 
26

 
161

 
802

Revenues from sales and services
106,572

 
26

 
161

 
106,759

 
 
 
 
 
 
 
 
Leasing income
356

 

 
4,429

 
4,785

Financing income

 

 
4,521

 
4,521

Insurance income

 

 
120

 
120

Total revenues
$
106,928

 
$
26

 
$
9,231

 
$
116,185




9

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. REVENUE (Continued)

The amount of consideration we receive and revenue we recognize on our vehicles, parts, and accessories varies with changes in marketing incentives and returns we offer to our customers and their customers. As a result of changes in our estimate of marketing incentives, we recorded a decrease related to revenue recognized in prior periods of $320 million and $454 million in the third quarter of 2018 and 2019, respectively.

We sell separately-priced service contracts that extend mechanical and maintenance coverages beyond our base warranty agreements to vehicle owners (“extended service contracts”). At December 31, 2017 and December 31, 2018, $3.8 billion and $4 billion, respectively, of unearned revenue associated with outstanding contracts was reported in Other liabilities and deferred revenue. We recognized $262 million and $274 million of the unearned amounts as revenue during the third quarter of 2018 and 2019, respectively, and $829 million and $864 million in the first nine months of 2018 and 2019, respectively. At September 30, 2019, the unearned amount was $4.1 billion. We expect to recognize approximately $300 million of the unearned amount in the remainder of 2019, $1.2 billion in 2020, and $2.6 billion thereafter.

Amounts paid to dealers to obtain these contracts are deferred and recorded as Other assets. We had a balance of $247 million and $265 million in deferred costs as of December 31, 2018 and September 30, 2019, respectively, and recognized $18 million and $17 million of amortization during the third quarter of 2018 and 2019, respectively, and $55 million and $56 million in the first nine months of 2018 and 2019, respectively.

NOTE 4. OTHER INCOME/(LOSS)

The amounts included in Other income/(loss), net for the periods ended September 30 were as follows (in millions):
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
2018
 
2019
Net periodic pension and other postretirement employee benefits (OPEB) income/(cost), excluding service cost
$
378

 
$
(21
)
 
$
1,284

 
$
362

Investment-related interest income
169

 
202

 
482

 
612

Interest income/(expense) on income taxes
(5
)
 
(5
)
 
28

 
(26
)
Realized and unrealized gains/(losses) on cash equivalents, marketable securities, and other investments
(76
)
 
199

 
136

 
79

Gains/(Losses) on changes in investments in affiliates
(14
)
 
44

 
44

 
46

Gains/(Losses) on extinguishment of debt

 
(1
)
 

 
(54
)
Royalty income
115

 
91

 
387

 
283

Other
38

 
25

 
111

 
132

Total
$
605

 
$
534

 
$
2,472

 
$
1,434



NOTE 5. INCOME TAXES

For interim tax reporting, we estimate one single effective tax rate for tax jurisdictions not subject to a valuation allowance, which is applied to the year-to-date ordinary income/(loss). Tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

In the third quarter, we recognized a tax benefit of $442 million, primarily from non-U.S. restructuring items, resulting in a tax rate of 2,326% on our $19 million loss before income taxes. Our effective tax rate for the first nine months of 2019 was 2.2%.


10

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. CAPITAL STOCK AND EARNINGS PER SHARE

Earnings Per Share Attributable to Ford Motor Company Common and Class B Stock

Basic and diluted income per share were calculated using the following (in millions):
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
2018
 
2019
Basic and Diluted Income Attributable to Ford Motor Company
 
 
 
 
 
 
 
Basic income
$
991

 
$
425

 
$
3,793

 
$
1,719

Diluted income
991

 
425

 
3,793

 
1,719

 
 
 
 
 
 
 
 
Basic and Diluted Shares
 

 
 

 
 
 
 
Basic shares (average shares outstanding)
3,976

 
3,970

 
3,976

 
3,976

Net dilutive options, unvested restricted stock units, and unvested restricted stock shares
24

 
37

 
23

 
30

Diluted shares
4,000

 
4,007

 
3,999

 
4,006




11

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

The fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis were as follows (in millions):
 
 
 
December 31, 2018
 
Fair Value
 Level
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
220

 
$

 
$
139

 
$
359

U.S. government agencies
2
 
496

 

 
25

 
521

Non-U.S. government and agencies
2
 
169

 

 
114

 
283

Corporate debt
2
 
174

 

 
884

 
1,058

Total marketable securities classified as cash equivalents
 
 
1,059

 

 
1,162

 
2,221

Cash, time deposits, and money market funds
 
 
5,999

 
53

 
8,445

 
14,497

Total cash and cash equivalents
 
 
$
7,058

 
$
53

 
$
9,607

 
$
16,718

 
 
 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
3,014

 
$

 
$
289

 
$
3,303

U.S. government agencies
2
 
1,953

 

 
65

 
2,018

Non-U.S. government and agencies
2
 
4,674

 

 
610

 
5,284

Corporate debt
2
 
5,614

 

 
198

 
5,812

Equities (a)
1
 
424

 

 

 
424

Other marketable securities
2
 
246

 

 
146

 
392

Total marketable securities
 
 
$
15,925

 
$

 
$
1,308

 
$
17,233

 
 
 
 
 
 
 
 
 
 
Restricted cash
 
 
$
16

 
$
33

 
$
140

 
$
189

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
Fair Value
 Level
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
1,044

 
$

 
$
447

 
$
1,491

U.S. government agencies
2
 
507

 

 
571

 
1,078

Non-U.S. government and agencies
2
 
702

 

 
1,405

 
2,107

Corporate debt
2
 
331

 

 
872

 
1,203

Total marketable securities classified as cash equivalents
 
 
2,584

 

 
3,295

 
5,879

Cash, time deposits, and money market funds
 
 
6,246

 
114

 
8,284

 
14,644

Total cash and cash equivalents
 
 
$
8,830

 
$
114

 
$
11,579

 
$
20,523

 
 
 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
2,705

 
$

 
$
710

 
$
3,415

U.S. government agencies
2
 
1,733

 

 
340

 
2,073

Non-U.S. government and agencies
2
 
4,021

 

 
1,927

 
5,948

Corporate debt
2
 
4,291

 

 
193

 
4,484

Equities (a)
1
 
358

 

 

 
358

Other marketable securities
2
 
246

 

 
284

 
530

Total marketable securities
 
 
$
13,354

 
$

 
$
3,454

 
$
16,808

 
 
 
 
 
 
 
 
 
 
Restricted cash
 
 
$
10

 
$
21

 
$
127

 
$
158


__________
(a) Net unrealized gains/losses on equities were a $25 million gain and a $72 million loss at December 31, 2018 and September 30, 2019, respectively.

12

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES (Continued)

The cash equivalents and marketable securities accounted for as available-for-sale (“AFS”) debt securities were as follows (in millions):
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Fair Value of Securities with
Contractual Maturities
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Within 1 Year
 
After 1 Year through
5 Years
 
After 5 Years
Automotive
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
2,933

 
$
5

 
$
(10
)
 
$
2,928

 
$
1,714

 
$
1,214

 
$

U.S. government agencies
1,920

 

 
(18
)
 
1,902

 
797

 
1,087

 
18

Non-U.S. government and agencies
3,841

 
4

 
(37
)
 
3,808

 
194

 
3,614

 

Corporate debt
4,010

 
3

 
(33
)
 
3,980

 
1,148

 
2,830

 
2

Other marketable securities
207

 

 

 
207

 
1

 
134

 
72

Total
$
12,911

 
$
12

 
$
(98
)
 
$
12,825

 
$
3,854

 
$
8,879

 
$
92

 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
Fair Value of Securities with
Contractual Maturities
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Within 1 Year
 
After 1 Year through
5 Years
 
After 5 Years
Automotive
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
2,624

 
$
13

 
$

 
$
2,637

 
$
1,358

 
$
1,260

 
$
19

U.S. government agencies
1,665

 
2

 
(1
)
 
1,666

 
1,052

 
574

 
40

Non-U.S. government and agencies
3,714

 
21

 
(2
)
 
3,733

 
1,062

 
2,671

 

Corporate debt
4,083

 
51

 
(1
)
 
4,133

 
821

 
3,312

 

Other marketable securities
201

 
2

 

 
203

 

 
125

 
78

Total
$
12,287

 
$
89

 
$
(4
)
 
$
12,372

 
$
4,293

 
$
7,942

 
$
137



Sales proceeds and gross realized gains/losses from the sale of AFS debt securities for the periods ended September 30 were as follows (in millions):
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
2018
 
2019
Automotive
 
 
 
 
 
 
 
Sales proceeds
$
1,327

 
$
1,176

 
$
4,173

 
$
4,176

Gross realized gains

 
3

 
1

 
8

Gross realized losses
4

 

 
15

 
10



13

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES (Continued)

The present fair values and gross unrealized losses for cash equivalents and marketable securities accounted for as AFS debt securities that were in an unrealized loss position, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, were as follows (in millions):
 
December 31, 2018
 
Less than 1 Year
 
1 Year or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
199

 
$
(1
)
 
$
1,637

 
$
(9
)
 
$
1,836

 
$
(10
)
U.S. government agencies
193

 
(1
)
 
1,596

 
(17
)
 
1,789

 
(18
)
Non-U.S. government and agencies
341

 
(1
)
 
2,445

 
(36
)
 
2,786

 
(37
)
Corporate debt
1,816

 
(16
)
 
856

 
(17
)
 
2,672

 
(33
)
Other marketable securities
125

 

 

 

 
125

 

Total
$
2,674

 
$
(19
)
 
$
6,534

 
$
(79
)
 
$
9,208

 
$
(98
)
 
 

 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
Less than 1 Year
 
1 Year or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Automotive
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
253

 
$

 
$
174

 
$

 
$
427

 
$

U.S. government agencies
171

 
(1
)
 
889

 
(1
)
 
1,060

 
(2
)
Non-U.S. government and agencies
401

 

 
816

 
(1
)
 
1,217

 
(1
)
Corporate debt
141

 

 
137

 
(1
)
 
278

 
(1
)
Other marketable securities
28

 

 
15

 

 
43

 

Total
$
994

 
$
(1
)
 
$
2,031

 
$
(3
)
 
$
3,025

 
$
(4
)


During the first nine months of 2018 and 2019, we did not recognize any other-than-temporary impairment loss.

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash as reported in the consolidated statement of cash flows were as follows (in millions):
 
December 31,
2018
 
September 30,
2019
Cash and cash equivalents
$
16,718

 
$
20,523

Restricted cash (a)
189

 
158

Total cash, cash equivalents, and restricted cash
$
16,907

 
$
20,681

__________
(a)
Included in Other assets in the non-current assets section of our consolidated balance sheet.

14

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. FORD CREDIT FINANCE RECEIVABLES

Ford Credit manages finance receivables as “consumer” and “non-consumer” portfolios.  The receivables are generally secured by the vehicles, inventory, or other property being financed. Finance receivables, net were as follows (in millions):
 
December 31,
2018
 
September 30,
2019
Consumer
 
 
 
Retail installment contracts, gross
$
70,874

 
$
68,559

Finance leases, gross
8,748

 
8,832

Retail financing, gross
79,622

 
77,391

Unearned interest supplements
(3,508
)
 
(3,595
)
Consumer finance receivables
76,114

 
73,796

Non-Consumer
 

 
 

Dealer financing
34,372

 
31,430

Non-Consumer finance receivables
34,372

 
31,430

Total recorded investment
$
110,486

 
$
105,226

 
 
 
 
Recorded investment in finance receivables
$
110,486

 
$
105,226

Allowance for credit losses
(589
)
 
(513
)
Finance receivables, net
$
109,897

 
$
104,713

 
 
 
 
Current portion
$
54,353

 
$
51,183

Non-current portion
55,544

 
53,530

Finance receivables, net
$
109,897

 
$
104,713

 
 
 
 
Net finance receivables subject to fair value (a)
$
101,471

 
$
96,244

Fair value (b)
100,877

 
96,499

__________
(a)
Net finance receivables subject to fair value exclude finance leases. Previously, certain consumer financing products in Europe were classified as retail installment contracts. We now classify these products as finance leases. Comparative information has been revised to reflect this change.
(b)
The fair value of finance receivables is categorized within Level 3 of the fair value hierarchy.

Ford Credit’s finance leases are comprised of sales-type and direct financing leases. Ford Credit offers finance leases to individuals, leasing companies, government entities, daily rental companies, and fleet customers. These financings include primarily lease plans for terms of 24 to 60 months. Financing revenue from finance leases for the third quarter of 2018 and 2019 was $91 million and $90 million, respectively, and for the first nine months of 2018 and 2019 was $281 million and $279 million, respectively. Financing revenue from finance leases is included in Ford Credit revenues on the consolidated income statement.

The amounts contractually due on Ford Credit’s finance lease receivables were as follows (in millions):
 
 
September 30,
2019
Within one year
 
$
2,032

After one year and within two years
 
1,980

After two years and within three years
 
1,534

After three years and within four years
 
708

After four years and within five years
 
114

After five years
 
2

Total future cash payments
 
6,370

Less: Present value discount
 
(316
)
Finance lease receivables
 
$
6,054



15

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. FORD CREDIT FINANCE RECEIVABLES (Continued)

The reconciliation from finance lease receivables to finance leases, gross and finance leases, net is as follows (in millions):
 
 
September 30,
2019
Finance lease receivables
 
$
6,054

Unguaranteed residual assets
 
2,653

Initial direct costs
 
125

Finance leases, gross
 
8,832

Unearned interest supplements from Ford and affiliated companies
 
(346
)
Allowance for credit losses
 
(17
)
Finance leases, net
 
$
8,469



At December 31, 2018 and September 30, 2019, accrued uncollected interest was $264 million and $241 million, respectively, which is reported in Other assets in the current assets section of our consolidated balance sheet.

Included in the recorded investment in finance receivables at December 31, 2018 and September 30, 2019, were consumer receivables of $40.7 billion and $37.8 billion, respectively, and non-consumer receivables of $25.7 billion and $24 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.

Aging

For all finance receivables, Ford Credit defines “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date. The recorded investment of consumer receivables greater than 90 days past due and still accruing interest was $20 million at December 31, 2018. At September 30, 2019, there were no balances greater than 90 days past due that are still accruing interest.

The aging analysis of Ford Credit’s finance receivables balances was as follows (in millions):
 
December 31,
2018
 
September 30,
2019
Consumer
 
 
 
31-60 days past due
$
859

 
$
741

61-90 days past due
123

 
110

91-120 days past due
39

 
39

Greater than 120 days past due
39

 
38

Total past due
1,060

 
928

Current
75,054

 
72,868

Consumer finance receivables
76,114

 
73,796

Non-Consumer
 
 
 
Total past due
76

 
70

Current
34,296

 
31,360

Non-Consumer finance receivables
34,372

 
31,430

Total recorded investment
$
110,486

 
$
105,226



16

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. FORD CREDIT FINANCE RECEIVABLES (Continued)

Credit Quality

Consumer Portfolio. Credit quality ratings for consumer receivables are based on aging. Consumer receivables credit quality ratings are as follows:

Pass – current to 60 days past due;
Special Mention – 61 to 120 days past due and in intensified collection status; and
Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral less costs to sell.

Non-Consumer Portfolio. Dealers are assigned to one of four groups according to risk ratings as follows:

Group I – strong to superior financial metrics;
Group II – fair to favorable financial metrics;
Group III – marginal to weak financial metrics; and
Group IV – poor financial metrics, including dealers classified as uncollectible.

The credit quality analysis of dealer financing receivables was as follows (in millions):
 
December 31,
2018
 
September 30,
2019
Dealer Financing
 
 
 
Group I
$
27,032

 
$
24,594

Group II
5,635

 
4,733

Group III
1,576

 
2,012

Group IV
129

 
91

Total recorded investment
$
34,372

 
$
31,430



Impaired Receivables. Impaired consumer receivables include accounts that have been rewritten or modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code that are considered to be Troubled Debt Restructurings (“TDRs”), as well as all accounts greater than 120 days past due. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer financing that has been modified in TDRs. The recorded investment of consumer receivables that were impaired at December 31, 2018 and September 30, 2019 was $370 million and $334 million, or 0.5% and 0.5% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at December 31, 2018 and September 30, 2019 was $129 million and $91 million, or 0.4% and 0.3% of non-consumer receivables, respectively. Impaired finance receivables are evaluated both collectively and specifically.

17

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. FORD CREDIT ALLOWANCE FOR CREDIT LOSSES

An analysis of the allowance for credit losses related to finance receivables for the periods ended September 30 was as follows (in millions):
 
Third Quarter 2018
 
First Nine Months 2018
 
Consumer
 
Non-Consumer
 
Total
 
Consumer
 
Non-Consumer
 
Total
Allowance for credit losses
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
573

 
$
14

 
$
587

 
$
582

 
$
15

 
$
597

Charge-offs
(128
)
 
(43
)
 
(171
)
 
(382
)
 
(46
)
 
(428
)
Recoveries
40

 
4

 
44

 
126

 
6

 
132

Provision for credit losses
73

 
52

 
125

 
237

 
52

 
289

Other
1

 

 
1

 
(4
)
 

 
(4
)
Ending balance
$
559

 
$
27

 
$
586

 
$
559

 
$
27

 
$
586

 
 
 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
Collective impairment allowance
 
 
 
 
 
 
$
538

 
$
14

 
$
552

Specific impairment allowance
 
 
 
 
 
 
21

 
13

 
34

Ending balance


 


 


 
559

 
27

 
586

 
 
 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables
Collectively evaluated for impairment
 
 
 
 
 
 
$
76,315

 
$
31,588

 
$
107,903

Specifically evaluated for impairment
 
 
 
 
 
 
379

 
165

 
544

Recorded investment


 


 


 
76,694

 
31,753

 
108,447

 
 
 
 
 
 
 


 
 
 
 
Ending balance, net of allowance for credit losses
 

 

 
$
76,135

 
$
31,726

 
$
107,861

 
Third Quarter 2019
 
First Nine Months 2019
 
Consumer
 
Non-Consumer
 
Total
 
Consumer
 
Non-Consumer
 
Total
Allowance for credit losses
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
496

 
$
17

 
$
513

 
$
566

 
$
23

 
$
589

Charge-offs
(129
)
 
(1
)
 
(130
)
 
(383
)
 
(18
)
 
(401
)
Recoveries
41

 

 
41

 
129

 
8

 
137

Provision for credit losses
93

 

 
93

 
187

 
2

 
189

Other
(3
)
 
(1
)
 
(4
)
 
(1
)
 

 
(1
)
Ending balance
$
498

 
$
15

 
$
513

 
$
498

 
$
15

 
$
513

 
 
 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
Collective impairment allowance
 
 
 
 
 
 
$
479

 
$
13

 
$
492

Specific impairment allowance
 
 
 
 
 
 
19

 
2

 
21

Ending balance
 
 
 
 
 
 
498

 
15

 
513

 
 
 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables
Collectively evaluated for impairment
 
 
 
 
 
 
$
73,462

 
$
31,339

 
$
104,801

Specifically evaluated for impairment
 
 
 
 
 
 
334

 
91

 
425

Recorded investment
 
 
 
 
 
 
73,796

 
31,430

 
105,226

 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
 
 
 
 
 
$
73,298

 
$
31,415

 
$
104,713



18

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. INVENTORIES

Inventories were as follows (in millions):
 
December 31,
2018
 
September 30,
2019
Raw materials, work-in-process, and supplies
$
4,536

 
$
4,524

Finished products
6,684

 
7,927

Total inventories
$
11,220

 
$
12,451



NOTE 11. NET INVESTMENT IN OPERATING LEASES

Net investment in operating leases consists primarily of lease contracts for vehicles with individuals, daily rental companies, government entities, and fleet customers. Assets subject to operating leases are depreciated using the straight-line method over the term of the lease to reduce the asset to its estimated residual value. Estimated residual values are based on assumptions for used vehicle prices at lease termination and the number of vehicles that are expected to be returned.

The net investment in operating leases was as follows (in millions):
 
 
December 31, 2018
 
September 30,
2019
Automotive Segment
 
 
 
 
Vehicles, net of depreciation
 
$
1,705

 
$
1,960

Ford Credit Segment
 
 
 
 
Vehicles and other equipment, at cost (a)
 
33,557

 
33,298

Accumulated depreciation
 
(6,143
)
 
(5,806
)
Total Ford Credit Segment
 
27,414

 
27,492

Total
 
$
29,119

 
$
29,452

__________
(a)
Includes Ford Credit’s operating lease assets of $16.3 billion and $12.7 billion at December 31, 2018 and September 30, 2019, respectively, that have been included in securitization transactions. These net investments in operating leases are available only for payment of the debt or other obligations issued or arising in the securitization transactions; they are not available to pay other obligations or the claims of other creditors.

Ford Credit Segment

Included in Ford Credit revenues are rents on operating leases. The amounts contractually due for minimum rentals on operating leases at December 31, 2018 were as follows (in millions):
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Total
Minimum rentals on operating leases
 
$
4,708

 
$
2,929

 
$
1,083

 
$
83

 
$
6

 
$
8,809



The amounts contractually due on operating leases at September 30, 2019 were as follows (in millions):
 
 
Within one year
 
After one year and within two years
 
After two years and within three years
 
After three years and within four years
 
After four years and within five years
 
Total
Operating lease payments
 
$
4,702

 
$
2,917

 
$
1,014

 
$
72

 
$
5

 
$
8,710






19

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. OTHER INVESTMENTS

We have investments in entities for which we do not have the ability to exercise significant influence and fair values are not readily available. We record these investments at cost (less impairment, if any), adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We report the carrying value of these investments in Other assets in the non-current assets section of our consolidated balance sheet. These investments were $250 million and $846 million at December 31, 2018 and September 30, 2019, respectively. The increase from December 31, 2018 primarily reflects the $500 million investment in Rivian we made during the second quarter of 2019, as well as adjustments for observable price events, none of which were material.

NOTE 13. GOODWILL

The net carrying amount of goodwill was $264 million and $291 million at December 31, 2018 and September 30, 2019, respectively, and is reported in Other assets in the non-current assets section of our consolidated balance sheet. The increase from December 31, 2018 primarily reflects the acquisition of Journey Holding Corporation in the third quarter of 2019.

NOTE 14. OTHER LIABILITIES AND DEFERRED REVENUE

Other liabilities and deferred revenue were as follows (in millions):
 
December 31,
2018
 
September 30,
2019
Current
 
 
 
Dealer and dealers’ customer allowances and claims
$
11,369

 
$
11,578

Deferred revenue
2,095

 
2,570

Employee benefit plans
1,755

 
1,912

Accrued interest
988

 
865

OPEB (a)
339

 
341

Pension (a)
204

 
201

Operating lease liabilities

 
309

Other
3,806

 
3,955

Total current other liabilities and deferred revenue
$
20,556

 
$
21,731

Non-current
 

 
 

Pension (a)
$
9,423

 
$
8,860

OPEB (a)
5,220

 
5,186

Dealer and dealers’ customer allowances and claims
2,497

 
2,117

Deferred revenue
3,985

 
4,168

Operating lease liabilities

 
958

Employee benefit plans
1,080

 
1,133

Other
1,383

 
1,307

Total non-current other liabilities and deferred revenue
$
23,588

 
$
23,729

__________
(a)
Balances at September 30, 2019 reflect pension and OPEB liabilities at December 31, 2018, updated for service and interest cost, expected return on assets, settlement gain and associated interim remeasurement (where applicable), separation expense, actual benefit payments, and cash contributions. For plans without interim remeasurement, the discount rate and rate of expected return assumptions are unchanged from year-end 2018. Included in Other assets are pension assets of $3.3 billion and $3.7 billion at December 31, 2018 and September 30, 2019, respectively.

20

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 15. RETIREMENT BENEFITS

Defined Benefit Plans - Expense

The pre-tax net periodic benefit cost/(income) for our defined benefit pension and OPEB plans for the periods ended September 30 were as follows (in millions):
 
Third Quarter
 
Pension Benefits
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Worldwide OPEB
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
Service cost
$
136

 
$
121

 
$
146

 
$
125

 
$
13

 
$
11

Interest cost
367

 
381

 
168

 
170

 
49

 
53

Expected return on assets
(721
)
 
(674
)
 
(318
)
 
(277
)
 

 

Amortization of prior service costs/(credits)
36

 
22

 
6

 
8

 
(27
)
 
(18
)
Net remeasurement (gain)/loss

 
263

 

 
43

 

 

Separation programs/other
15

 
7

 
47

 
78

 

 

Settlements and curtailments

 
(16
)
 

 
(19
)
 

 

Net periodic benefit cost/(income)
$
(167
)
 
$
104

 
$
49

 
$
128

 
$
35

 
$
46

 
 
 
 
 
 
 
 
 
 
 
 
 
First Nine Months
 
Pension Benefits
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Worldwide OPEB
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
Service cost
$
408

 
$
349

 
$
449

 
$
381

 
$
40

 
$
33

Interest cost
1,100

 
1,199

 
517

 
519

 
147

 
158

Expected return on assets
(2,165
)
 
(1,972
)
 
(981
)
 
(844
)
 

 

Amortization of prior service costs/(credits)
107

 
65

 
19

 
25

 
(82
)
 
(53
)
Net remeasurement (gain)/loss
(26
)
 
253

 

 
43

 

 

Separation programs/other
29

 
8

 
65

 
322

 
1

 

Settlements and curtailments
(15
)
 
(66
)
 

 
(19
)
 

 

Net periodic benefit cost/(income)
$
(562
)
 
$
(164
)
 
$
69

 
$
427

 
$
106

 
$
138



The service cost component is included in Cost of sales and Selling, administrative, and other expenses. Other components of net periodic benefit cost/(income) are included in Other income/(loss), net on our consolidated income statement.

As part of our ongoing global redesign activities, we recognized additional pension expense of $85 million and $330 million in the third quarter and first nine months of 2019, respectively, related to separation programs.  In addition, in the third quarter, we recognized settlements and curtailments, which required plan remeasurements at current discount rates, asset returns, and economic conditions.  This resulted in remeasurement losses of $306 million and $296 million in the third quarter and first nine months of 2019, respectively. Additionally, we recognized settlement and curtailment gains of $35 million and $85 million in the third quarter and first nine months of 2019, respectively.  Until our global redesign actions are completed, we anticipate further adjustments to our plans in subsequent periods.

Pension Plan Contributions

During 2019, we expect to contribute about $750 million (most of which are mandatory contributions) from cash and cash equivalents to our worldwide funded pension plans and to make about $350 million of benefit payments to participants in unfunded plans, for a total of about $1.1 billion. In the first nine months of 2019, we contributed $611 million (including $140 million in discretionary contributions in the United States) to our worldwide funded pension plans and made $253 million of benefit payments to participants in unfunded plans.

21

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 16. LEASE COMMITMENTS

We lease land, dealership facilities, offices, distribution centers, warehouses, and equipment under agreements with contractual periods ranging from less than one year to 40 years. Many of our leases contain one or more options to extend. In certain dealership lease agreements, we are the tenant and we sublease the site to a dealer. In the event the sublease is terminated, we have the option to terminate the head lease. We include options that we are reasonably certain to exercise in our evaluation of the lease term after considering all relevant economic and financial factors.

Leases that are economically similar to the purchase of an asset are classified as finance leases. The leased (“right-of-use”) assets in finance lease arrangements are reported in Net property on our consolidated balance sheet. Otherwise, the leases are classified as operating leases and reported in Other assets in the non-current assets section of our consolidated balance sheet.

For the majority of our leases commencing after January 1, 2019, we do not separate the non-lease components (e.g., maintenance and operating services) from the lease components to which they relate. Instead, non-lease components are included in the measurement of the lease liabilities. However, we do separate lease and non-lease components for contracts containing a significant service component (e.g., energy performance contracts). We calculate the initial lease liability as the present value of fixed payments not yet paid and variable payments that are based on a market rate or an index (e.g., CPI), measured at commencement. The majority of our leases are discounted using our incremental borrowing rate because the rate implicit in the lease is not readily determinable. All other variable payments are expensed as incurred.

Lease right-of-use assets and liabilities at September 30 were as follows (in millions):
 
 
September 30,
2019
Operating leases
 
 
Other assets, non-current
 
$
1,264

 
 
 
Other liabilities and deferred revenue, current
 
$
309

Other liabilities and deferred revenue, non-current
 
958

Total operating lease liabilities
 
$
1,267

 
 
 
Finance leases
 
 
Property and equipment, gross
 
$
227

Accumulated depreciation
 
(40
)
Property and equipment, net
 
$
187

 
 
 
Automotive debt payable within one year
 
$
88

Automotive long-term debt
 
68

Total finance lease liabilities
 
$
156



Minimum non-cancellable operating lease commitments at December 31, 2018 were as follows (in millions):
 
 
Operating Leases
2019
 
$
363

2020
 
271

2021
 
193

2022
 
141

2023
 
106

Thereafter
 
437

Total
 
$
1,511



22

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 16. LEASE COMMITMENTS (Continued)

The amounts contractually due on our lease liabilities as of September 30, 2019 were as follows (in millions):
 
 
Operating
Leases
 
Finance
Leases (a)
Within one year
 
$
347

 
$
93

After one year and within two years
 
258

 
25

After two years and within three years
 
185

 
19

After three years and within four years
 
141

 
15

After four years and within five years
 
110

 
8

After five years
 
394

 
6

Total
 
1,435

 
166

Less: Present value discount
 
168

 
10

Total lease liabilities
 
$
1,267

 
$
156

__________
(a)
Excludes approximately $400 million in future lease payments for a 20-year finance lease commencing in a future period.

Supplemental cash flow information related to leases for the period ended September 30 was as follows (in millions):
 
 
First Nine Months 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
320

Operating cash flows from finance leases
 
4

Financing cash flows from finance leases
 
25

Right-of-use assets obtained in exchange for lease liabilities
 
 
Operating leases
 
$
245

Finance leases
 
16



The components of lease expense for the periods ended September 30 were as follows (in millions):
 
 
Third Quarter 2019
 
First Nine Months 2019
Operating lease expense
 
$
108

 
$
328

Variable lease expense
 
15

 
46

Sublease income
 
(5
)
 
(13
)
Finance lease expense
 
 
 
 
Amortization of right-of-use assets
 
3

 
10

Interest on lease liabilities
 
1

 
4

Total lease expense
 
$
122

 
$
375



The weighted average remaining lease term and weighted average discount rate at September 30 were as follows:
 
 
September 30,
2019
Weighted average remaining lease term (years)
 
 
Operating leases
 
6.7

Finance leases
 
2.9

Weighted average discount rate
 
 
Operating leases
 
3.5
%
Finance leases
 
3.5
%


23

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 17. DEBT
The carrying value of Automotive, Ford Credit, and Other debt was as follows (in millions):
Automotive
December 31,
2018
 
September 30,
2019
Debt payable within one year
 
 
 
Short-term
$
614

 
$
512

Long-term payable within one year
 

 
 

U.S. Department of Energy Advanced Technology Vehicles Manufacturing (“DOE ATVM”) Incentive Program
591

 
591

Other debt
1,125

 
519

Unamortized (discount)/premium
(16
)
 

Total debt payable within one year
2,314

 
1,622

Long-term debt payable after one year
 

 
 

Public unsecured debt securities (a)
9,033

 
9,783

DOE ATVM Incentive Program
1,470

 
1,027

Delayed draw term loan (b)

 
1,500

Other debt
1,026

 
562

Adjustments
 
 
 
Unamortized (discount)/premium
(224
)
 
(164
)
Unamortized issuance costs
(72
)
 
(93
)
Total long-term debt payable after one year
11,233

 
12,615

Total Automotive
$
13,547

 
$
14,237

Fair value of Automotive debt (c)
$
13,319

 
$
14,806

Ford Credit
 

 
 

Debt payable within one year
 

 
 

Short-term
$
14,705

 
$
13,541

Long-term payable within one year
 

 
 

Unsecured debt
14,373

 
14,854

Asset-backed debt
22,130

 
24,496

Adjustments
 
 
 
Unamortized (discount)/premium
2

 

Unamortized issuance costs
(16
)
 
(19
)
Fair value adjustments (d)
(15
)
 
(20
)
Total debt payable within one year
51,179

 
52,852

Long-term debt payable after one year
 
 
 
Unsecured debt
52,409

 
55,651

Asset-backed debt
36,844

 
30,209

Adjustments
 
 
 
Unamortized (discount)/premium

 
(2
)
Unamortized issuance costs
(195
)
 
(200
)
Fair value adjustments (d)
(171
)
 
764

Total long-term debt payable after one year
88,887

 
86,422

Total Ford Credit
$
140,066

 
$
139,274

Fair value of Ford Credit debt (c)
$
138,809

 
$
140,110

Other
 
 
 
Long-term debt payable within one year
$

 
$
130

Long-term debt payable after one year
 
 
 
Unsecured debt
604

 
474

Adjustments
 
 
 
Unamortized (discount)/premium
(3
)
 
(3
)
Unamortized issuance costs
(1
)
 
(1
)
Total long-term debt payable after one year
600

 
470

Total Other
$
600

 
$
600

Fair value of Other debt
$
697

 
$
709

__________
(a)
Public unsecured debt securities increased by $750 million reflecting our unsecured debt (retail bond) issuance in the second quarter of 2019.
(b)
We drew $500 million in the second quarter of 2019 and $1 billion in the third quarter of 2019 under our delayed draw term loan facility.
(c)
The fair value of debt includes $458 million and $396 million of Automotive segment short-term debt and $13.8 billion and $12.7 billion of Ford Credit segment short-term debt at December 31, 2018 and September 30, 2019, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
(d)
These adjustments relate to designated fair value hedges. The carrying value of hedged debt was $38 billion and $39.3 billion at December 31, 2018 and September 30, 2019, respectively.

24

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates, certain commodity prices, and interest rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, reported in income for the periods ended September 30 were as follows (in millions):
 
Third Quarter
 
First Nine Months
Cash flow hedges (a)
2018
 
2019
 
2018
 
2019
Reclassified from AOCI to Cost of sales
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
45

 
$
(8
)
 
$
50

 
$
90

Commodity contracts

 
(10
)
 

 
(21
)
Fair value hedges
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
Net interest settlements and accruals on hedging instruments
(5
)
 

 
19

 
(32
)
Fair value changes on hedging instruments
(102
)
 
203

 
(531
)
 
927

Fair value changes on hedged debt
110

 
(194
)
 
521

 
(910
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Foreign currency exchange contracts (b)
(10
)
 
347

 
290

 
324

Cross-currency interest rate swap contracts
(75
)
 
(257
)
 
(258
)
 
(261
)
Interest rate contracts
9

 
18

 
(28
)
 
(12
)
Commodity contracts
(24
)
 
(8
)
 
(62
)
 
(9
)
Total
$
(52
)
 
$
91

 
$
1

 
$
96

__________
(a)
For the third quarter and first nine months of 2018, a $91 million loss and a $30 million gain, respectively, were reported in Other comprehensive income/(loss), net of tax related to foreign currency exchange contracts. For the third quarter and first nine months of 2019, a $68 million loss and a $384 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax related to foreign currency exchange contracts. For the third quarter and first nine months of 2019, a $32 million loss and $58 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax related to commodity contracts.
(b)
For the third quarter and first nine months of 2018, a $16 million loss and a $186 million gain were reported in Cost of sales and a $6 million gain and a $104 million gain were reported in Other income/(loss), net, respectively. For the third quarter and first nine months of 2019, a $193 million gain and a $136 million gain were reported in Cost of sales and a $154 million gain and $188 million gain were reported in Other income/(loss), net, respectively.

25

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are reported on our consolidated balance sheet at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties which we do not use to offset our derivative assets and liabilities.

The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions):
 
December 31, 2018
 
September 30, 2019
 
Notional
 
Fair Value of
Assets
 
Fair Value of
Liabilities
 
Notional
 
Fair Value of
Assets
 
Fair Value of
Liabilities
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
15,972

 
$
391

 
$
110

 
$
13,849

 
$
113

 
$
208

Commodity contracts
327

 

 
20

 
559

 

 
56

Fair value hedges
 

 
 

 
 

 
 
 
 
 
 
Interest rate contracts
22,989

 
158

 
208

 
25,235

 
789

 
10

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
20,695

 
202

 
99

 
22,383

 
340

 
154

Cross-currency interest rate swap contracts
5,235

 
232

 
157

 
7,203

 
127

 
319

Interest rate contracts
76,904

 
235

 
274

 
64,523

 
271

 
290

Commodity contracts
638

 
3

 
45

 
426

 
2

 
18

Total derivative financial instruments, gross (a) (b)
$
142,760

 
$
1,221

 
$
913

 
$
134,178

 
$
1,642

 
$
1,055

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
 
 
$
681

 
$
601

 
 
 
$
590

 
$
795

Non-current portion
 
 
540

 
312

 
 
 
1,052

 
260

Total derivative financial instruments, gross
 
 
$
1,221

 
$
913

 
 
 
$
1,642

 
$
1,055


__________
(a)
At December 31, 2018 and September 30, 2019, we held collateral of $19 million and $24 million, and we posted collateral of $59 million and $100 million, respectively.
(b)
At December 31, 2018 and September 30, 2019, the fair value of assets and liabilities available for counterparty netting was $434 million and $536 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.

26

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 19. EMPLOYEE SEPARATION ACTIONS AND EXIT AND DISPOSAL ACTIVITIES

We record costs associated with voluntary separations at the time of employee acceptance, unless the acceptance requires explicit approval by the Company. We record costs associated with involuntary separation programs when management has approved the plan for separation, the affected employees are identified, and it is unlikely that actions required to complete the separation plan will change significantly. Costs associated with benefits that are contingent on the employee continuing to provide service are accrued over the required service period.

Automotive Segment

As announced, we are executing a global redesign of our business. Redesign-related activities, including employee separation costs, payments to dealers and suppliers, and other charges, are recorded in Cost of sales and Selling, administrative, and other expenses. Below are actions we have initiated as part of the redesign.

Brazil. On February 15, 2019, Ford Motor Company Brasil Ltda. (“Ford Brazil”), our subsidiary in Brazil, committed to a plan to exit the commercial heavy truck business in South America.  As a result, Ford Brazil will cease production at the São Bernardo do Campo plant in Brazil during 2019.

Russia. On March 27, 2019, Ford Sollers Netherlands B.V. (“Ford Sollers”), a joint venture between Ford and Sollers PJSC (“Sollers”) in which Ford had control, announced its plan to restructure its business in Russia to focus exclusively on commercial vehicles and to exit the passenger car segment. As a result of these actions, Ford acquired 100% ownership of Ford Sollers and ceased production at the Naberezhnye Chelny and St. Petersburg vehicle assembly plants and the Elabuga engine plant during the second quarter of 2019.

Subsequent to completion of the restructuring actions, in July 2019, Ford sold a 51% controlling interest in the restructured entity to Sollers, which resulted in deconsolidation of our Ford Sollers subsidiary. Our continued involvement in Ford Sollers is accounted for as an equity method investment.

United Kingdom. On June 5, 2019, Ford Motor Company Limited (“Ford of Britain”), a subsidiary of Ford, announced its plan to exit the Ford Bridgend plant in South Wales in 2020.

India. In the third quarter of 2019, Ford committed to a plan to sell specific assets in our India Automotive operations. See Note 21 for more information concerning this plan.

Other Global Redesign Actions. In 2018, we announced our plan to end production at the Ford Aquitaine Industries plant in Bordeaux, France, and in March 2019, we announced our plan to phase-out the production of the C-Max at the Saarlouis Body and Assembly Plant in Germany. Furthermore, we are reducing our global workforce and taking other restructuring actions.

The following table summarizes the redesign-related activities for the periods ended September 30, which are recorded in Other liabilities and deferred revenue (in millions):
 
Third Quarter 2019
 
First Nine Months 2019
Beginning balance
$
929

 
$
291

Changes in accruals (a)
173

 
1,181

Payments
(334
)
 
(692
)
Foreign currency translation
(39
)
 
(51
)
Ending balance
$
729

 
$
729

__________
(a)    Excludes pension costs of $49 million and $244 million in the third quarter and first nine months of 2019, respectively.

We also recorded $821 million and $1.4 billion in the third quarter and first nine months of 2019, respectively, for the impairment of our held-for-sale India Automotive operations, accelerated depreciation, and other non-cash items. We estimate that we will incur total charges in 2019 that range between $3 billion and $3.5 billion related to the actions above, primarily attributable to employee separations, the impairment of our held-for-sale India Automotive operations, accelerated depreciation, and dealer and supplier settlements.  

27

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 20. REDEEMABLE NONCONTROLLING INTEREST

We formed the Ford Sollers joint venture with Sollers in October 2011 to operate in Russia. The value of the redeemable noncontrolling interest, reflecting redemption features embedded in the 50% equity interest in the joint venture held by Sollers, reported in the mezzanine section of our consolidated balance sheet at December 31, 2018 was $100 million. The redeemable noncontrolling interest became exercisable beginning on January 1, 2019, and Sollers exercised its option in March 2019 for a value of $135 million. The $35 million increase in value from December 2018 was reported in Income/(Loss) attributable to noncontrolling interests on our consolidated income statement during the first quarter of 2019. We purchased the noncontrolling interest from Sollers in the second quarter of 2019, derecognized the redeemable noncontrolling interest balance, and restructured our Russian operations. Subsequent to completion of the restructuring actions, in July 2019, we sold a 51% controlling interest in our restructured operations to Sollers, which resulted in deconsolidation of our Ford Sollers subsidiary. See Note 19 for more information concerning the restructuring of our business in Russia.

28

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 21. HELD-FOR-SALE OPERATIONS

Automotive Segment

In the third quarter of 2019, we committed to a plan to sell specific assets in our India Automotive operations. We entered into a definitive agreement to form a joint venture with Mahindra & Mahindra Limited (“Mahindra”), with Mahindra owning a 51% controlling stake and Ford owning a 49% stake. Under the terms of the transaction, which is expected to close in the next twelve months, we will sell certain India Automotive operations to the joint venture. Accordingly, we have reported the assets and liabilities of these operations as held for sale and ceased depreciation and amortization of those assets.

The assets and liabilities of our India Automotive operations classified as held for sale were as follows (in millions):
 
 
September 30,
2019
Assets
 
 
Trade and other receivables, net
 
$
286

Inventories
 
289

Other assets, current
 
149

Net property
 
280

Other assets, non-current
 
12

Total assets of held-for-sale operations
 
1,016

Less: Intercompany asset balances
 
(204
)
Consolidated total assets of held-for-sale operations (a)
 
$
812

 
 
 
Liabilities
 
 
Payables
 
$
573

Other liabilities and deferred revenue, current
 
74

Automotive debt payable within one year
 
92

Other liabilities and deferred revenue, non-current
 
28

Total liabilities of held-for-sale operations
 
767

Less: Intercompany liability balances
 
(243
)
Consolidated total liabilities of held-for-sale operations (a)
 
$
524

__________
(a)
As of September 30, 2019, intercompany items and transactions have been eliminated in the consolidated balance sheet. Upon closing, the buyer will assume the intercompany assets and liabilities. Accordingly, we have presented those balances in the table for informational purposes.

We recognized a pre-tax impairment charge of $799 million reported in Cost of sales in the third quarter of 2019 to adjust the carrying value of the held-for-sale assets to fair value less cost to sell. The value is measured on a nonrecurring basis and categorized within Level 3 of the fair value hierarchy. We determined fair value using a market approach, estimated based on expected proceeds to be received, which we conclude is most representative of the value of the assets given the current market conditions, the characteristics of viable market participants, and the pending sales transaction. The transaction is subject to regulatory approvals and satisfaction of other closing conditions that may impact the final proceeds received.

29

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 22. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

The changes in the balances for each component of accumulated other comprehensive income/(loss) attributable to Ford Motor Company for the periods ended September 30 were as follows (in millions):
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
2018
 
2019
Foreign currency translation
 
 
 
 
 
 
 
Beginning balance
$
(4,577
)
 
$
(4,684
)
 
$
(4,277
)
 
$
(4,800
)
Gains/(Losses) on foreign currency translation
(136
)
 
(301
)
 
(419
)
 
(169
)
Less: Tax/(Tax benefit)
(2
)
 
58

 
17

 
74

Net gains/(losses) on foreign currency translation
(134
)
 
(359
)
 
(436
)
 
(243
)
(Gains)/Losses reclassified from AOCI to net income (a)
1

 
(1
)
 
3

 
(1
)
Other comprehensive income/(loss), net of tax
(133
)
 
(360
)
 
(433
)
 
(244
)
Ending balance
$
(4,710
)
 
$
(5,044
)
 
$
(4,710
)
 
$
(5,044
)
 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Beginning balance
$
(103
)
 
$
63

 
$
(48
)
 
$
(59
)
Gains/(Losses) on available for sale securities
(7
)
 
15

 
(91
)
 
169

Less: Tax/(Tax benefit)
(1
)
 
4

 
(22
)
 
40

Net gains/(losses) on available for sale securities
(6
)
 
11

 
(69
)
 
129

(Gains)/Losses reclassified from AOCI to net income
4

 
(3
)
 
14

 
2

Less: Tax/(Tax benefit)

 

 
2

 
1

Net (gains)/losses reclassified from AOCI to net income
4

 
(3
)
 
12

 
1

Other comprehensive income/(loss), net of tax
(2
)
 
8

 
(57
)
 
130

Ending balance
$
(105
)
 
$
71

 
$
(105
)
 
$
71

 
 
 
 
 
 
 
 
Derivative instruments
 
 
 
 
 
 
 
Beginning balance
$
103

 
$
(128
)
 
$
18

 
$
201

Gains/(Losses) on derivative instruments
(91
)
 
(100
)
 
30

 
(442
)
Less: Tax/(Tax benefit)
(21
)
 
(17
)
 
8

 
(95
)
Net gains/(losses) on derivative instruments
(70
)
 
(83
)
 
22

 
(347
)
(Gains)/Losses reclassified from AOCI to net income
(45
)
 
18

 
(50
)
 
(69
)
Less: Tax/(Tax benefit)
(12
)
 
4

 
(10
)
 
(18
)
Net (gains)/losses reclassified from AOCI to net income (b)
(33
)
 
14

 
(40
)
 
(51
)
Other comprehensive income/(loss), net of tax
(103
)
 
(69
)
 
(18
)
 
(398
)
Ending balance
$

 
$
(197
)
 
$

 
$
(197
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefits
 
 
 
 
 
 
 
Beginning balance
$
(2,627
)
 
$
(2,687
)
 
$
(2,652
)
 
$
(2,708
)
Amortization and recognition of prior service costs/(credits)
15

 
12

 
44

 
37

Less: Tax/(Tax benefit)
2

 
2

 
8

 
7

Net prior service costs/(credits) reclassified from AOCI to net income
13

 
10

 
36

 
30

Translation impact on non-U.S. plans

 
5

 
2

 
6

Other comprehensive income/(loss), net of tax
13

 
15

 
38

 
36

Ending balance
$
(2,614
)
 
$
(2,672
)
 
$
(2,614
)
 
$
(2,672
)
 
 
 
 
 
 
 
 
Total AOCI ending balance at September 30
$
(7,429
)
 
$
(7,842
)
 
$
(7,429
)
 
$
(7,842
)
__________
(a)
Reclassified to Other income/(loss), net.
(b)
Reclassified to Cost of sales. During the next twelve months we expect to reclassify existing net losses on cash flow hedges of $137 million. See Note 18 for additional information.

30

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 23. COMMITMENTS AND CONTINGENCIES

Commitments and contingencies primarily consist of guarantees and indemnifications, litigation and claims, and warranty and field service actions.

Guarantees and Indemnifications

The maximum potential payments and the carrying value of recorded liabilities related to guarantees and limited indemnities were as follows (in millions):
 
December 31,
2018
 
September 30,
2019
Maximum potential payments
$
1,163

 
$
874

Carrying value of recorded liabilities related to guarantees and limited indemnities
351

 
278



Guarantees and indemnifications are recorded at fair value at their inception. We regularly review our performance risk under these arrangements, and in the event it becomes probable we will be required to perform under a guarantee or indemnity, the amount of probable payment is recorded.

We guarantee the resale value of vehicles sold in certain arrangements to daily rental companies. The maximum potential payment of $734 million as of September 30, 2019, included in the table above, represents the total proceeds we guarantee the rental company will receive on re-sale.  Reflecting our present estimate of proceeds the rental companies will receive on resale from third parties, we have recorded $243 million as our best estimate of the amount we will have to pay under the guarantee. 

We also guarantee debt and lease obligations of certain joint ventures, as well as certain financial obligations of outside third parties, including suppliers, to support our business and economic growth. Expiration dates vary through 2033, and guarantees will terminate on payment and/or cancellation of the underlying obligation. A payment by us would be triggered by failure of the joint venture or other third party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from a third party amounts paid by us under the guarantee. However, our ability to enforce these rights is sometimes stayed until the guaranteed party is paid in full, and may be limited in the event of insolvency of the third party or other circumstances.

In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction, such as the sale of a business. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax, and shareholder matters; intellectual property rights; power generation contracts; governmental regulations and employment-related matters; dealer, supplier, and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of terms of the contract or by a third-party claim. While some of these indemnifications are limited in nature, many of them do not limit potential payment. Therefore, we are unable to estimate a maximum amount of future payments that could result from claims made under these unlimited indemnities.

Litigation and Claims

Various legal actions, proceedings, and claims (generally, “matters”) are pending or may be instituted or asserted against us. These include, but are not limited to, matters arising out of alleged defects in our products; product warranties; governmental regulations relating to safety, emissions, and fuel economy or other matters; government incentives; tax matters; alleged illegal acts resulting in fines or penalties; financial services; employment-related matters; dealer, supplier, and other contractual relationships; intellectual property rights; environmental matters; shareholder or investor matters; and financial reporting matters. Certain of the pending legal actions are, or purport to be, class actions. Some of the matters involve or may involve claims for compensatory, punitive, or antitrust or other treble damages in very large amounts, or demands for field service actions, environmental remediation programs, sanctions, loss of government incentives, assessments, or other relief, which, if granted, would require very large expenditures.

The extent of our financial exposure to these matters is difficult to estimate. Many matters do not specify a dollar amount for damages, and many others specify only a jurisdictional minimum. To the extent an amount is asserted, our historical experience suggests that in most instances the amount asserted is not a reliable indicator of the ultimate outcome.

31

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 23. COMMITMENTS AND CONTINGENCIES (Continued)

We accrue for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood that we will prevail, and the severity of any potential loss. We reevaluate and update our accruals as matters progress over time.

For the majority of matters, which generally arise out of alleged defects in our products, we establish an accrual based on our extensive historical experience with similar matters. We do not believe there is a reasonably possible outcome materially in excess of our accrual for these matters.

For the remaining matters, where our historical experience with similar matters is of more limited value (i.e., “non-pattern matters”), we evaluate the matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of a material loss in excess of any accrual that can be estimated. Our estimate of reasonably possible loss in excess of our accruals for all material matters currently reflects indirect tax and customs matters, for which we estimate the aggregate risk to be a range of up to about $500 million. In addition, we have a reasonably possible risk of loss for an emission matter. At this stage, we cannot estimate the risk of loss or predict the outcome, and cannot provide reasonable assurance that it will not have a material adverse effect on us.

As noted, the litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. Our assessments are based on our knowledge and experience, but the ultimate outcome of any matter could require payment substantially in excess of the amount that we have accrued and/or disclosed.

Warranty and Field Service Actions

We accrue obligations for warranty costs and field service actions (i.e., safety recalls, emission recalls, and other product campaigns) at the time of sale using a patterned estimation model that includes historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. Warranty and field service action obligations are reported in Other liabilities and deferred revenue. We reevaluate the adequacy of our accruals on a regular basis.

We recognize the benefit from a recovery of the costs associated with our warranty and field service actions when specifics of the recovery have been agreed with our supplier and the amount of recovery is virtually certain. Recoveries are reported in Trade and other receivables and Other assets.

The estimate of our future warranty and field service action costs, net of estimated supplier recoveries, for the periods ended September 30 was as follows (in millions):
 
First Nine Months
 
2018
 
2019
Beginning balance
$
5,296

 
$
5,137

Payments made during the period
(3,107
)
 
(3,395
)
Changes in accrual related to warranties issued during the period
1,832

 
2,180

Changes in accrual related to pre-existing warranties
792

 
1,355

Foreign currency translation and other
(103
)
 
(57
)
Ending balance
$
4,710

 
$
5,220



Revisions to our estimated costs are reported as changes in accrual related to pre-existing warranties in the table above.

32

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 24. SEGMENT INFORMATION

Below is a description of our reportable segments and other activities.

Automotive Segment

Our Automotive segment primarily includes the sale of Ford and Lincoln vehicles, service parts, and accessories worldwide, together with the associated costs to develop, manufacture, distribute, and service the vehicles, parts, and accessories. This segment includes revenues and costs related to our electrification vehicle programs. The segment includes the following regional business units:  North America, South America, Europe, China, Asia Pacific Operations, and Middle East & Africa.

Mobility Segment

Our Mobility segment primarily includes development costs related to our autonomous vehicles and our investment in mobility through Ford Smart Mobility LLC (“FSM”). Autonomous vehicles includes self-driving systems development and vehicle integration, autonomous vehicle research and advanced engineering, autonomous vehicle transportation-as-a-service network development, user experience, and business strategy and business development teams. FSM designs and builds mobility products and subscription services on its own, and collaborates with service providers and technology companies.  In 2019, we began recording in the Mobility segment subscription related income previously reported in the Automotive segment.  This income is generated from services managed in our Mobility segment.

Ford Credit Segment

The Ford Credit segment is comprised of the Ford Credit business on a consolidated basis, which is primarily vehicle-related financing and leasing activities.

Corporate Other

Corporate Other primarily includes corporate governance expenses, interest income (excluding interest earned on our extended service contract portfolio that is included in our Automotive segment) and gains and losses from our cash, cash equivalents, marketable securities, and other investments, and foreign exchange derivatives gains and losses associated with intercompany lending. Corporate governance expenses are primarily administrative, delivering benefit on behalf of the global enterprise, and are not allocated to specific Automotive business units or operating segments. These include expenses related to setting and directing global policy, providing oversight and stewardship, and promoting the Company’s interests. The underlying assets and liabilities associated with these activities remain with the respective Automotive and Mobility segments.

Interest on Debt

Interest on Debt is presented as a separate reconciling item and consists of interest expense on Automotive and Other debt. The underlying liability is reported in the Automotive segment and in Corporate Other.

Special Items

Special Items are presented as a separate reconciling item. They consist of (i) pension and OPEB remeasurement gains and losses, (ii) significant personnel expenses, dealer-related costs, and facility-related charges stemming from our efforts to match production capacity and cost structure to market demand and changing model mix, and (iii) other items that we do not necessarily consider to be indicative of earnings from ongoing operating activities. Our management excludes these items from its review of the results of the operating segments for purposes of measuring segment profitability and allocating resources. We also report these special items separately to help investors track amounts related to these activities and to allow investors analyzing our results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results.

33

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 24. SEGMENT INFORMATION (Continued)

Key financial information for the periods ended or at September 30 was as follows (in millions):
 
Automotive
 
Mobility
 
Ford Credit
 
Corporate
Other
 
Interest
on Debt
 
Special Items
 
Adjustments
 
Total
Third Quarter 2018
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
34,660

 
$
8

 
$
2,998

 
$

 
$

 
$

 
$

 
$
37,666

Income/(loss) before income taxes
1,402

 
(196
)
 
678

 
(216
)
 
(343
)
 
(231
)
 

 
1,094

Equity in net income/(loss) of affiliated companies
(40
)
 

 
8

 

 

 

 

 
(32
)
Cash, cash equivalents, marketable securities, and restricted cash
23,595

 
56

 
12,884

 

 

 

 

 
36,535

Total assets
102,615

 
510

 
159,976

 

 

 

 
(4,135
)
(a)
258,966

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third Quarter 2019
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
33,931

 
$
14

 
$
3,045

 
$

 
$

 
$

 
$

 
$
36,990

Income/(loss) before income taxes
1,329

 
(290
)
 
736

 
18

 
(276
)
 
(1,536
)
 

 
(19
)
Equity in net income/(loss) of affiliated companies
(27
)
 
2

 
9

 

 

 

 

 
(16
)
Cash, cash equivalents, marketable securities, and restricted cash
22,194

 
135

 
15,160

 

 

 

 

 
37,489

Total assets
101,865

 
1,193

 
160,322

 

 

 

 
(5,223
)
(a)
258,157

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 
Mobility
 
Ford Credit
 
Corporate
Other
 
Interest
on Debt
 
Special Items
 
Adjustments
 
Total
First Nine Months 2018
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
109,577

 
$
18

 
$
8,950

 
$

 
$

 
$

 
$

 
$
118,545

Income/(loss) before income taxes
4,291

 
(479
)
 
1,964

 
(231
)
 
(933
)
 
(250
)
 

 
4,362

Equity in net income/(loss) of affiliated companies
232

 

 
20

 

 

 

 

 
252

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Nine Months 2019
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
106,928

 
$
26

 
$
9,231

 
$

 
$

 
$

 
$

 
$
116,185

Income/(loss) before income taxes
4,711

 
(842
)
 
2,368

 
(343
)
 
(765
)
 
(3,333
)
 

 
1,796

Equity in net income/(loss) of affiliated companies
62

 
11

 
23

 

 

 

 

 
96


__________
(a)
Includes eliminations of intersegment transactions occurring in the ordinary course of business and deferred tax netting.

34


ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Net income attributable to Ford Motor Company was $425 million in the third quarter of 2019 and $1.7 billion in the first nine months of 2019. Company adjusted EBIT was $1.8 billion in the third quarter of 2019 and $5.9 billion in the first nine months of 2019.

Net income includes certain items (“special items”) that are excluded from Company Adjusted EBIT. These items are discussed in more detail in Note 24 of the Notes to the Financial Statements. We report special items separately to allow investors analyzing our results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results. Our pre-tax and tax special items were as follows (in millions):
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
2018
 
2019
Global Redesign
 
 
 
 
 
 
 
South America incl. São Bernardo do Campo closure
$
(8
)
 
$
(43
)
 
$
(34
)
 
$
(479
)
Europe excl. Russia
(77
)
 
(215
)
 
(102
)
 
(1,039
)
Russia

 
24

 

 
(358
)
India

 
(799
)
 

 
(799
)
Separations and Other (not included above)
(139
)
 
(10
)
 
(139
)
 
(93
)
Subtotal Global Redesign
$
(224
)
 
$
(1,043
)
 
$
(275
)
 
$
(2,768
)
Other Items
 
 
 
 
 
 
 
Focus cancellation
$
(7
)
 
$

 
$
(16
)
 
$
(72
)
Chariot closure

 

 

 
(11
)
Transit Connect customs ruling

 
(187
)
 

 
(187
)
Subtotal Other Items
$
(7
)
 
$
(187
)
 
$
(16
)
 
$
(270
)
Pension and OPEB Gain / (Loss)
 
 
 
 
 
 
 
Other pension remeasurement
$

 
$
(306
)
 
$
26

 
$
(295
)
Pension curtailment

 

 
15

 

Subtotal Pension and OPEB Gain / (Loss)
$

 
$
(306
)
 
$
41

 
$
(295
)
Total EBIT Special Items
$
(231
)
 
$
(1,536
)
 
$
(250
)
 
$
(3,333
)
 
 
 
 
 
 
 
 
Cash effect of Global Redesign (incl. separations)
$
(45
)
 
$
(334
)
 
$
(79
)
 
$
(692
)
 
 
 
 
 
 
 
 
Tax special items
$
48

 
$
605

 
$
53

 
$
828


We recorded $1.5 billion of special item charges in the third quarter of 2019 with cash effects of $334 million. Actions related to our Global Redesign accounted for $1 billion of the special items, including $799 million for an impairment charge related to fixed assets in our India Automotive operations. We plan to sell these assets to an unconsolidated joint venture in India we are creating with Mahindra & Mahindra Limited. Special item charges also included $306 million for non-cash pension remeasurement losses and $187 million for the Transit Connect customs ruling.

In Note 24 of the Notes to the Financial Statements, special items are reflected as a separate reconciling item, as opposed to being allocated among the Automotive, Mobility, and Ford Credit segments. This reflects the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources.

35

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

COMPANY KEY METRICS

The table below shows our third quarter and year-to-date 2019 key metrics for the Company, compared to a year ago.
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
GAAP Financial Measures
 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Operating Activities ($B)
$
5.2

 
$
4.7

 
$
(0.4
)
 
$
13.7

 
$
14.7

 
$
1.1

Revenue ($B)
37.6

 
37.0

 
(2) %

 
118.5

 
116.2

 
(2) %

Net Income ($B)
1.0

 
0.4

 
(0.6
)
 
3.8

 
1.7

 
(2.1
)
Net Income Margin (%)
2.6 %

 
1.1 %

 
(1.5) ppts

 
3.2 %

 
1.5 %

 
(1.7) ppts

EPS (Diluted)
$
0.25

 
$
0.11

 
$
(0.14
)
 
$
0.95

 
$
0.43

 
$
(0.52
)
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Financial Measures *
 
 
 
 
 
 
 
 
 
 
 
Company Adj. Free Cash Flow ($B)
$
0.1

 
$
0.2

 
$
0.1

 
$
1.3

 
$
2.3

 
$
1.0

Company Adj. EBIT ($B)
1.7

 
1.8

 
0.1

 
5.5

 
5.9

 
0.3

Company Adj. EBIT Margin (%)
4.4 %

 
4.8 %

 
0.4 ppts

 
4.7 %

 
5.1 %

 
0.4 ppts

Adjusted EPS (Diluted)
$
0.29

 
$
0.34

 
$
0.05

 
$
1.00

 
$
1.06

 
$
0.06

Adjusted ROIC (Trailing Four Qtrs)
8.2 %

 
9.0 %

 
0.8 ppts

 
 
 
 
 
 
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

In the third quarter of 2019, our diluted earnings per share of Common and Class B Stock was $0.11 and our diluted adjusted earnings per share was $0.34.

Net income margin was 1.1% in the third quarter of 2019, down 1.5 percentage points from a year ago. Company adjusted EBIT margin was 4.8% in the third quarter of 2019, up 0.4 percentage points from a year ago.

The table below shows our third quarter 2019 net income attributable to Ford and Company adjusted EBIT by segment.
 
 
Third Quarter
 
First Nine Months
 
 
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Automotive
 
$
1,402

 
$
1,329

 
$
(73
)
 
$
4,291

 
$
4,711

 
$
420

Mobility
 
(196
)
 
(290
)
 
(94
)
 
(479
)
 
(842
)
 
(363
)
Ford Credit
 
678

 
736

 
58

 
1,964

 
2,368

 
404

Corporate Other
 
(216
)
 
18

 
234

 
(231
)
 
(343
)
 
(112
)
Company Adjusted EBIT *
 
$
1,668

 
$
1,793

 
$
125

 
$
5,545

 
$
5,894

 
$
349

Interest on Debt
 
(343
)
 
(276
)
 
67

 
(933
)
 
(765
)
 
168

Special Items
 
(231
)
 
(1,536
)
 
(1,305
)
 
(250
)
 
(3,333
)
 
(3,083
)
Taxes / Noncontrolling Interests
 
(103
)
 
444

 
547

 
(569
)
 
(77
)
 
492

Net Income
 
$
991

 
$
425

 
$
(566
)
 
$
3,793

 
$
1,719

 
$
(2,074
)
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

The $566 million year-over-year decline in net income in the third quarter of 2019 is more than explained by the $1.5 billion of special item charges discussed in more detail above under “Results of Operations.”

Company adjusted EBIT increased $125 million year over year in the third quarter of 2019 to $1.8 billion driven by improvement in our businesses in China, Europe, and North America, mark-to-market gains on investments (reflected in Corporate Other), and another strong performance by Ford Credit.

36

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Automotive Segment

The table below shows our third quarter 2019 Automotive segment EBIT by region (in millions).
 
 
Third Quarter

First Nine Months
 
 
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
North America
 
$
1,960

 
$
2,012

 
$
52

 
$
5,648

 
$
5,912

 
$
264

South America
 
(152
)
 
(165
)
 
(13
)
 
(479
)
 
(527
)
 
(48
)
Europe
 
(245
)
 
(179
)
 
66

 
(199
)
 
(69
)
 
130

China
 
(378
)
 
(281
)
 
97

 
(1,011
)
 
(565
)
 
446

Asia Pacific Operations
 
170

 
(31
)
 
(201
)
 
290

 
17

 
(273
)
Middle East & Africa
 
47

 
(27
)
 
(74
)
 
42

 
(58
)
 
(100
)
Automotive Segment
 
$
1,402

 
$
1,329

 
$
(73
)
 
$
4,291

 
$
4,711

 
$
420


The tables below and on the following pages provide third quarter and year-to-date 2019 key metrics and the change in third quarter 2019 EBIT compared with third quarter 2018 by causal factor for our Automotive segment and its regional business units: North America, South America, Europe, China, Asia Pacific Operations, and Middle East & Africa. For a description of these causal factors, see Definitions and Information Regarding Automotive Causal Factors.
 
Third Quarter

First Nine Months
Key Metrics
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Market Share (%)
6.3 %

 
6.0 %

 
(0.3) ppts

 
6.5 %

 
6.0 %

 
(0.5) ppts

Wholesale Units (000)
1,353

 
1,244

 
(109
)
 
4,508

 
4,033

 
(475
)
Revenue ($B)
$
34.7

 
$
33.9

 
$
(0.7
)
 
$
109.6

 
$
106.9

 
$
(2.7
)
EBIT ($M)
$
1,402

 
$
1,329

 
$
(73
)
 
$
4,291

 
$
4,711

 
$
420

EBIT Margin (%)
4.0 %

 
3.9 %

 
(0.1) ppts

 
3.9 %

 
4.4 %

 
0.5 ppts

Change in EBIT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBIT
 
$
1,402

Volume / Mix
 
(175
)
Net Pricing
 
937

Cost
 
(679
)
Exchange
 
(205
)
Other
 
49

Third Quarter 2019 EBIT
 
$
1,329


In the third quarter of 2019, wholesales in our Automotive segment declined 8 percent year over year, primarily driven by Europe, China, and South America, while Automotive revenue was down 2 percent, driven by exchange.

Our third quarter 2019 Automotive segment EBIT was $1.3 billion, down $73 million from a year ago, and EBIT margin was 3.9 percent, as higher net pricing and flat structural costs, excluding past service pension and OPEB costs, were offset by higher material costs associated with product launches, higher warranty expenses, and adverse exchange.

37

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

North America
 
Third Quarter

First Nine Months
Key Metrics
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Market Share (%)
13.3 %

 
12.6 %

 
(0.7) ppts

 
13.6 %

 
13.3 %

 
(0.3) ppts

Wholesale Units (000)
644

 
639

 
(5)

 
2,182

 
2,085

 
(97)

Revenue ($B)
$
22.3

 
$
23.4

 
$
1.1

 
$
70.8

 
$
72.7

 
$
2.0

EBIT ($M)
$
1,960

 
$
2,012

 
$
52

 
$
5,648

 
$
5,912

 
$
264

EBIT Margin (%)
8.8 %

 
8.6 %

 
(0.2) ppts

 
8.0 %

 
8.1 %

 
0.1 ppts

Change in EBIT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBIT
 
$
1,960

Volume / Mix
 
70

Net Pricing
 
657

Cost
 
(721
)
Exchange
 
31

Other
 
15

Third Quarter 2019 EBIT
 
$
2,012


In North America, third quarter 2019 wholesales declined 1 percent from a year ago, driven by Mexico and Canada, while U.S. wholesales were up 1 percent. The decline primarily reflected the Explorer and Escape launch in 2019, the overlap of strong production of F-Series in the third quarter of 2018 to recover from the decline in production volume caused by the Meridian fire earlier in 2018, and our decision to exit low margin sedans. Favorable impacts from the introduction of the new Edge at the end of 2018 as well as Ranger largely offset the decline. Third quarter 2019 revenue increased 5 percent year over year, driven by higher net pricing and improved mix.

North America’s third quarter 2019 EBIT increased 3 percent from a year ago with an EBIT margin of 8.6 percent, driven by higher net pricing and higher volume in the United States. Launch-related production costs and higher warranty expenses were partial offsets.

South America
 
Third Quarter

First Nine Months
Key Metrics
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Market Share (%)
8.4 %

 
7.1 %

 
(1.3) ppts

 
8.6 %

 
7.4 %

 
(1.2) ppts

Wholesale Units (000)
94

 
79

 
(15
)
 
276

 
222

 
(54
)
Revenue ($B)
$
1.3

 
$
1.0

 
$
(0.2
)
 
$
4.1

 
$
2.9

 
$
(1.1
)
EBIT ($M)
$
(152
)
 
$
(165
)
 
$
(13
)
 
$
(479
)
 
$
(527
)
 
$
(48
)
EBIT Margin (%)
(11.8) %

 
(15.9) %

 
(4.1) ppts

 
(11.8) %

 
(17.9) %

 
(6.2) ppts

Change in EBIT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBIT
 
$
(152
)
Volume / Mix
 
(38
)
Net Pricing
 
162

Cost
 
(110
)
Exchange
 
(29
)
Other
 
2

Third Quarter 2019 EBIT
 
$
(165
)

In South America, third quarter 2019 wholesales declined 16 percent from a year ago, driven by a decrease in market share, primarily due to the strategic decision to exit heavy trucks and discontinue Fiesta and Focus. Third quarter 2019 revenue declined 19 percent year over year, driven by the lower volume and adverse exchange, and partially offset by higher net pricing.

South America’s third quarter 2019 EBIT loss of $165 million increased $13 million from a year ago despite significant macroeconomic headwinds, particularly in Argentina. Lower volume, higher inflationary costs, and adverse exchange were offset by higher net pricing.


38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Europe
 
Third Quarter

First Nine Months
Key Metrics
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Market Share (%)
7.0 %

 
6.7 %

 
(0.3) ppts

 
7.2 %

 
6.9 %

 
(0.3) ppts

Wholesale Units * (000)
356

 
303

 
(53
)
 
1,172

 
1,073

 
(99
)
Revenue ($B)
$
7.4

 
$
6.4

 
$
(1.0
)
 
$
23.9

 
$
21.6

 
$
(2.3
)
EBIT ($M)
$
(245
)
 
$
(179
)
 
$
66

 
$
(199
)
 
$
(69
)
 
$
130

EBIT Margin (%)
(3.3) %

 
(2.8) %

 
0.5 ppts

 
(0.8) %

 
(0.3) %

 
0.5 ppts

Change in EBIT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBIT
 
$
(245
)
Volume / Mix
 
(144
)
Net Pricing
 
71

Cost
 
74

Exchange
 
(130
)
Other
 
195

Third Quarter 2019 EBIT
 
$
(179
)
*
Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Turkey (about 7,000 units in Q3 2018 and 6,000 units in Q3 2019). Revenue does not include these sales.

In Europe, third quarter 2019 wholesales declined 15 percent from a year ago, driven by our redesign actions to exit low margin businesses, including the discontinuation of the C-Max sedan. Third quarter 2019 revenue, which declined 14 percent year over year (or 9 percent excluding exchange), was also affected by the lower volume.

EBIT improved 27% year over year, primarily reflecting Europe’s redesign efforts. This is the first time in three years that we have posted two consecutive quarters of year-over-year improvement in Europe’s EBIT. This performance was driven by lower structural costs, stronger product mix, and higher profits from our commercial vehicle joint venture, Ford Otosan. Lower volume and adverse exchange were partial offsets.


39

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

China
 
Third Quarter

First Nine Months
Key Metrics
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Market Share (%)
2.9 %

 
2.3 %

 
(0.6) ppts

 
3.1 %

 
2.2 %

 
(0.9) ppts

Wholesale Units * (000)
153

 
134

 
(19
)
 
559

 
375

 
(184
)
Revenue ($B)
$
1.2

 
$
0.9

 
$
(0.3
)
 
$
3.1

 
$
2.7

 
$
(0.4
)
EBIT ($M)
$
(378
)
 
$
(281
)
 
$
97

 
$
(1,011
)
 
$
(565
)
 
$
446

EBIT Margin (%)
(31.4) %

 
(32.0) %

 
(0.6) ppts

 
(33.0) %

 
(21.3) %

 
11.7 ppts

 
 
 
 
 
 
 
 
 
 
 
 
China Unconsolidated Affiliates
 
 
 
 
 
 
 
 
 
 
 
Wholesales (000)
135

 
116

 
(19
)
 
504

 
323

 
(181
)
Ford Equity Income ($M)
$
(38
)
 
$
(112
)
 
$
(74
)
 
$
103

 
$
(146
)
 
$
(249
)
*
Wholesale units include Ford brand and JMC brand vehicles produced and sold in China by our unconsolidated affiliates. Revenue does not include these sales.
Change in EBIT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBIT
 
$
(378
)
Volume / Mix
 
5

Net Pricing
 
37

Cost
 
102

Exchange
 
10

Other (Including Joint Ventures)
 
(57
)
Third Quarter 2019 EBIT
 
$
(281
)

In China, compared with a year ago, third quarter 2019 wholesales declined 12 percent and consolidated revenue was down 27 percent as improvements in mix and pricing were more than offset by lower volumes and lower component sales to our joint ventures in China. Our EBIT loss in China narrowed to $281 million in the third quarter, a year-over-year improvement of $97 million, driven by lower structural costs and favorable market factors in consolidated operations. This is the third consecutive quarter of year-over-year improvement in China’s EBIT.

Changan Ford dealer profitability and engagement are showing signs of improvement, and we are continuing to keep production aligned with demand to maintain appropriate dealer stock.

40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Asia Pacific Operations
 
Third Quarter

First Nine Months
Key Metrics
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Market Share (%)
1.9 %

 
1.7 %

 
(0.2) ppts

 
1.9 %

 
1.7 %

 
(0.2) ppts

Wholesale Units (000)
80

 
65

 
(15
)
 
241

 
211

 
(30
)
Revenue ($B)
$
1.9

 
$
1.7

 
$
(0.2
)
 
$
5.8

 
$
5.3

 
$
(0.5
)
EBIT ($M)
$
170

 
$
(31
)
 
$
(201
)
 
$
290

 
$
17

 
$
(273
)
EBIT Margin (%)
8.9 %

 
(1.9) %

 
(10.8) ppts

 
5.0 %

 
0.3 %

 
(4.7) ppts

Change in EBIT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBIT
 
$
170

Volume / Mix
 
(88
)
Net Pricing
 
(18
)
Cost
 
27

Exchange
 
(69
)
Other
 
(53
)
Third Quarter 2019 EBIT
 
$
(31
)

In our Asia Pacific Operations, third quarter 2019 wholesales declined 19 percent from a year ago, primarily reflecting lower industry volume in key markets and lower market share. Third quarter 2019 revenue declined 12 percent year over year, driven by the lower industry volume as well as lower share and unfavorable mix.

Asia Pacific Operations third quarter 2019 EBIT was $201 million lower than a year ago, driven by unfavorable market factors and adverse exchange (primarily the Australian dollar and Thai baht), partially offset by lower costs.

Middle East & Africa
 
Third Quarter
 
First Nine Months
Key Metrics
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Market Share (%)
3.2 %

 
3.3 %

 
0.1 ppts

 
3.0 %

 
3.1 %

 
0.1 ppts

Wholesale Units (000)
25

 
24

 
(1
)
 
77

 
67

 
(10
)
Revenue ($B)
$
0.6

 
$
0.6

 
$

 
$
2.0

 
$
1.8

 
$
(0.2
)
EBIT ($M)
$
47

 
$
(27
)
 
$
(74
)
 
$
42

 
$
(58
)
 
$
(100
)
EBIT Margin (%)
7.7 %

 
(4.4) %

 
(12.2) ppts

 
2.1 %

 
(3.3) %

 
(5.4) ppts

Change in EBIT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBIT
 
$
47

Volume / Mix
 
21

Net Pricing
 
29

Cost
 
(51
)
Exchange
 
(18
)
Other
 
(55
)
Third Quarter 2019 EBIT
 
$
(27
)

In Middle East & Africa, third quarter 2019 wholesales declined 4 percent from a year ago, primarily driven by North Africa and South Africa. Third quarter 2019 revenue was about flat compared with a year ago.

Middle East & Africa third quarter 2019 EBIT was $74 million lower than a year ago, primarily driven by increased cost and adverse exchange, partially offset by higher net pricing and favorable series mix.


41

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Definitions and Information Regarding Automotive Causal Factors

In general, we measure year-over-year change in Automotive segment EBIT using the causal factors listed below, with net pricing and cost variances calculated at present-period volume and mix and exchange:

Market Factors (exclude the impact of unconsolidated affiliate wholesales):
Volume and Mix – primarily measures EBIT variance from changes in wholesale volumes (at prior-year average contribution margin per unit) driven by changes in industry volume, market share, and dealer stocks, as well as the EBIT variance resulting from changes in product mix, including mix among vehicle lines and mix of trim levels and options within a vehicle line
Net Pricing – primarily measures EBIT variance driven by changes in wholesale prices to dealers and marketing incentive programs such as rebate programs, low-rate financing offers, special lease offers, and stock adjustments on dealer inventory

Cost:
Contribution Costs – primarily measures EBIT variance driven by per-unit changes in cost categories that typically vary with volume, such as material costs (including commodity and component costs), warranty expense, and freight and duty costs
Structural Costs – primarily measures EBIT variance driven by absolute change in cost categories that typically do not have a directly proportionate relationship to production volume. Structural costs include the following cost categories:
Manufacturing, Including Volume-Related consists primarily of costs for hourly and salaried manufacturing personnel, plant overhead (such as utilities and taxes), and new product launch expense. These costs could be affected by volume for operating pattern actions such as overtime, line-speed, and shift schedules
Engineering consists primarily of costs for engineering personnel, prototype materials, testing, and outside engineering services
Spending-Related consists primarily of depreciation and amortization of our manufacturing and engineering assets, but also includes asset retirements and operating leases
Advertising and Sales Promotions includes costs for advertising, marketing programs, brand promotions, customer mailings and promotional events, and auto shows
Administrative and Selling includes primarily costs for salaried personnel and purchased services related to our staff activities and selling functions, as well as associated information technology costs
Pension and OPEB consists primarily of past service pension costs and other postretirement employee benefit costs

Exchange – primarily measures EBIT variance driven by one or more of the following: (i) transactions denominated in currencies other than the functional currencies of the relevant entities, (ii) effects of converting functional currency income to U.S. dollars, (iii) effects of remeasuring monetary assets and liabilities of the relevant entities in currencies other than their functional currency, or (iv) results of our foreign currency hedging

Other includes a variety of items, such as parts and services earnings, royalties, government incentives, and compensation-related changes

In addition, definitions and calculations used in this report include:

Wholesales and Revenue – wholesale unit volumes include all Ford and Lincoln badged units (whether produced by Ford or by an unconsolidated affiliate) that are sold to dealerships, units manufactured by Ford that are sold to other manufacturers, units distributed by Ford for other manufacturers, and local brand units produced by our China joint venture, Jiangling Motors Corporation, Ltd. (“JMC”), that are sold to dealerships. Vehicles sold to daily rental car companies that are subject to a guaranteed repurchase option (i.e., rental repurchase), as well as other sales of finished vehicles for which the recognition of revenue is deferred (e.g., consignments), also are included in wholesale unit volumes. Revenue from certain vehicles in wholesale unit volumes (specifically, Ford badged vehicles produced and distributed by our unconsolidated affiliates, as well as JMC brand vehicles) are not included in our revenue

Industry Volume and Market Share – based, in part, on estimated vehicle registrations; includes medium and heavy duty trucks

SAAR – seasonally adjusted annual rate



42

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Mobility Segment

Our Mobility segment primarily includes development costs related to our autonomous vehicles and our investment in mobility through Ford Smart Mobility LLC (“FSM”). Autonomous vehicles includes self-driving systems development and vehicle integration, autonomous vehicle research and advanced engineering, autonomous vehicle transportation-as-a-service network development, user experience, and business strategy and business development teams. FSM designs and builds mobility products and subscription services on its own, and collaborates with service providers and technology companies.  In 2019, we began recording in the Mobility segment subscription related income previously reported in the Automotive segment.  This income is generated from services managed in our Mobility segment.

In our Mobility segment, our third quarter 2019 EBIT loss was $290 million, a $94 million higher loss than a year ago, primarily driven by our continued investment in mobility services. Our strategic investments in Mobility in the third quarter of 2019 increased by 48 percent year over year as we continue to build-out capabilities in connected services and autonomous vehicles.

In the third quarter of 2019, we announced the expansion of our collaboration with Volkswagen, including a commitment to invest in Argo AI. We will collaborate with Argo AI on the self-driving system, which will enable Volkswagen and us to reduce investment and development costs for our autonomous vehicle businesses by sharing costs and expertise.

43

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Ford Credit Segment

Ford Credit files periodic reports with the SEC that contain additional information regarding Ford Credit. The reports are available through Ford Credit’s website located at www.fordcredit.com/investor-center and can also be found on the SEC’s website located at www.sec.gov.

The tables below provide third quarter and year-to-date 2019 key metrics and the change in third quarter 2019 EBT compared with third quarter 2018 by causal factor for the Ford Credit segment. For a description of these causal factors, see Definitions and Information Regarding Ford Credit Causal Factors.
 
Third Quarter
 
First Nine Months
GAAP Financial Measures
2018
 
2019
 
H / (L)
 
2018
 
2019
 
H / (L)
Net Receivables ($B)
$
144

 
$
140

 
(3) %

 
$
144

 
$
140

 
(3) %

Loss-to-Receivables * (bps)
51

 
51

 

 
50

 
48

 
(2
)
Auction Values **
$
19,190

 
$
18,865

 
(2) %

 
$
18,415

 
$
18,160

 
(1) %

EBT ($M)
$
678

 
$
736

 
$
58

 
$
1,964

 
$
2,368

 
$
404

ROE (%)
13 %

 
15 %

 
2 ppts

 
14 %

 
16 %

 
2 ppts

 
 
 
 
 
 
 
 
 
 
 
 
Other Balance Sheet Metrics
 
 
 
 
 
 
 
 
 
 
 
Debt ($B)
 
 
 
 
 
 
$
138

 
$
139

 
1 %

Net Liquidity ($B)
 
 
 
 
 
 
$
29

 
$
35

 
22 %

Financial Statement Leverage (to 1)
 
 
 
 
 
 
9.1

 
9.8

 
0.7

*
U.S. retail financing only, previously included both retail financing and operating leases.
**
U.S. 36-month off-lease third quarter auction values at Q3 2019 mix and YTD amounts at 2019 YTD mix.
 
First Nine Months
Non-GAAP Financial Measures
2018
 
2019
 
H / (L)
Managed Receivables * ($B)
$
152

 
$
149

 
(2) %

Managed Leverage ** (to 1)
8.4

 
8.8

 
0.4

*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
**
See Liquidity and Capital Resources - Ford Credit Segment section for reconciliation to GAAP.
Change in EBT by Causal Factor (in millions)
 
 
Third Quarter 2018 EBT
 
$
678

Volume / Mix
 
(19
)
Financing Margin
 
5

Credit Loss
 
34

Lease Residual
 
6

Exchange
 
(8
)
Other
 
40

Third Quarter 2019 EBT
 
$
736


Ford Credit’s loss metrics reflected healthy and stable consumer credit conditions, and auction values for off-lease vehicles were slightly better than expected. We now believe full year 2019 auction values will be down about 2 percent on average year over year, at constant mix. Receivables were down year over year.

Ford Credit delivered $736 million of EBT, a 9 percent increase from a year ago, led by favorable derivatives market valuation and improved operating costs, which are both reflected in other. Favorable credit loss performance primarily reflects the non-recurrence of a non-consumer loss recognized in the third quarter of 2018. Unfavorable volume and mix, which was driven by lower receivables, was a partial offset.

44

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Definitions and Information Regarding Ford Credit Causal Factors

In general, we measure year-over-year changes in Ford Credit’s EBT using the causal factors listed below:

Volume and Mix:
Volume primarily measures changes in net financing margin driven by changes in average managed receivables at prior period financing margin yield (defined below in financing margin) at prior period exchange rates. Volume changes are primarily driven by the volume of new and used vehicles sold and leased, the extent to which Ford Credit purchases retail installment sale and finance lease contracts (retail financing) and operating lease contracts, the extent to which Ford Credit provides wholesale financing, the sales price of the vehicles financed, the level of dealer inventories, Ford-sponsored special financing programs available exclusively through Ford Credit, and the availability of cost-effective funding
Mix primarily measures changes in net financing margin driven by period-over-period changes in the composition of Ford Credit’s average managed receivables by product within each region

Financing Margin:
Financing margin variance is the period-to-period change in financing margin yield multiplied by the present period average managed receivables at prior period exchange rates. This calculation is performed at the product and country level and then aggregated. Financing margin yield equals revenue, less interest expense and scheduled depreciation for the period, divided by average managed receivables for the same period
Financing margin changes are driven by changes in revenue and interest expense. Changes in revenue are primarily driven by the level of market interest rates, cost assumptions in pricing, mix of business, and competitive environment. Changes in interest expense are primarily driven by the level of market interest rates, borrowing spreads, and asset-liability management

Credit Loss:
Credit loss is the change in the provision for credit losses at prior period exchange rates. For analysis purposes, management splits the provision for credit losses into net charge-offs and the change in the allowance for credit losses
Net charge-off changes are primarily driven by the number of repossessions, severity per repossession, and recoveries. Changes in the allowance for credit losses are primarily driven by changes in historical trends in credit losses and recoveries, changes in the composition and size of Ford Credit’s present portfolio, changes in trends in historical used vehicle values, and changes in economic conditions
As of January 1, 2019, we changed our accounting method for reporting early termination losses related to customer defaults on operating leases.  Previously, we presented the early termination loss reserve on operating leases due to customer default events as part of the allowance for credit losses which reduces Net investment in operating leases on the balance sheet. We now consider the effects of operating lease early terminations when determining depreciation estimates, which are included as part of accumulated depreciation within Net investment in operating leases on the balance sheet.  We believe this change in accounting method is preferable as the characterization of these changes is better reflected as depreciation.  We have reclassified prior period amounts to reflect these changes.  For additional information, refer to the “Critical Accounting Estimates - Allowance for Credit Losses” section of Item 7 of Part II of our 2018 Form 10-K Report

Lease Residual:
Lease residual measures changes to residual performance at prior period exchange rates. For analysis purposes, management splits residual performance primarily into residual gains and losses, and the change in accumulated supplemental depreciation
Residual gain and loss changes are primarily driven by the number of vehicles returned to Ford Credit and sold, and the difference between the auction value and the depreciated value (which includes both base and accumulated supplemental depreciation) of the vehicles sold. Changes in accumulated supplemental depreciation are primarily driven by changes in Ford Credit’s estimate of the expected auction value at the end of the lease term, and changes in Ford Credit’s estimate of the number of vehicles that will be returned to it and sold. With the change in accounting method discussed above, accumulated depreciation now reflects early termination losses on operating leases due to customer default events for all periods presented. For additional information, refer to the “Critical Accounting Estimates - Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Part II of our 2018 Form 10-K Report

Exchange:
Reflects changes in EBT driven by the effects of converting functional currency income to U.S. dollars


45

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Other:
Primarily includes operating expenses, other revenue, insurance expenses, and other income at prior period exchange rates
Changes in operating expenses are primarily driven by salaried personnel costs, facilities costs, and costs associated with the origination and servicing of customer contracts
In general, other income changes are primarily driven by changes in earnings related to market valuation adjustments to derivatives (primarily related to movements in interest rates) and other miscellaneous items

In addition, the following definitions and calculations apply to Ford Credit when used in this report:

Cash (as shown in the Funding Structure, Liquidity, and Leverage tables) – Cash, cash equivalents, and marketable securities, excluding amounts related to insurance activities

Debt (as shown in the Key Metrics and Leverage tables) – Debt on Ford Credit’s balance sheet. Includes debt issued in securitizations and payable only out of collections on the underlying securitized assets and related enhancements. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions

Earnings Before Taxes (EBT) – Reflects Ford Credit’s income before income taxes

Return on Equity (ROE) (as shown in the Key Metrics table) – Reflects return on equity calculated by annualizing net income for the period and dividing by monthly average equity for the period

Securitizations (as shown in the Public Term Funding Plan table) – Public securitization transactions, Rule 144A offerings sponsored by Ford Credit, and widely distributed offerings by Ford Credit Canada

Securitization Cash (as shown in the Liquidity table) – Cash held for the benefit of the securitization investors (for example, a reserve fund)

Term Asset-Backed Securities (as shown in the Funding Structure table) – Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements

Total Net Receivables (as shown in the Key Metrics and Ford Credit Net Receivables Reconciliation To Managed Receivables tables) – Includes finance receivables (retail financing and wholesale) sold for legal purposes and net investment in operating leases included in securitization transactions that do not satisfy the requirements for accounting sale treatment. These receivables and operating leases are reported on Ford Credit’s balance sheet and are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations of Ford Credit or the claims of Ford Credit’s other creditors

46

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Corporate Other

Corporate Other primarily includes corporate governance expenses, interest income (excluding interest earned on our extended service contract portfolio that is included in our Automotive segment) and gains and losses from our cash, cash equivalents, marketable securities, and other investments, and foreign exchange derivatives gains and losses associated with intercompany lending. Corporate governance expenses are primarily administrative, delivering benefit on behalf of the global enterprise, and are not allocated to specific Automotive business units or operating segments. These include expenses related to setting and directing global policy, providing oversight and stewardship, and promoting the Company’s interests. In the third quarter of 2019, Corporate Other had an $18 million profit, reflecting mark-to-market and other gains on our investments of $113 million, including $77 million from Pivotal Software.

Interest on Debt

Interest on Debt consists of interest expense on Automotive and Other debt. Third quarter 2019 interest expense on Automotive and Other debt was $276 million, which is $67 million lower than a year ago, more than explained by lower foreign debt interest expense, including our repayment of higher-cost affiliate debt as discussed in the Liquidity and Capital Resources section below.

Taxes

In the third quarter of 2019, we recognized a tax benefit of $442 million. For the first nine months of 2019, we recognized a tax provision of $40 million. This resulted in effective tax rates of 2,326% and 2.2%, respectively, reflecting a benefit recognized during the third quarter for non-U.S. restructuring items.

Our third quarter and first nine months of 2019 adjusted effective tax rates, which exclude special items, were 10.7% and 16.9%, respectively.


47

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2019, total balance sheet cash, cash equivalents, marketable securities, and restricted cash (including Ford Credit) was $37.5 billion.

We consider our key balance sheet metrics to be: (i) Company cash, which includes cash equivalents, marketable securities, and restricted cash, excluding Ford Credit’s cash, cash equivalents, marketable securities, and restricted cash; and (ii) Company liquidity, which includes Company cash, less restricted cash, and total available committed credit lines, excluding Ford Credit’s total available committed credit lines.

Company excluding Ford Credit
 
December 31, 2018
 
September 30, 2019
Balance Sheet
 
 
 
Company Cash
$
23.1

 
$
22.3

Liquidity
34.2

 
35.4

 
 
 
 
Debt
$
(14.1
)
 
$
(14.8
)
Cash Net of Debt
8.9

 
7.5

 
 
 
 
Pension Funded Status *
 
 
 
Funded Plans
$
(0.3
)
 
$
0.4

Unfunded Plans
(6.0
)
 
(5.8
)
Total Global Pension
$
(6.3
)
 
$
(5.4
)
 
 
 
 
Total Funded Status OPEB
$
(5.6
)
 
$
(5.5
)
*
Balances at September 30, 2019 reflect net underfunded status at December 31, 2018, updated for service and interest cost, expected return on assets, settlement gain and associated interim remeasurement (where applicable), separation expense, actual benefit payments, and cash contributions. For plans without interim remeasurement, the discount rate and rate of expected return assumptions are unchanged from year-end 2018.

Liquidity. One of our key priorities is to maintain a strong balance sheet, while at the same time having resources available to invest in and grow our business. Based on our planning assumptions, we believe we have sufficient liquidity and capital resources to continue to invest in new products and services, pay our debts and obligations as and when they come due, pay a regular dividend, and provide protection within an uncertain global economic environment.
 
At September 30, 2019, we had Company cash of $22.3 billion, with 87% held by consolidated entities domiciled in the United States. To be prepared for an economic downturn, we target an ongoing Company cash balance at or above $20 billion. We expect to have periods when we will be above or below this amount due to:  (i) future cash flow expectations, such as for investments in future opportunities, capital investments, debt maturities, pension contributions, or restructuring requirements, (ii) short-term timing differences, and (iii) changes in the global economic environment.

Our Company cash investments primarily include U.S. Department of Treasury obligations, federal agency securities, bank time deposits with investment-grade institutions, investment-grade corporate securities, investment-grade commercial paper, and debt obligations of a select group of non-U.S. governments, non-U.S. governmental agencies, and supranational institutions. The average maturity of these investments is approximately one year and adjusted based on market conditions and liquidity needs. We monitor our Company cash levels and average maturity on a daily basis.

In addition to our Company cash target, we also target to maintain a $10 billion balance available under our corporate credit facility, discussed below, for our Automotive business to protect against exogenous shocks. We assess the appropriate long-term target for total Company liquidity, which includes Company cash and the Automotive portion of the corporate credit facility, to be at or above $30 billion, which is an amount we believe is sufficient to support our business priorities and to protect our business. At September 30, 2019, we had $35.4 billion of Company liquidity, which is up over $1 billion from December 31, 2018, reflecting the addition of our supplemental credit facility (described below in Available Credit Lines). We may reduce our Company cash and liquidity targets over time, based on improved operating performance and changes in our risk profile.

48

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Changes in Company Cash. In managing our business, we classify changes in Company cash into operating and non-operating items. Operating items include: Company adjusted EBIT excluding Ford Credit EBT, capital spending, depreciation and tooling amortization, changes in working capital, Ford Credit distributions, and all other and timing differences. Non-operating items include: Global Redesign (including separation payments), changes in Automotive and Other debt, contributions to funded pension plans, shareholder distributions, and other items (including acquisitions and divestitures and other transactions with Ford Credit).

With respect to “Changes in working capital,” in general we carry relatively low Automotive segment trade receivables compared with our trade payables because the majority of our Automotive wholesales are financed (primarily by Ford Credit) immediately upon sale of vehicles to dealers, which generally occurs shortly after being produced. In contrast, our Automotive trade payables are based primarily on industry-standard production supplier payment terms generally ranging between 30 days to 45 days. As a result, our cash flow tends to improve as wholesale volumes increase, but can deteriorate when wholesale volumes decrease. These working capital balances generally are subject to seasonal changes that can impact cash flow. For example, we typically experience cash flow timing differences associated with inventories and payables due to our annual summer and December shutdown periods when production, and therefore inventories and wholesale volumes, are usually at their lowest levels, while payables continue to come due and be paid. The net impact of this typically results in cash outflows from changes in our working capital balances during these shutdown periods.

Changes in Company cash excluding Ford Credit are summarized below (in billions):
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
2018
 
2019
Company Excluding Ford Credit
 
 
 
 
 
 
 
Company Adjusted EBIT* excluding Ford Credit
$
1.0

 
$
1.1

 
$
3.6

 
$
3.5

 
 
 
 
 
 
 
 
Capital spending
$
(2.0
)
 
$
(1.8
)
 
$
(5.6
)
 
$
(5.3
)
Depreciation and tooling amortization
1.4

 
1.4

 
4.0

 
4.1

Net spending
$
(0.6
)
 
$
(0.4
)
 
$
(1.6
)
 
$
(1.2
)
 
 
 
 
 
 
 
 
Changes in working capital
$
(0.3
)
 
$
(1.4
)
 
$
(1.3
)
 
$
(1.0
)
Ford Credit distributions
0.6

 
1.1

 
2.1

 
2.4

All other and timing differences
(0.6
)
 
(0.1
)
 
(1.4
)
 
(1.4
)
Company adjusted free cash flow *
$
0.1

 
$
0.2

 
$
1.3

 
$
2.3

 
 
 
 
 
 
 
 
Global Redesign (including separations)
$

 
$
(0.3
)
 
$
(0.1
)
 
$
(0.7
)
Changes in debt
(0.7
)
 
0.4

 
(0.6
)
 
0.7

Funded pension contributions
(0.1
)
 
(0.2
)
 
(0.3
)
 
(0.6
)
Shareholder distributions
(0.7
)
 
(0.8
)
 
(2.5
)
 
(2.0
)
All other (including acquisitions and divestitures)
(0.1
)
 
(0.1
)
 
(0.7
)
 
(0.4
)
Change in cash
$
(1.5
)
 
$
(0.9
)
 
$
(2.9
)
 
$
(0.8
)
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
*
Note: Numbers may not sum due to rounding.

Capital spending was $1.8 billion in the third quarter of 2019 and $5.3 billion year to date. Year-to-date capital spending was 6 percent lower than a year ago. We expect full year 2019 capital spending to be about $7.5 billion.

Third quarter 2019 working capital was $1.4 billion negative. Year-to-date 2019 working capital was $1 billion negative, more than explained by higher inventory.

Third quarter and year-to-date 2019 all other and timing differences were both negative, reflecting assorted timing differences, interest payments on Automotive and Other debt, and cash taxes.

In the third quarter and first nine months of 2019, we contributed $211 million and $611 million, respectively, to our worldwide funded pension plans. We now expect full year contributions to our funded plans to total about $750 million (most of which are mandatory contributions).


49

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Shareholder distributions were $835 million in the third quarter of 2019 and $2 billion year-to-date. We expect full year 2019 distributions of $2.6 billion.

Available Credit Lines. Total committed Company credit lines excluding Ford Credit at September 30, 2019 were $14.9 billion, consisting of $10.4 billion of our corporate credit facility, $3.5 billion of our supplemental credit facility, and $1 billion of local credit facilities. At September 30, 2019, the utilized portion of the corporate credit facility was $28 million, representing amounts utilized for letters of credit. At September 30, 2019, the utilized portion of the local credit facilities was $190 million. The utilized portion of our supplemental credit facility is described below.

Lenders under our corporate credit facility have commitments to us totaling $13.4 billion, with 75% of the commitments maturing on April 30, 2024 and 25% of the commitments maturing on April 30, 2022. We have allocated $3 billion of commitments to Ford Credit on an irrevocable and exclusive basis to support its liquidity. We would guarantee any borrowings by Ford Credit under the corporate credit facility.

The corporate credit facility is unsecured and free of material adverse change conditions to borrowing, restrictive financial covenants (for example, interest or fixed-charge coverage ratio, debt-to-equity ratio, and minimum net worth requirements), and credit rating triggers that could limit our ability to obtain funding. The corporate credit facility contains a liquidity covenant that requires us to maintain a minimum of $4 billion in aggregate of domestic cash, cash equivalents, and loaned and marketable securities and/or availability under the facility. If our senior, unsecured, long-term debt does not maintain at least two investment grade ratings from Fitch, Moody’s, and S&P, the guarantees of certain subsidiaries will be required.

Earlier this year, we closed on a $3.5 billion supplemental credit facility, further strengthening our liquidity and providing additional financial flexibility. The terms and conditions of the supplemental credit facility are consistent with our corporate credit facility; however, unlike our corporate credit facility, the supplemental facility is intended to be utilized and includes a $2 billion revolving facility maturing on April 30, 2022 and a $1.5 billion delayed draw term loan facility maturing on December 31, 2022. We drew $500 million under the term loan facility in the second quarter of 2019 and the remaining $1 billion under the term loan facility in the third quarter of 2019. As of October 23, 2019, all $2 billion under the supplemental revolving facility was available for use.

Debt. As shown in Note 17 of the Notes to the Financial Statements, at September 30, 2019, Company debt excluding Ford Credit was $14.8 billion, including Automotive debt of $14.2 billion. Both balances were $690 million higher than at December 31, 2018, and include the $1.5 billion drawn under the term loan facility described above and our $750 million unsecured debt (retail bond) issuance in the second quarter of 2019.  The impact of these transactions is leverage neutral after taking into consideration debt reduction actions we took late last year and this year to repay higher-cost affiliate debt.

Leverage. We manage Company debt (excluding Ford Credit) levels with a leverage framework to maintain investment grade credit ratings through a normal business cycle. The leverage framework includes a ratio of total company debt (excluding Ford Credit) adjusted to include unamortized discount/premium and issuance costs (excluding Ford Credit), operating lease minimum commitments, and net pension liabilities excluding prepaid assets, divided by Company adjusted EBIT (excluding Ford Credit EBT), and further adjusted to include depreciation and tooling amortization (excluding Ford Credit), operating lease expense, and certain pension costs.

Ford Credit’s leverage is calculated as a separate business as described in the Liquidity - Ford Credit Segment section of Item 2. Ford Credit is self-funding and its debt, which is used to fund its operations, is separate from our Automotive and Other debt.

50

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Ford Credit Segment

Funding Overview. Ford Credit’s primary funding objective is to be well capitalized, with a strong balance sheet and ample liquidity to support its financing activities and growth under a variety of market conditions, including short-term and long-term market disruptions. Ford Credit’s funding strategy remains focused on diversification, and it plans to continue accessing a variety of markets, channels, and investors.

Ford Credit’s liquidity profile continues to be diverse, robust, and focused on maintaining liquidity levels that meet its business and funding requirements. Ford Credit annually stress tests its balance sheet and liquidity to ensure that it continues to meet its financial obligations through economic cycles.

The following table shows funding for Ford Credit’s managed receivables (in billions):
 
 
September 30, 2018
 
December 31, 2018
 
September 30, 2019
Term Debt (incl. Bank Borrowings)
 
$
73

 
$
70

 
$
74

Term Asset-Backed Securities
 
55

 
60

 
55

Commercial Paper
 
4

 
4

 
4

Ford Interest Advantage / Deposits
 
6

 
6

 
7

Other
 
11

 
10

 
9

Equity
 
15

 
15

 
14

Adjustments for Cash
 
(12
)
 
(10
)
 
(14
)
Total Managed Receivables *
 
$
152

 
$
155

 
$
149

 
 
 
 
 
 
 
Securitized Funding as Percent of Managed Receivables
 
36
%
 
39
%
 
37
%
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

Managed receivables were $149 billion at September 30, 2019, and were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 37%. Ford Credit targets a mix of securitized funding between 35% and 40%. The calendarization of the funding plan will result in quarterly fluctuations of the securitized funding percentage.

Public Term Funding Plan. The following table shows Ford Credit’s issuances for full-year 2017 and 2018, planned issuances for full-year 2019, and its global public term funding issuances through October 22, 2019, excluding short-term funding programs (in billions):
 
 
2017
Actual
 
2018
Actual
 
2019 Forecast
 
Through Oct 22
Unsecured - Currency of issuance (USD equivalent)
 
 
 
 
 
 
 
 
USD
 
$
10

 
$
6

 
$ 9 - 10

 
$
9

CAD
 
2

 
1

 
1

 
1

EUR / GBP
 
3

 
4

 
4 - 5

 
4

Other
 
1

 
1

 
1

 
1

Total unsecured
 
$
16

 
$
13

 
$ 15 - 17

 
$
14

Securitizations *
 
15

 
14

 
13 - 14

 
12

Total public
 
$
32

 
$
27

 
$ 28 - 31

 
$
26

*
See Definitions and Information Regarding Ford Credit Causal Factors section.
*
Note: Numbers may not sum due to rounding.

Ford Credit’s total unsecured public term funding plan is categorized by currency of issuance. Ford Credit plans to continue issuing its eurocurrency-denominated (e.g., euro and sterling) public unsecured debt from the United States. For 2019, Ford Credit now projects full-year public term funding in the range of $28 billion to $31 billion.

Through October 22, 2019, Ford Credit has completed $26 billion of public term issuances.

51

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Liquidity. The following table shows Ford Credit’s liquidity sources and utilization (in billions):
 
 
September 30, 2018
 
December 31, 2018
 
September 30, 2019
Liquidity Sources *
 
 
 
 
 
 
Cash
 
$
12.1

 
$
10.2

 
$
14.3

Committed asset-backed facilities
 
32.0

 
35.4

 
35.2

Other unsecured credit facilities
 
3.0

 
3.0

 
2.6

Ford corporate credit facility allocation
 
3.0

 
3.0

 
3.0

Total liquidity sources
 
$
50.1

 
$
51.6

 
$
55.1

 
 
 
 
 
 
 
Utilization of Liquidity *
 
 
 
 
 
 
Securitization cash
 
$
(3.0
)
 
$
(3.0
)
 
$
(2.9
)
Committed asset-backed facilities
 
(17.7
)
 
(20.7
)
 
(14.4
)
Other unsecured credit facilities
 
(0.7
)
 
(0.7
)
 
(0.5
)
Ford corporate credit facility allocation
 

 

 

Total utilization of liquidity
 
$
(21.4
)
 
$
(24.4
)
 
$
(17.8
)
 
 
 
 
 
 
 
Gross liquidity
 
$
28.7

 
$
27.2

 
$
37.3

Adjustments
 
0.3

 
0.1

 
(1.9
)
Net liquidity available for use
 
$
29.0

 
$
27.3

 
$
35.4

*
See Definitions and Information Regarding Ford Credit Causal Factors section.

Ford Credit’s net liquidity available for use will fluctuate quarterly based on factors including near-term debt maturities, receivable growth, and timing of funding transactions. Ford Credit targets liquidity of about $25 billion.

At September 30, 2019, Ford Credit’s net liquidity available for use was $35.4 billion, $8.1 billion higher than year-end 2018.

Ford Credit’s sources of liquidity include cash, committed asset-backed facilities, unsecured credit facilities, and the corporate credit facility allocation. At September 30, 2019, Ford Credit’s liquidity sources including cash totaled $55.1 billion, up $3.5 billion from year-end 2018.

52

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Leverage. Ford Credit uses leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for finance receivable and operating lease financing, and assessing its capital structure.

The table below shows the calculation of Ford Credit’s financial statement leverage and managed leverage (in billions):
 
 
September 30, 2018
 
December 31, 2018
 
September 30, 2019
Leverage Calculation
 
 
 
 
 
 
Debt *
 
$
138.2

 
$
140.1

 
$
139.3

Adjustments for cash
 
(12.1
)
 
(10.2
)
 
(14.3
)
Adjustments for derivative accounting *
 
0.6

 
0.2

 
(0.8
)
Total adjusted debt
 
$
126.7

 
$
130.1

 
$
124.2

 
 
 
 
 
 
 
Equity **
 
$
15.2

 
$
15.0

 
$
14.2

Adjustments for derivative accounting *
 
(0.1
)
 
(0.2
)
 

Total adjusted equity
 
$
15.1

 
$
14.8

 
$
14.2

 
 
 
 
 
 
 
GAAP Financial Measure
 
 
 
 
 
 
Financial statement leverage (to 1)
 
9.1

 
9.4

 
9.8

Non-GAAP Financial Measure ***
 
 
 
 
 
 
Managed leverage (to 1)
 
8.4

 
8.8

 
8.8

*
Related primarily to market valuation adjustments to derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings.
**
Total shareholder’s interest reported on Ford Credit’s balance sheet.
***
See the Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

Ford Credit plans its managed leverage by considering market conditions and the risk characteristics of its business. At September 30, 2019, Ford Credit’s financial statement leverage was 9.8:1, and its managed leverage was 8.8:1. Ford Credit targets managed leverage in the range of 8:1 to 9:1.

53

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Total Company

Pension Plans - Underfunded Balances. As of September 30, 2019, our total Company pension underfunded status reported on our balance sheet was $5.4 billion and reflects the net underfunded status at December 31, 2018, updated for service and interest cost, expected return on assets, settlement gain, curtailment gain, and associated interim remeasurement (where applicable), separation expense, actual benefit payments, and cash contributions.  For plans without interim remeasurement, the discount rate and rate of expected return assumptions are unchanged from year-end 2018.

Based on our planning assumptions for asset returns, discount rates, and contributions, we expect our funded status to deteriorate at year-end 2019 compared to the end of 2018 due to the impact of expected lower discount rates on unfunded plans.

Return on Invested Capital. We analyze total Company performance using an adjusted Return on Invested Capital (“ROIC”) financial metric based on an after-tax, rolling four quarter average. The following table contains the calculation of our ROIC for the periods shown (in billions):
 
Four Quarters Ending
 
September 30, 2018
 
September 30, 2019
Adjusted Net Operating Profit After Cash Tax
 
 
 
Net income attributable to Ford
$
6.3

 
$
1.6

Add: Noncontrolling interest

 

Less: Income tax
0.1

 
(0.1
)
Add: Cash tax
(0.6
)
 
(0.7
)
Less: Interest on debt
(1.2
)
 
(1.1
)
Less: Total pension / OPEB income / (cost)
0.7

 
(1.2
)
Add: Pension / OPEB service costs
(1.2
)
 
(1.1
)
Net operating profit after cash tax
$
4.9

 
$
2.3

Less: Special items (excl. pension / OPEB) pre-tax
(0.3
)
 
(3.3
)
Adjusted net operating profit after cash tax
$
5.3

 
$
5.6

 
 
 
 
Invested Capital
 
 
 
Equity
$
36.6

 
$
35.4

Redeemable noncontrolling interest
0.1

 

Debt (excl. Ford Credit)
15.3

 
14.8

Net pension and OPEB liability
11.3

 
10.9

Invested capital (end of period)
$
63.3

 
$
61.1

Average invested capital
$
64.6

 
$
62.1

 

 
 
ROIC *
7.7
%
 
3.6
%
Adjusted ROIC (Non-GAAP) **
8.2
%
 
9.0
%
*
Calculated as the sum of net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters.
**
Calculated as the sum of adjusted net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters.
*
Note: Numbers may not sum due to rounding.

54

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

CREDIT RATINGS

Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”) by the U.S. Securities and Exchange Commission: DBRS, Fitch, Moody’s, and S&P.

In several markets, locally recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with a corporate entity or particular securities issued by that entity. Rating agencies’ ratings of us are based on information provided by us and other sources. Credit ratings are not recommendations to buy, sell, or hold securities and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency.

The following rating actions were taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

On September 9, 2019, Moody’s downgraded the credit ratings for Ford and Ford Credit to non-investment grade (Ba1 from Baa3) and revised the outlook to stable from negative.

The following table summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:
 
NRSRO RATINGS
 
Ford
 
Ford Credit
 
NRSROs
 
Issuer
Default /
Corporate /
Issuer Rating
 
Long-Term Senior Unsecured
 
Outlook / Trend
 
Long-Term Senior Unsecured
 
Short-Term
Unsecured
 
Outlook / Trend
 
Minimum Long-Term Investment Grade Rating
DBRS
BBB
 
BBB
 
Negative
 
BBB
 
R-2M
 
Negative
 
BBB (low)
Fitch
BBB
 
BBB
 
Negative
 
BBB
 
F2
 
Negative
 
BBB-
Moody’s
N/A
 
Ba1
 
Stable
 
Ba1
 
NP
 
Stable
 
Baa3
S&P
BBB
 
BBB
 
Negative
 
BBB
 
A-2
 
Negative
 
BBB-


55

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

OUTLOOK

We provided 2019 Company guidance in our earnings release furnished on Form 8-K dated October 23, 2019.  The guidance is based on our expectations as of October 23, 2019, and assumes no material change in the current economic environment, including commodities, foreign exchange, and tariffs. Our actual results could differ materially from our guidance due to risks, uncertainties, and other factors, including those set forth in “Risk Factors” in Item 1A of Part II. 

 
 
2019 Guidance
Total Company
 
 
Adjusted Free Cash Flow*
 
Higher than 2018
Adjusted EBIT*
 
$6.5B - $7.0B
Adjusted EPS*
 
$1.20 - $1.32 **
Global Redesign EBIT charges
 
$3.0B - $3.5B
Global Redesign cash effects
 
$1.0B - $1.5B
Pension contributions
 
About $750M
Pension funded status
 
Lower ***
Full-year shareholder distributions
 
$2.6B
Capital spending (excluding Ford Credit)
 
About $7.5B
Ford Credit
 
 
Ford Credit auction values
 
Down about 2% ****
*
When we provide guidance for Adjusted Free Cash Flow, Adjusted EBIT, and Adjusted EPS, we do not provide guidance for the most comparable GAAP measures because, as described in more detail below in “Non-GAAP Measures That Supplement GAAP Measures,” they include items that are difficult to predict with reasonable certainty.
**
Assumes an adjusted effective tax rate of around 12% - 13%, which is lower than our previous expectation, largely driven by more clarity on provisions in the U.S. Tax Cuts and Jobs Act of 2017.
***
At year-end 2019 compared with year-end 2018.
****
On average compared with full-year 2018 at constant mix.

Our guidance has been updated to reflect several headwinds that have intensified since we provided guidance on July 24, 2019, including:

Higher warranty — particularly related to coverages;
Higher incentives than planned in North America; and
China, due to lower volumes and JV profits.

We continue to expect strong market factors, lower full-year Automotive structural costs, excluding pensions and OPEB, and strength in Ford Credit. We also continue to expect adjusted free cash flow to be higher than in 2018, driven by our Automotive segment.







56

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Cautionary Note on Forward-Looking Statements

Statements included or incorporated by reference herein may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts, and assumptions by our management and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated, including, without limitation:

Ford’s long-term competitiveness depends on the successful execution of fitness actions;
Industry sales volume, particularly in the United States, Europe, or China, could decline if there is a financial crisis, recession, or significant geopolitical event;
Ford’s new and existing products and mobility services are subject to market acceptance;
Ford’s results are dependent on sales of larger, more profitable vehicles, particularly in the United States;
Ford may face increased price competition resulting from industry excess capacity, currency fluctuations, or other factors;
Fluctuations in commodity prices, foreign currency exchange rates, and interest rates can have a significant effect on results;
With a global footprint, Ford’s results could be adversely affected by economic, geopolitical, protectionist trade policies, or other events, including Brexit;
Ford’s production, as well as Ford’s suppliers’ production, could be disrupted by labor disputes, natural or man-made disasters, financial distress, production difficulties, or other factors;
Ford’s ability to maintain a competitive cost structure could be affected by labor or other constraints;
Pension and other postretirement liabilities could adversely affect Ford’s liquidity and financial condition;
Economic and demographic experience for pension and other postretirement benefit plans (e.g., discount rates or investment returns) could be worse than Ford has assumed;
Ford’s vehicles could be affected by defects that result in delays in new model launches, recall campaigns, or increased warranty costs;
Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, and other regulations that may change in the future;
Ford could experience unusual or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, perceived environmental impacts, or otherwise;
Ford’s receipt of government incentives could be subject to reduction, termination, or clawback;
Operational systems, security systems, and vehicles could be affected by cyber incidents;
Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors;
Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles;
Ford Credit could face increased competition from banks, financial institutions, or other third parties seeking to increase their share of financing Ford vehicles; and
Ford Credit could be subject to new or increased credit regulations, consumer or data protection regulations, or other regulations.

We cannot be certain that any expectation, forecast, or assumption made in preparing forward-looking statements will prove accurate, or that any projection will be realized. It is to be expected that there may be differences between projected and actual results. Our forward-looking statements speak only as of the date of their initial issuance, and we do not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events, or otherwise. For additional discussion, see “Item 1A. Risk Factors” in our 2018 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.


57

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

NON-GAAP FINANCIAL MEASURES THAT SUPPLEMENT GAAP MEASURES

We use both generally accepted accounting principles (“GAAP”) and non-GAAP financial measures for operational and financial decision making, and to assess Company and segment business performance. The non-GAAP measures listed below are intended to be considered by users as supplemental information to their equivalent GAAP measures, to aid investors in better understanding our financial results. We believe that these non-GAAP measures provide useful perspective on underlying business results and trends, and a means to assess our period-over-period results. These non-GAAP measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. These non-GAAP measures may not be the same as similarly titled measures used by other companies due to possible differences in method and in items or events being adjusted.

Company Adjusted EBIT (Most Comparable GAAP Measure: Net Income Attributable to Ford) – Earnings before interest and taxes (EBIT) excludes interest on debt (excl. Ford Credit Debt), taxes and pre-tax special items. This non-GAAP measure is useful to management and investors because it allows users to evaluate our operating results aligned with industry reporting. Pre-tax special items consist of (i) pension and OPEB remeasurement gains and losses, (ii) significant personnel expenses, dealer-related costs, and facility-related charges stemming from our efforts to match production capacity and cost structure to market demand and changing model mix, and (iii) other items that we do not necessarily consider to be indicative of earnings from ongoing operating activities.  When we provide guidance for adjusted EBIT, we do not provide guidance on a net income basis because the GAAP measure will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end, including pension and OPEB remeasurement gains and losses.

Company Adjusted EBIT Margin (Most Comparable GAAP Measure: Company Net Income Margin) – Company Adjusted EBIT margin is Company adjusted EBIT divided by Company revenue. This non-GAAP measure is useful to management and investors because it allows users to evaluate our operating results aligned with industry reporting.

Adjusted Earnings Per Share (Most Comparable GAAP Measure: Earnings Per Share) – Measure of Company’s diluted net earnings per share adjusted for impact of pre-tax special items (described above), tax special items and restructuring impacts in noncontrolling interests. The measure provides investors with useful information to evaluate performance of our business excluding items not indicative of the underlying run rate of our business. When we provide guidance for adjusted earnings per share, we do not provide guidance on an earnings per share basis because the GAAP measure will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end, including pension and OPEB remeasurement gains and losses.

Adjusted Effective Tax Rate (Most Comparable GAAP Measure: Effective Tax Rate) – Measure of Company’s tax rate excluding pre-tax special items (described above) and tax special items. The measure provides an ongoing effective rate which investors find useful for historical comparisons and for forecasting. When we provide guidance for adjusted effective tax rate, we do not provide guidance on an effective tax rate basis because the GAAP measure will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end, including pension and OPEB remeasurement gains and losses.

Company Adjusted Free Cash Flow (Most Comparable GAAP Measure: Net Cash Provided By / (Used In) Operating Activities) – Measure of Company’s operating cash flow excluding Ford Credit’s operating cash flows. The measure contains elements management considers operating activities, including Automotive and Mobility capital spending, Ford Credit distributions to its parent, and settlement of derivatives. The measure excludes cash outflows for funded pension contributions, separation payments, and other items that are considered operating cash outflows under U.S. GAAP. This measure is useful to management and investors because it is consistent with management’s assessment of the Company’s operating cash flow performance. When we provide guidance for Company adjusted free cash flow, we do not provide guidance for net cash provided by/(used in) operating activities because the GAAP measure will include items that are difficult to quantify or predict with reasonable certainty, including cash flows related to the Company's exposures to foreign currency exchange rates and certain commodity prices (separate from any related hedges), Ford Credit's operating cash flows, and cash flows related to special items, including separation payments, each of which individually or in the aggregate could have a significant impact to our net cash provided by/(used in) our operating activities.



58

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Adjusted Free Cash Conversion (Most Comparable GAAP Measure: Net Cash Provided By / (Used In) Operating Activities divided by Net Income Attributable to Ford) – Adjusted Free Cash Conversion is Company adjusted free cash flow divided by Company Adjusted EBIT.  This non-GAAP measure is useful to management and investors because it allows users to evaluate how much of Ford's Adjusted EBIT is converted into cash flow.

Adjusted ROIC – Calculated as the sum of adjusted net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters. Adjusted Return on Invested Capital (“ROIC”) provides management and investors with useful information to evaluate the Company’s after-cash tax operating return on its invested capital for the period presented. Adjusted net operating profit after cash tax measures operating results less special items, interest on debt (excl. Ford Credit Debt), and certain pension/OPEB costs. Average invested capital is the sum of average balance sheet equity, debt (excl. Ford Credit Debt), and net pension/OPEB liability. When we provide guidance for adjusted ROIC, we do not provide guidance on an unadjusted ROIC basis because it will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end.

Ford Credit Managed Receivables (Most Comparable GAAP Measure: Net Finance Receivables plus Net Investment in Operating Leases) – Measure of Ford Credit’s total net receivables, excluding unearned interest supplements and residual support, allowance for credit losses, and other (primarily accumulated supplemental depreciation). The measure is useful to management and investors as it closely approximates the customer’s outstanding balance on the receivables, which is the basis for earning revenue.

Ford Credit Managed Leverage (Most Comparable GAAP Measure: Financial Statement Leverage) – Ford Credit’s debt-to-equity ratio adjusted (i) to exclude cash, cash equivalents, and marketable securities (other than amounts related to insurance activities), and (ii) for derivative accounting. The measure is useful to investors because it reflects the way Ford Credit manages its business. Cash, cash equivalents, and marketable securities are deducted because they generally correspond to excess debt beyond the amount required to support operations and on-balance sheet securitization transactions. Derivative accounting adjustments are made to asset, debt, and equity positions to reflect the impact of interest rate instruments used with Ford Credit’s term-debt issuances and securitization transactions. Ford Credit generally repays its debt obligations as they mature, so the interim effects of changes in market interest rates are excluded in the calculation of managed leverage.

59

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Non-GAAP Financial Measure Reconciliations

The following tables show our Non-GAAP financial measure reconciliations. The GAAP reconciliation for Ford Credit Managed Leverage can be found in the Ford Credit Segment section of “Liquidity and Capital Resources.”

Net Income Reconciliation to Adjusted EBIT ($M)
 
 
Third Quarter

First Nine Months
 
 
 
2018
 
2019
 
2018
 
2019
 
Memo:
FY 2018
Net income / (loss) attributable to Ford (GAAP)
 
$
991


$
425


$
3,793


$
1,719

 
$
3,677

Income / (Loss) attributable to noncontrolling interests
 
2

 
(2
)
 
14

 
37

 
18

Net income / (loss)
 
$
993

 
$
423

 
$
3,807

 
$
1,756

 
$
3,695

Less: (Provision for) / Benefit from income taxes
 
(101
)
 
442

 
(555
)
 
(40
)
 
(650
)
Income / (Loss) before income taxes
 
$
1,094

 
$
(19
)
 
$
4,362

 
$
1,796

 
$
4,345

Less: Special items pre-tax
 
(231
)
 
(1,536
)
 
(250
)
 
(3,333
)
 
(1,429
)
Income / (Loss) before special items pre-tax
 
$
1,325

 
$
1,517

 
$
4,612

 
$
5,129

 
$
5,774

Less: Interest on debt
 
(343
)
 
(276
)
 
(933
)
 
(765
)
 
(1,228
)
Adjusted EBIT (Non-GAAP)
 
$
1,668

 
$
1,793

 
$
5,545

 
$
5,894

 
$
7,002

 
 
 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
 
 
Revenue ($B)
 
$
37.6

 
$
37.0

 
$
118.5

 
$
116.2

 
$
160.3

Net income margin (%)
 
2.6
%
 
1.1
%
 
3.2
%
 
1.5
%
 
2.3
%
Adjusted EBIT margin (%)
 
4.4
%
 
4.8
%
 
4.7
%
 
5.1
%
 
4.4
%

Earnings per Share Reconciliation to Adjusted Earnings per Share
 
 
Third Quarter

First Nine Months
 
2018
 
2019
 
2018
 
2019
Diluted After-Tax Results ($M)
 
 
 
 
 
 
 
 
Diluted after-tax results (GAAP)
 
$
991

 
$
425

 
$
3,793

 
$
1,719

Less: Impact of pre-tax and tax special items
 
(183
)
 
(931
)
 
(197
)
 
(2,505
)
Less: Noncontrolling interests impact of Russia restructuring
 

 

 

 
(35
)
Adjusted net income – diluted (Non-GAAP)
 
$
1,174

 
$
1,356

 
$
3,990

 
$
4,259

 
 
 
 

 
 
 
 
Basic and Diluted Shares (M)
 
 
 
 
 
 
 
 
Basic shares (average shares outstanding)
 
3,976

 
3,970

 
3,976

 
3,976

Net dilutive options, unvested restricted stock units and restricted stock
 
24

 
37

 
23

 
30

Diluted shares
 
4,000

 
4,007

 
3,999

 
4,006

 
 
 
 
 
 
 
 
 
Earnings per share – diluted (GAAP)
 
$
0.25

 
$
0.11

 
$
0.95

 
$
0.43

Less: Net impact of adjustments
 
(0.04
)
 
(0.23
)
 
(0.05
)
 
(0.63
)
Adjusted earnings per share – diluted (Non-GAAP)
 
$
0.29

 
$
0.34

 
$
1.00

 
$
1.06


60

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Effective Tax Rate Reconciliation to Adjusted Effective Tax Rate
 
 
Third Quarter
 
First Nine Months
 
 
 
 
2018
 
2019
 
2018
 
2019
 
Memo:
FY 2018
Pre-Tax Results ($M)
 
 
 
 
 
 
 
 
 
 
Income / (Loss) before income taxes (GAAP)
 
$
1,094

 
$
(19
)

$
4,362


$
1,796

 
$
4,345

Less: Impact of special items
 
(231
)
 
(1,536
)
 
(250
)
 
(3,333
)
 
(1,429
)
Adjusted earnings before taxes (Non-GAAP)
 
$
1,325

 
$
1,517

 
$
4,612

 
$
5,129

 
$
5,774

 
 
 
 
 
 
 
 
 
 
 
Taxes ($M)
 
 
 
 
 
 
 
 
 
 
(Provision for) / Benefit from income taxes (GAAP)
 
$
(101
)
 
$
442

 
$
(555
)
 
$
(40
)
 
$
(650
)
Less: Impact of special items
 
48

 
605

 
53

 
828

 
(88
)
Adjusted (provision for) / benefit from income taxes (Non-GAAP)
 
$
(149
)
 
$
(163
)
 
$
(608
)
 
$
(868
)
 
$
(562
)
 
 
 
 
 
 
 
 
 
 
 
Tax Rate (%)
 
 
 
 
 
 
 
 
 
 
Effective tax rate (GAAP)
 
9.2
%
 
2,326
%
 
12.7
%
 
2.2
%
 
15.0
%
Adjusted effective tax rate (Non-GAAP)
 
11.2
%
 
10.7
%
 
13.2
%
 
16.9
%
 
9.7
%

Net Cash Provided by/(Used in) Operating Activities Reconciliation to Company Adjusted Free Cash Flow ($M)
 
 
Third Quarter
 
First Nine Months
 
2018
 
2019
 
2018
 
2019
Net cash provided by / (used in) operating activities (GAAP)
 
$
5,179

 
$
4,732

 
$
13,665

 
$
14,739

 
 
 
 
 
 
 
 
 
Less: Items not included in Company Adjusted Free Cash Flows
 
 
 
 
 
 
 
 
Ford Credit free cash flows
 
$
3,811

 
$
4,523

 
$
9,403

 
$
10,908

Funded pension contributions
 
(123
)
 
(211
)
 
(283
)
 
(611
)
Global Redesign (including separations)
 
(45
)
 
(334
)
 
(79
)
 
(692
)
Other, net
 
163

 
(124
)
 
104

 
30

 
 
 
 
 
 
 
 
 
Add: Items included in Company Adjusted Free Cash Flows
 
 
 
 
 
 
 
 
Automotive and Mobility capital spending
 
$
(1,968
)
 
$
(1,787
)
 
$
(5,635
)
 
$
(5,318
)
Ford Credit distributions
 
600

 
1,100

 
2,063

 
2,425

Settlement of derivatives
 
109

 
16

 
62

 
76

Pivotal conversion to a marketable security
 

 

 
263

 

 
 
 
 
 
 
 
 
 
Company adjusted free cash flow (Non-GAAP)
 
$
115

 
$
207

 
$
1,274

 
$
2,288


61

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Ford Credit Net Receivables Reconciliation to Managed Receivables ($B)

 
 
September 30, 2018
 
December 31, 2018
 
September 30, 2019
Ford Credit finance receivables, net (GAAP) *
 
$
107.9

 
$
109.9

 
$
104.7

Net investment in operating leases (GAAP) *
 
27.6

 
27.4

 
27.5

Consolidating adjustments **
 
8.1

 
8.9

 
8.1

Total net receivables
 
$
143.6

 
$
146.3

 
$
140.3

Ford Credit unearned interest supplements and residual support
 
6.7

 
6.8

 
6.8

Allowance for credit losses
 
0.6

 
0.6

 
0.5

Other, primarily accumulated supplemental depreciation
 
1.2

 
1.2

 
1.1

Total managed receivables (Non-GAAP)
 
$
152.1

 
$
154.9

 
$
148.7

__________
*
Includes finance receivables (retail and wholesale) sold for legal purposes and net investment in operating leases included in securitization transactions that do not satisfy the requirements for accounting sale treatment. These receivables and operating leases are reported on Ford Credit’s balance sheet and are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations of Ford Credit or the claims of Ford Credit’s other creditors.
**
Primarily includes Automotive segment receivables purchased by Ford Credit which are classified to Trade and other receivables on our consolidated balance sheet. Also includes eliminations of intersegment transactions.
*
Note: Numbers may not sum due to rounding.

62

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

SUPPLEMENTAL INFORMATION

The tables below provide supplemental consolidating financial information, other financial information, and U.S. sales by type. Company excluding Ford Credit includes our Automotive and Mobility reportable segments, Corporate Other, Interest on Debt, and Special Items. Eliminations, where presented, primarily represent eliminations of intersegment transactions and deferred tax netting.

Selected Cash Flow Information. The following tables provide supplemental cash flow information (in millions):
 
 
For the period ended September 30, 2019
 
 
First Nine Months
Cash flows from operating activities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Net income
 
$
(31
)
 
$
1,787

 
$

 
$
1,756

Depreciation and tooling amortization
 
4,574

 
2,736

 

 
7,310

Other amortization
 
38

 
(929
)
 

 
(891
)
Held-for-sale impairment charges
 
799

 

 

 
799

Provision for credit and insurance losses
 

 
292

 

 
292

Pension and OPEB expense/(income)
 
401

 

 

 
401

Equity investment (earnings)/losses in excess of dividends received
96

 
(23
)
 

 
73

Foreign currency adjustments
 
116

 
(67
)
 

 
49

Net (gain)/loss on changes in investments in affiliates
 
(39
)
 
(7
)
 

 
(46
)
Stock compensation
 
232

 
6

 

 
238

Provision for deferred income taxes
 
(540
)
 
137

 

 
(403
)
Decrease/(Increase) in finance receivables (wholesale and other)

 
2,792

 

 
2,792

Decrease/(Increase) in intersegment receivables/payables
(684
)
 
684

 

 

Decrease/(Increase) in accounts receivable and other assets
(1,043
)
 
20

 

 
(1,023
)
Decrease/(Increase) in inventory
 
(1,790
)
 

 

 
(1,790
)
Increase/(Decrease) in accounts payable and accrued and other liabilities
5,364

 
(138
)
 

 
5,226

Other
 
(4
)
 
(40
)
 

 
(44
)
Interest supplements and residual value support to Ford Credit
(3,658
)
 
3,658

 

 

Net cash provided by/(used in) operating activities
 
$
3,831

 
$
10,908

 
$

 
$
14,739

Cash flows from investing activities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Capital spending
 
$
(5,318
)
 
$
(40
)
 
$

 
$
(5,358
)
Acquisitions of finance receivables and operating leases
 

 
(41,142
)
 

 
(41,142
)
Collections of finance receivables and operating leases
 

 
37,854

 

 
37,854

Purchases of marketable securities and other investments
 
(7,929
)
 
(4,438
)
 

 
(12,367
)
Sales and maturities of marketable securities and other investments
10,210

 
2,322

 

 
12,532

Settlements of derivatives
 
76

 
87

 

 
163

Other
 
(50
)
 
(3
)
 

 
(53
)
Investing activity (to)/from other segments
 
2,504

 

 
(2,504
)
 

Net cash provided by/(used in) investing activities
 
$
(507
)
 
$
(5,360
)
 
$
(2,504
)
 
$
(8,371
)
Cash flows from financing activities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Cash payments for dividends and dividend equivalents
 
$
(1,794
)
 
$

 
$

 
$
(1,794
)
Purchases of common stock
 
(237
)
 

 

 
(237
)
Net changes in short-term debt
 
18

 
(1,112
)
 

 
(1,094
)
Proceeds from issuance of long-term debt
 
2,282

 
33,423

 

 
35,705

Principal payments on long-term debt
 
(1,631
)
 
(33,216
)
 

 
(34,847
)
Other
 
(86
)
 
(87
)
 

 
(173
)
Financing activity to/(from) other segments
 

 
(2,504
)
 
2,504

 

Net cash provided by/(used in) financing activities
 
$
(1,448
)
 
$
(3,496
)
 
$
2,504

 
$
(2,440
)
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
$
(61
)
 
$
(93
)
 
$

 
$
(154
)


63

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Selected Income Statement Information. The following table provides supplemental income statement information (in millions):
 
 
For the period ended September 30, 2019
 
 
Third Quarter
 
 
Company excluding Ford Credit
 
 
 
 
 
 
Automotive
 
Mobility
 
Other (a)
 
Subtotal
 
Ford Credit
 
Consolidated
Revenues
 
$
33,931

 
$
14

 
$

 
$
33,945

 
$
3,045

 
$
36,990

Total costs and expenses
33,158

 
339

 
1,386

 
34,883

 
2,368

 
37,251

Operating income
773

 
(325
)
 
(1,386
)
 
(938
)
 
677

 
(261
)
Interest expense on Automotive debt

 

 
262

 
262

 

 
262

Interest expense on Other debt

 

 
14

 
14

 

 
14

Other income/(loss), net
583

 
33

 
(132
)
 
484

 
50

 
534

Equity in net income of affiliated companies
(27
)
 
2

 

 
(25
)
 
9

 
(16
)
Income/(Loss) before income taxes
1,329

 
(290
)
 
(1,794
)
 
(755
)
 
736

 
(19
)
Provision for/(Benefit from) income taxes
132

 
(70
)
 
(669
)
 
(607
)
 
165

 
(442
)
Net income/(loss)
1,197

 
(220
)
 
(1,125
)
 
(148
)
 
571

 
423

Less: Income/(Loss) attributable to noncontrolling interests
(2
)
 

 

 
(2
)
 

 
(2
)
Net income/(loss) attributable to Ford Motor Company
$
1,199

 
$
(220
)
 
$
(1,125
)
 
$
(146
)
 
$
571

 
$
425

 
 
For the period ended September 30, 2019
 
 
First Nine Months
 
 
Company excluding Ford Credit
 
 
 
 
 
 
Automotive
 
Mobility
 
Other (a)
 
Subtotal
 
Ford Credit
 
Consolidated
Revenues
 
$
106,928

 
$
26

 
$

 
$
106,954

 
$
9,231

 
$
116,185

Total costs and expenses
103,742

 
986

 
3,322

 
108,050

 
7,104

 
115,154

Operating income
3,186

 
(960
)
 
(3,322
)
 
(1,096
)
 
2,127

 
1,031

Interest expense on Automotive debt

 

 
723

 
723

 

 
723

Interest expense on Other debt

 

 
42

 
42

 

 
42

Other income/(loss), net
1,463

 
107

 
(354
)
 
1,216

 
218

 
1,434

Equity in net income of affiliated companies
62

 
11

 

 
73

 
23

 
96

Income/(Loss) before income taxes
4,711

 
(842
)
 
(4,441
)
 
(572
)
 
2,368

 
1,796

Provision for/(Benefit from) income taxes
757

 
(203
)
 
(1,095
)
 
(541
)
 
581

 
40

Net income/(loss)
3,954

 
(639
)
 
(3,346
)
 
(31
)
 
1,787

 
1,756

Less: Income/(Loss) attributable to noncontrolling interests
37

 

 

 
37

 

 
37

Net income/(loss) attributable to Ford Motor Company
$
3,917

 
$
(639
)
 
$
(3,346
)
 
$
(68
)
 
$
1,787

 
$
1,719


(a) Other includes Corporate Other, Interest on Debt, and Special Items


64

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Selected Balance Sheet Information. The following tables provide supplemental balance sheet information (in millions):
 
 
September 30, 2019
Assets
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Cash and cash equivalents
 
$
8,944

 
$
11,579

 
$

 
$
20,523

Marketable securities
 
13,354

 
3,454

 

 
16,808

Ford Credit finance receivables, net
 

 
51,183

 

 
51,183

Trade and other receivables, less allowances
 
3,700

 
6,921

 

 
10,621

Inventories
 
12,451

 

 

 
12,451

Assets of held-for-sale operations
 
812

 

 

 
812

Other assets
 
2,061

 
1,295

 

 
3,356

Receivable from other segments
 
301

 
2,095

 
(2,396
)
 

   Total current assets
 
41,623

 
76,527

 
(2,396
)
 
115,754

 
 
 
 
 
 
 
 
 
Ford Credit finance receivables, net
 

 
53,530

 

 
53,530

Net investment in operating leases
 
1,960

 
27,492

 

 
29,452

Net property
 
35,195

 
209

 

 
35,404

Equity in net assets of affiliated companies
 
2,502

 
121

 

 
2,623

Deferred income taxes
 
12,906

 
182

 
(2,411
)
 
10,677

Other assets
 
8,458

 
2,259

 

 
10,717

Receivable from other segments
 
414

 
2

 
(416
)
 

   Total assets
 
$
103,058

 
$
160,322

 
$
(5,223
)
 
$
258,157

Liabilities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Payables
 
$
21,156

 
$
1,072

 
$

 
$
22,228

Other liabilities and deferred revenue
 
20,151

 
1,580

 

 
21,731

Automotive debt payable within one year
 
1,622

 

 

 
1,622

Ford Credit debt payable within one year
 

 
52,852

 

 
52,852

Other debt payable within one year
 
130

 

 

 
130

Liabilities of held-for-sale operations
 
524

 

 

 
524

Payable to other segments
 
2,396

 

 
(2,396
)
 

   Total current liabilities
 
45,979

 
55,504

 
(2,396
)
 
99,087

 
 
 
 
 
 
 
 
 
Other liabilities and deferred revenue
 
22,607

 
1,122

 

 
23,729

Automotive long-term debt
 
12,615

 

 

 
12,615

Ford Credit long-term debt
 

 
86,422

 

 
86,422

Other long-term debt
 
470

 

 

 
470

Deferred income taxes
 
146

 
2,712

 
(2,411
)
 
447

Payable to other segments
 
9

 
407

 
(416
)
 

   Total liabilities
 
$
81,826

 
$
146,167

 
$
(5,223
)
 
$
222,770



65

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Selected Other Information.

Equity. At September 30, 2019, total equity attributable to Ford was $35.3 billion, a decrease of $583 million compared with December 31, 2018. The detail for this change is shown below (in billions):
 
Increase/
(Decrease)
Net income
$
1.7

Shareholder distributions
(2.0
)
Common stock issued (including share-based compensation impacts)
0.2

Other comprehensive income
(0.5
)
Total
$
(0.6
)

U.S. Sales by Type. The following table shows third quarter 2019 U.S. sales volume and U.S. wholesales segregated by truck, SUV, and car sales. U.S. sales volume reflects transactions with (i) retail and fleet customers (as reported by dealers), (ii) governments, and (iii) Ford management.  U.S. wholesales reflect sales to dealers.
 
U.S. Sales
 
U.S. Wholesales
Trucks
309,920

 
304,584

SUVs
193,100

 
185,425

Cars
77,231

 
67,288

Total Vehicles
580,251

 
557,297



66

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

CRITICAL ACCOUNTING ESTIMATES

Based on events occurring subsequent to December 31, 2018, we are updating certain of the Critical Accounting Estimates disclosed in our 2018 Form 10-K Report.

Impairment of Long-Lived Assets

Nature of Estimates Required - Held-for-Sale Operations.   We perform an impairment test on an asset group to be discontinued, held for sale, or otherwise disposed of when management has committed to the action and the action is expected to be completed within one year.  We estimate fair value to approximate the expected proceeds to be received, less transaction costs, and compare it to the carrying value of the asset group.  An impairment charge is recognized when the carrying value exceeds the estimated fair value.

Assumptions and Approach Used.  In the third quarter of 2019, we committed to a plan to sell specific assets in our India Automotive operations. We entered into a definitive agreement to form a joint venture with Mahindra & Mahindra Limited (“Mahindra”), with Mahindra owning a 51 percent controlling stake and Ford owning a 49 percent stake. Under the terms of the transaction, which is expected to close in the next twelve months, Ford will sell certain India Automotive operations to the joint venture.

Our commitment to sell the India Automotive operations triggered a held-for-sale impairment test in the third quarter of 2019. The fair value of the assets is measured using a market approach and estimated based on expected proceeds to be received, which we conclude is most representative of the value of the assets given the current market conditions, the characteristics of viable market participants, and the pending sales transaction. As a result of the impairment testing, we recognized a pre-tax impairment charge of $799 million reported in Cost of sales in the third quarter of 2019.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standards Updates (“ASU”) which are not expected to have a material impact (with the exception of ASU 2016-13) to our financial statements or financial statement disclosures. For additional information, see Note 2 of the Notes to the Financial Statements.
ASU
 
Effective Date (a)
2018-18
Clarifying the Interaction between Collaborative Arrangements and Revenue from Contracts with Customers
 
January 1, 2020
2018-15
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
 
January 1, 2020
2016-13
Credit Losses - Measurement of Credit Losses on Financial Instruments
 
January 1, 2020 (b)
2018-14
Changes to the Disclosure Requirements for Defined Benefits Plans
 
January 1, 2021
2018-12
Targeted Improvements to the Accounting for Long Duration Contracts
 
January 1, 2021
__________
(a)
Early adoption for each of the standards is permitted.
(b)
The FASB has issued the following update to the Credit Losses standard: ASU 2019-05 (Targeted Transition Relief). We will adopt the new Credit Losses standard effective January 1, 2020.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

Automotive Segment
 
Foreign Currency Risk. The net fair value of foreign exchange forward contracts (including adjustments for credit risk) as of September 30, 2019, was an asset of $1 million, compared with an asset of $363 million as of December 31, 2018. The potential decrease in fair value from a 10% adverse change in the underlying exchange rates, in U.S. dollar terms, was $2.2 billion at September 30, 2019, compared with $2.5 billion at December 31, 2018.

Commodity Price Risk. The net fair value of commodity forward contracts (including adjustments for credit risk) as of September 30, 2019, was a liability of $72 million, compared with a liability of $62 million at December 31, 2018. The potential decrease in fair value from a 10% adverse change in the underlying commodity prices, in U.S. dollar terms, was $91 million at September 30, 2019, compared with $90 million at December 31, 2018.


67


Ford Credit Segment
  
Interest Rate Risk. To provide a quantitative measure of the sensitivity of its pre-tax cash flow to changes in interest rates, Ford Credit uses interest rate scenarios that assume a hypothetical, instantaneous increase or decrease of one percentage point in all interest rates across all maturities (a “parallel shift”), as well as a base case that assumes that all interest rates remain constant at existing levels. The differences in pre-tax cash flow between these scenarios and the base case over a 12-month period represent an estimate of the sensitivity of Ford Credit’s pre-tax cash flow. Under this model, Ford Credit estimates that at September 30, 2019, all else constant, such an increase in interest rates would increase its pre-tax cash flow by $2 million over the next 12 months, compared with an increase of $51 million at December 31, 2018. In reality, interest rate changes are rarely instantaneous or parallel and rates could move more or less than the one percentage point assumed in Ford Credit’s analysis. As a result, the actual impact to pre-tax cash flow could be higher or lower than the results detailed above.

ITEM 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. James P. Hackett, our Chief Executive Officer (“CEO”), and Tim Stone, our Chief Financial Officer (“CFO”), have performed an evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of September 30, 2019, and each has concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by SEC rules and forms, and that such information is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting. There were no changes in internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

68


PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

CONSUMER MATTERS

We provide warranties on the vehicles we sell.  Warranties are offered for specific periods of time and/or mileage, and vary depending upon the type of product and the geographic location of its sale.  Pursuant to these warranties, we will repair, replace, or adjust all parts on a vehicle that are defective in factory-supplied materials or workmanship during the specified warranty period.  We are a defendant in numerous actions in state and federal courts alleging damages based on state and federal consumer protection laws and breach of warranty obligations.  Remedies under these statutes may include repurchase, civil penalties, and plaintiff’s attorney fees.  In some cases, plaintiffs also include an allegation of fraud.

The cost of these matters is included in our warranty costs.  We accrue obligations for warranty costs at the time of sale using a patterned estimation model that includes historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year.  We reevaluate the adequacy of our accruals on a regular basis.

As previously reported, we are currently a defendant in a significant number of litigation matters relating to the performance of vehicles equipped with DPS6 transmissions.

OTHER MATTERS

Transit Connect Customs Ruling (as previously reported on page 23 of our 2018 Form 10-K Report, in our Current Report on Form 8-K filed on June 12, 2019, and on page 74 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019). On March 8, 2013, U.S. Customs and Border Protection (“CBP”) ruled that Transit Connects imported as passenger wagons and later converted into cargo vans are subject to the 25% duty applicable to cargo vehicles, rather than the 2.5% duty applicable to passenger vehicles. As a result of the ruling, CBP is requiring Ford to pay the 25% duty upon importation of Transit Connects that will be converted to cargo vehicles, and is seeking the difference in duty rates for prior imports. Our protest of the ruling within CBP was denied, and we filed a challenge in the U.S. Court of International Trade (“CIT”). On August 9, 2017, the CIT ruled in our favor. On October 6, 2017, CBP filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”), and on June 7, 2019, a panel of three Federal Circuit judges ruled in favor of CBP. On July 22, 2019, we filed a petition for rehearing and rehearing en banc with the Federal Circuit. On October 16, 2019, the Federal Circuit denied our petition. We intend to file a petition for a writ of certiorari with the U.S. Supreme Court. If we prevail, we will receive a refund of the contested amounts paid, plus interest. If we do not prevail, CBP would recover the increased duties for prior imports, plus interest, and might assert a claim for penalties.

Emissions Certification (as previously reported on page 23 of our 2018 Form 10-K Report, on page 70 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, and on page 74 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019). The Company has become aware of a potential concern involving its U.S. emissions certification process. This matter currently focuses on issues relating to road load estimations, including analytical modeling and coastdown testing. The potential concern does not involve the use of defeat devices (see page 10 of our 2018 Form 10-K Report for a definition of defeat devices). We voluntarily disclosed this matter to the U.S. Environmental Protection Agency and the California Air Resources Board on February 18, 2019 and February 21, 2019, respectively. Subsequently, the U.S. Department of Justice opened a criminal investigation into the matter. In addition, we have notified a number of other state and federal agencies. We continue to cooperate fully with all government agencies. At this stage, we cannot predict the outcome, and we cannot provide assurance that it will not have a material adverse effect on us.


69



ITEM 1A. Risk Factors.

The risk factor “Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors included in Item 1A of our 2018 Form 10-K Report is revised as follows:

Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors. Ford and Ford Credit’s ability to obtain unsecured funding at a reasonable cost is dependent on their credit ratings or their perceived creditworthiness. Further, Ford Credit’s ability to obtain securitized funding under its committed asset-backed liquidity programs and certain other asset-backed securitization transactions is subject to having a sufficient amount of assets eligible for these programs, as well as Ford Credit’s ability to obtain appropriate credit ratings and, for certain committed programs, derivatives to manage the interest rate risk. Over time, and particularly in the event of credit rating downgrades, market volatility, market disruption, or other factors, Ford Credit may reduce the amount of receivables it purchases or originates because of funding constraints. The potential phase out of LIBOR is one such risk that could cause market volatility or disruption. In July 2017 the chief executive of the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unknown whether any banks will continue to voluntarily submit rates for the calculation of LIBOR after 2021 or whether LIBOR will continue to be published by its administrator based on these submissions or on any other basis. It is not possible to predict the effect of these changes, other reforms, or the establishment of alternative reference rates, but the potential phase out of LIBOR could adversely affect Ford Credit’s access to the capital markets and cost of funding.  In addition, Ford Credit may be limited in the amount of receivables it purchases or originates in certain countries or regions if the local capital markets, particularly in developing countries, do not exist or are not adequately developed. Similarly, Ford Credit may reduce the amount of receivables it purchases or originates if there is a significant decline in the demand for the types of securities it offers or Ford Credit is unable to obtain derivatives to manage the interest rate risk associated with its securitization transactions. A significant reduction in the amount of receivables Ford Credit purchases or originates would significantly reduce its ongoing profits and could adversely affect its ability to support the sale of Ford vehicles.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In the third quarter of 2019, we completed a modest anti-dilutive share repurchase program to offset the dilutive effect of share-based compensation granted during 2019. The plan authorized repurchases of up to 25 million shares of Ford Common Stock.
Period
 
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
July 1, 2019 through July 31, 2019
 
5,520,119

 
$
9.61

 

 
19,479,881

August 1, 2019 through August 31, 2019
 
19,479,881

 
$
9.42

 

 

Total/Average
 
25,000,000

 
$
9.46

 
 
 
 



70

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

ITEM 6. Exhibits.
Designation
 
Description
 
Method of Filing
 
Rule 15d-14(a) Certification of CEO.
 
Filed with this Report.
 
Rule 15d-14(a) Certification of CFO.
 
Filed with this Report.
 
Section 1350 Certification of CEO.
 
Furnished with this Report.
 
Section 1350 Certification of CFO.
 
Furnished with this Report.
Exhibit 101.INS
 
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (“Inline XBRL”).
 
*
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
*
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
*
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
*
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
*
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
*
Exhibit 104
 
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
 
*
__________
* Submitted electronically with this Report.

71


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FORD MOTOR COMPANY

By:
/s/ Cathy O’Callaghan
 
Cathy O’Callaghan, Controller
 
(principal accounting officer)
 
 
Date:
October 23, 2019



72