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FORD MOTOR CO - Quarter Report: 2020 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, 2020

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)
Delaware38-0549190
(State of incorporation)(I.R.S. Employer Identification No.)
One American Road
Dearborn,Michigan48126
(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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $.01 per shareFNew York Stock Exchange
6.200% Notes due June 1, 2059FPRBNew York Stock Exchange
6.000% Notes due December 1, 2059FPRCNew 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 23, 2020, Ford had outstanding 3,907,575,284 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, 2020
 Table of ContentsPage
 Part I - Financial Information 
Item 1Financial Statements
Consolidated Statements of Cash Flows
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Equity
Notes to the Financial Statements
Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments
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 Measures That Supplement GAAP Measures
Non-GAAP Financial Measure Reconciliations
Supplemental Information
Critical Accounting Estimates
Accounting Standards Issued But Not Yet Adopted
Item 3Quantitative and Qualitative Disclosures About Market Risk
Item 4Controls and Procedures
Part II - Other Information
Item 1Legal Proceedings
Item 1ARisk Factors
Item 6Exhibits
Signature

i


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
For the periods ended September 30,
 20192020
First Nine Months
(unaudited)
Cash flows from operating activities  
Net income/(loss)$1,756 $1,515 
Depreciation and tooling amortization7,310 6,670 
Other amortization(891)(938)
Held-for-sale impairment charges (Note 17)799 21 
Provision for credit and insurance losses292 866 
Pension and other post-retirement employee benefits (“OPEB”) expense/(income)401 (454)
Equity investment dividends received in excess of (earnings)/losses73 132 
Foreign currency adjustments49 (216)
Net (gain)/loss on changes in investments in affiliates(46)(3,483)
Stock compensation238 170 
Provision for deferred income taxes(403)978 
Decrease/(Increase) in finance receivables (wholesale and other)2,792 11,006 
Decrease/(Increase) in accounts receivable and other assets(1,023)74 
Decrease/(Increase) in inventory(1,790)(202)
Increase/(Decrease) in accounts payable and accrued and other liabilities5,226 3,858 
Other(44)(267)
Net cash provided by/(used in) operating activities 14,739 19,730 
Cash flows from investing activities
Capital spending(5,358)(4,211)
Acquisitions of finance receivables and operating leases(41,142)(43,473)
Collections of finance receivables and operating leases37,854 36,536 
Proceeds from sale of business (Note 17)— 1,340 
Purchases of marketable securities and other investments(12,367)(27,401)
Sales and maturities of marketable securities and other investments12,532 24,402 
Settlements of derivatives163 (407)
Other(53)344 
Net cash provided by/(used in) investing activities(8,371)(12,870)
Cash flows from financing activities  
Cash payments for dividends and dividend equivalents(1,794)(596)
Purchases of common stock(237) 
Net changes in short-term debt(1,094)(2,815)
Proceeds from issuance of long-term debt35,705 54,325 
Principal payments on long-term debt(34,847)(50,641)
Other(173)(242)
Net cash provided by/(used in) financing activities(2,440)31 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(154)(160)
Net increase/(decrease) in cash, cash equivalents, and restricted cash$3,774 $6,731 
Cash, cash equivalents, and restricted cash at beginning of period (Note 7)$16,907 $17,741 
Net increase/(decrease) in cash, cash equivalents, and restricted cash3,774 6,731 
Cash, cash equivalents, and restricted cash at end of period (Note 7)$20,681 $24,472 

The accompanying notes are part of the consolidated financial statements.
1

Item 1. Financial Statements (continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in millions, except per share amounts)
For the periods ended September 30,
 2019202020192020
 Third QuarterFirst Nine Months
(unaudited)
Revenues  
Automotive$33,931 $34,707 $106,928 $82,669 
Ford Credit3,045 2,774 9,231 8,480 
Mobility14 20 26 43 
Total revenues (Note 3)36,990 37,501 116,185 91,192 
Costs and expenses  
Cost of sales32,282 31,223 99,881 79,677 
Selling, administrative, and other expenses2,601 2,266 8,169 6,663 
Ford Credit interest, operating, and other expenses2,368 1,661 7,104 6,818 
Total costs and expenses37,251 35,150 115,154 93,158 
Operating income/(loss)(261)2,351 1,031 (1,966)
Interest expense on Automotive debt262 487 723 1,140 
Interest expense on Other debt14 11 42 35 
Other income/(loss), net (Note 4)534 845 1,434 5,843 
Equity in net income/(loss) of affiliated companies(16)58 96 (8)
Income/(Loss) before income taxes(19)2,756 1,796 2,694 
Provision for/(Benefit from) income taxes(442)366 40 1,179 
Net income/(loss)423 2,390 1,756 1,515 
Less: Income/(Loss) attributable to noncontrolling interests(2)5 37 6 
Net income/(loss) attributable to Ford Motor Company$425 $2,385 $1,719 $1,509 
EARNINGS PER SHARE ATTRIBUTABLE TO FORD MOTOR COMPANY COMMON AND CLASS B STOCK (Note 6)
Basic income/(loss)$0.11 $0.60 $0.43 $0.38 
Diluted income/(loss)0.11 0.60 0.43 0.38 
Weighted-average shares used in computation of earnings per share
Basic shares3,9703,9763,9763,971
Diluted shares4,0074,0054,0063,997

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 For the periods ended September 30,
 2019202020192020
 Third QuarterFirst Nine Months
(unaudited)
Net income/(loss)$423 $2,390 $1,756 $1,515 
Other comprehensive income/(loss), net of tax (Note 18)
Foreign currency translation(360)(70)(244)(1,625)
Marketable securities(17)130 96 
Derivative instruments(69)(71)(398)597 
Pension and other postretirement benefits15 15 36 46 
Total other comprehensive income/(loss), net of tax(406)(143)(476)(886)
Comprehensive income/(loss)17 2,247 1,280 629 
Less: Comprehensive income/(loss) attributable to noncontrolling interests
(2)4 37 5 
Comprehensive income/(loss) attributable to Ford Motor Company$19 $2,243 $1,243 $624 

The accompanying notes are part of the consolidated financial statements.
2

Item 1. Financial Statements (continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
 December 31,
2019
September 30,
2020
 (unaudited)
ASSETS  
Cash and cash equivalents (Note 7)$17,504 $24,263 
Marketable securities (Note 7)17,147 20,568 
Ford Credit finance receivables, net of allowance for credit losses of $162 and $394 (Note 8)
53,651 41,847 
Trade and other receivables, less allowances of $63 and $80
9,237 10,114 
Inventories (Note 9)10,786 10,583 
Assets held for sale (Note 17)2,383 676 
Other assets3,339 3,714 
Total current assets114,047 111,765 
Ford Credit finance receivables, net of allowance for credit losses of $351 and $920 (Note 8)
53,703 55,659 
Net investment in operating leases29,230 27,895 
Net property36,469 36,118 
Equity in net assets of affiliated companies2,519 4,741 
Deferred income taxes11,863 10,907 
Other assets10,706 12,858 
Total assets$258,537 $259,943 
LIABILITIES  
Payables$20,673 $21,466 
Other liabilities and deferred revenue (Note 12)22,987 20,293 
Automotive debt payable within one year (Note 14)1,445 1,368 
Ford Credit debt payable within one year (Note 14)52,371 49,447 
Other debt payable within one year (Note 14)130 180 
Liabilities held for sale (Note 17)526 405 
Total current liabilities98,132 93,159 
Other liabilities and deferred revenue (Note 12)25,324 26,826 
Automotive long-term debt (Note 14)13,233 22,363 
Ford Credit long-term debt (Note 14)87,658 83,626 
Other long-term debt (Note 14)470 291 
Deferred income taxes490 517 
Total liabilities225,307 226,782 
EQUITY  
Common Stock, par value $0.01 per share (4,025 million shares issued of 6 billion authorized)
40 40 
Class B Stock, par value $0.01 per share (71 million shares issued of 530 million authorized)
1 
Capital in excess of par value of stock22,165 22,262 
Retained earnings20,320 21,031 
Accumulated other comprehensive income/(loss) (Note 18)(7,728)(8,613)
Treasury stock(1,613)(1,596)
Total equity attributable to Ford Motor Company33,185 33,125 
Equity attributable to noncontrolling interests45 36 
Total equity33,230 33,161 
Total liabilities and equity$258,537 $259,943 
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 sheets above.
December 31,
2019
September 30,
2020
(unaudited)
ASSETS  
Cash and cash equivalents$3,202 $2,905 
Ford Credit finance receivables, net58,478 48,490 
Net investment in operating leases14,883 14,613 
Other assets12  
LIABILITIES
Other liabilities and deferred revenue$19 $69 
Debt50,865 44,766 

The accompanying notes are part of the consolidated financial statements.
3

Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, unaudited)
 Equity Attributable to Ford Motor Company 
 Capital StockCap. In Excess of Par Value of StockRetained EarningsAccumulated Other Comprehensive Income/(Loss) (Note 18)Treasury StockTotalEquity Attributable to Non-controlling InterestsTotal
Equity
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/(loss)— — 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/(loss)— — 148 — — 148 150 
Other comprehensive income/(loss), net
— — — 65 — 65 — 65 
Common stock issued (a)
— 85 — — — 85 — 85 
Treasury stock/other — — — — 
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/(loss)— — 425 — — 425 (2)423 
Other comprehensive income/(loss), net
— — — (406)— (406)— (406)
Common stock issued (a)
— 68 — — — 68 — 68 
Treasury stock/other— — — — (231)(231)(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 
Balance at December 31, 2019$41 $22,165 $20,320 $(7,728)$(1,613)$33,185 $45 $33,230 
Adoption of accounting standards
— — (202)— — (202)— (202)
Net income/(loss)— — (1,993)— — (1,993)— (1,993)
Other comprehensive income/(loss), net
— — — (733)— (733)— (733)
Common stock issued (a)
— (15)— — — (15)— (15)
Treasury stock/other — — — — 
Dividends and dividend equivalents declared ($0.15 per share) (b)
— — (598)— — (598)— (598)
Balance at March 31, 2020$41 $22,150 $17,527 $(8,461)$(1,607)$29,650 $48 $29,698 
Net income/(loss)— — 1,117 — — 1,117 1,118 
Other comprehensive income/(loss), net
— — — (10)— (10)— (10)
Common stock issued (a)
— 60 — — — 60 — 60 
Treasury stock/other — — — — (18)(12)
Dividends and dividend equivalents declared (b)
— — — — — 
Balance at June 30, 2020$41 $22,210 $18,645 $(8,471)$(1,601)$30,824 $31 $30,855 
Net income/(loss)  2,385   2,385 5 2,390 
Other comprehensive income/(loss), net
   (142) (142)(1)(143)
Common stock issued (a)
 52    52  52 
Treasury stock/other    5 5 1 6 
Dividends and dividend equivalents declared (b)
  1   1  1 
Balance at September 30, 2020$41 $22,262 $21,031 $(8,613)$(1,596)$33,125 $36 $33,161 
__________
(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 1Presentation
Note 2New Accounting Standards
Note 3Revenue
Note 4Other Income/(Loss)
Note 5Income Taxes
Note 6Capital Stock and Earnings Per Share
Note 7Cash, Cash Equivalents, and Marketable Securities
Note 8Ford Credit Finance Receivables and Allowance for Credit Losses
Note 9Inventories
Note 10Other Investments
Note 11Goodwill
Note 12Other Liabilities and Deferred Revenue
Note 13Retirement Benefits
Note 14Debt
Note 15Derivative Financial Instruments and Hedging Activities
Note 16Employee Separation Actions and Exit and Disposal Activities
Note 17Held-for-Sale Operations and Changes in Investments in Affiliates
Note 18Accumulated Other Comprehensive Income/(Loss)
Note 19Commitments and Contingencies
Note 20Segment 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 consolidated 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, 2019 (“2019 Form 10-K Report”).

Global Pandemic

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures.  As a result, extraordinary actions were taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. These actions included travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

Consistent with the actions taken by governmental authorities, by late March 2020, we had idled all of our significant manufacturing operations in regions around the world. By May 2020, we restarted manufacturing operations in a phased manner at locations around the world.

Our results include adjustments to our assets and liabilities recorded during the first nine months of 2020 due to the impact of COVID-19, the most significant of which were a valuation allowance on certain deferred tax assets (see Note 5) and a charge to the provision for credit losses on Ford Credit’s finance receivables (see Note 8). The majority of these adjustments were recorded in the first quarter and there were no material adjustments to our assets and liabilities related to COVID-19 in the third quarter.
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”) 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. On January 1, 2020, we adopted the new credit loss standard and all of the related amendments, which replaced the incurred loss impairment method with a method that reflects lifetime expected credit losses. We adopted the changes in accounting for credit losses by recognizing the cumulative effect of initially applying the new credit loss 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 accounting standard in effect for those periods.

The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2020, for the adoption of ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments, was as follows (in millions):
Balance at
December 31, 2019
Adjustments due to ASU 2016-13Balance at
January 1, 2020
Assets
Ford Credit finance receivables, net, current$53,651 $(69)$53,582 
Trade and other receivables, net9,237 (3)9,234 
Ford Credit finance receivables, net, non-current53,703 (183)53,520 
Equity in net assets of affiliated companies2,519 (7)2,512 
Deferred income taxes11,863 11,865 
Liabilities
Deferred income taxes490 (58)432 
Equity
Retained earnings20,320 (202)20,118 

ASU 2020-04, Reference Rate Reform:  Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  On April 1, 2020, we adopted the new standard, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform (e.g., discontinuation of LIBOR) if certain criteria are met. As of September 30, 2020, we have not yet elected any optional expedients provided in the standard.  We will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We do not expect the standard to have a material impact on our consolidated financial statements.

We also adopted the following ASUs during 2020, none of which had a material impact to our consolidated financial statements or financial statement disclosures:
ASUEffective Date
2020-01Clarifying the Interaction between Equity Securities, Equity Method and Joint Ventures, and Derivatives and HedgingJanuary 1, 2020
2018-18Clarifying the Interaction between Collaborative Arrangements and Revenue from Contracts with CustomersJanuary 1, 2020
2018-15
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
January 1, 2020

Accounting Standards Issued But Not Yet Adopted

The Company considers the applicability and impact of all ASUs.  ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.
7

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 2019
AutomotiveMobilityFord CreditConsolidated
Vehicles, parts, and accessories$32,609 $— $— $32,609 
Used vehicles647 — — 647 
Extended service contracts347 — — 347 
Other revenue183 14 55 252 
Revenues from sales and services
33,786 14 55 33,855 
Leasing income145 — 1,480 1,625 
Financing income— — 1,472 1,472 
Insurance income— — 38 38 
Total revenues$33,931 $14 $3,045 $36,990 
Third Quarter 2020
AutomotiveMobilityFord CreditConsolidated
Vehicles, parts, and accessories$33,005 $— $— $33,005 
Used vehicles818 — — 818 
Extended service contracts356 — — 356 
Other revenue438 20 37 495 
Revenues from sales and services
34,617 20 37 34,674 
Leasing income90 — 1,407 1,497 
Financing income— — 1,303 1,303 
Insurance income— — 27 27 
Total revenues$34,707 $20 $2,774 $37,501 
First Nine Months 2019
AutomotiveMobilityFord CreditConsolidated
Vehicles, parts, and accessories$102,420 $— $— $102,420 
Used vehicles2,509 — — 2,509 
Extended service contracts1,028 — — 1,028 
Other revenue615 26 161 802 
Revenues from sales and services
106,572 26 161 106,759 
Leasing income356 — 4,429 4,785 
Financing income— — 4,521 4,521 
Insurance income— — 120 120 
Total revenues$106,928 $26 $9,231 $116,185 
First Nine Months 2020
AutomotiveMobilityFord CreditConsolidated
Vehicles, parts, and accessories$78,252 $— $— $78,252 
Used vehicles2,282 — — 2,282 
Extended service contracts1,066 — — 1,066 
Other revenue836 43 122 1,001 
Revenues from sales and services
82,436 43 122 82,601 
Leasing income233 — 4,267 4,500 
Financing income— — 3,989 3,989 
Insurance income— — 102 102 
Total revenues$82,669 $43 $8,480 $91,192 
8

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 return rights and marketing incentives we offer to our customers and their customers. Estimates of marketing incentives are based on expected retail and fleet sales volumes, mix of products to be sold, and incentive programs to be offered. Customer acceptance of products and programs, as well as other market conditions, will impact these estimates. As a result of changes in our estimate of marketing incentives, we recorded a decrease in revenue of $454 million in the third quarter of 2019 and an increase in revenue of $168 million in the third quarter of 2020 related to revenue recognized in prior periods.

We sell separately-priced service contracts that extend mechanical and maintenance coverages beyond our base warranty agreements to vehicle owners (“extended service contracts”). We had a balance of $4.2 billion and $4.1 billion of unearned revenue associated with outstanding contracts reported in Other liabilities and deferred revenue at December 31, 2019 and September 30, 2020, respectively. We expect to recognize approximately $300 million of the unearned amount in the remainder of 2020, $1.2 billion in 2021, and $2.6 billion thereafter. We recognized $274 million and $295 million of unearned amounts as revenue during the third quarter of 2019 and 2020, respectively, and $864 million and $901 million in the first nine months of 2019 and 2020, respectively.

Amounts paid to dealers to obtain these contracts are deferred and recorded as Other assets. We had a balance of $270 million and $278 million in deferred costs as of December 31, 2019 and September 30, 2020, respectively. We recognized $17 million and $20 million of amortization during the third quarter of 2019 and 2020, respectively, and $56 million and $59 million in the first nine months of 2019 and 2020, 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 QuarterFirst Nine Months
 2019202020192020
Net periodic pension and OPEB income/(cost), excluding service cost
$(21)$277 $362 $1,272 
Investment-related interest income202 90 612 374 
Interest income/(expense) on income taxes
(5)(4)(26)(15)
Realized and unrealized gains/(losses) on cash equivalents, marketable securities, and other investments
199 297 79 312 
Gains/(Losses) on changes in investments in affiliates (a)
44 46 3,483 
Gains/(Losses) on extinguishment of debt
(1)— (54)(1)
Royalty income91 139 283 322 
Other25 43 132 96 
Total$534 $845 $1,434 $5,843 
__________
(a)See Note 17 for additional information relating to our Argo AI, LLC (“Argo AI”) and Volkswagen AG (“VW”) transaction.

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.

Based on all available evidence, we established a valuation allowance against certain net operating losses and tax credits of $1 billion during the first nine months of 2020, as it is more likely than not that these deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, we consider the trade-offs between cash preservation and cash outlays to preserve tax credits.
9

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/(loss) per share were calculated using the following (in millions):
Third QuarterFirst Nine Months
 2019202020192020
Basic and Diluted Income/(Loss) Attributable to Ford Motor Company  
Basic income/(loss)$425 $2,385 $1,719 $1,509 
Diluted income/(loss)425 2,385 1,719 1,509 
Basic and Diluted Shares   
Basic shares (average shares outstanding)3,970 3,976 3,976 3,971 
Net dilutive options, unvested restricted stock units, and unvested restricted stock shares37 29 30 26 
Diluted shares4,007 4,005 4,006 3,997 

NOTE 7. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

Cash Equivalents

Cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal. A debt security is classified as a cash equivalent if it meets these criteria and if it has a remaining time to maturity of three months or less from the date of purchase. Amounts on deposit and available upon demand, or negotiated to provide for daily liquidity without penalty, are classified as cash and cash equivalents. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are reported at par value on our consolidated balance sheets.

Marketable Securities

Investments in securities with a maturity date greater than three months at the date of purchase, and other securities for which there is more than an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal, are classified as marketable securities.

Realized gains and losses and interest income on all of our marketable securities and unrealized gains and losses on securities not classified as available for sale are recorded in Other income/(loss), net. Unrealized gains and losses on available-for-sale securities are recognized in Unrealized gains and losses on securities, a component of Other comprehensive income/(loss), net of tax. Realized gains and losses and reclassifications of accumulated other comprehensive income into net income are measured using the specific identification method.

On a quarterly basis, we review our available-for-sale debt securities for credit losses. We compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, we determine if a credit loss allowance is necessary. If a credit loss allowance is necessary, we will record an allowance, limited by the amount that fair value is less than the amortized cost basis, and recognize the corresponding charge in Other income/(loss), net. Factors we consider include the severity of the impairment, the reason for the decline in value, interest rate changes, and counterparty long-term ratings.
10

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 fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis were as follows (in millions):
December 31, 2019
 Fair Value LevelAutomotiveMobilityFord CreditConsolidated
Cash and cash equivalents  
U.S. government1$520 $— $— $520 
U.S. government agencies2125 — — 125 
Non-U.S. government and agencies2601 — 350 951 
Corporate debt2642 — 604 1,246 
Total marketable securities classified as cash equivalents
1,888 — 954 2,842 
Cash, time deposits, and money market funds6,432 117 8,113 14,662 
Total cash and cash equivalents$8,320 $117 $9,067 $17,504 
Marketable securities
U.S. government1$2,930 $— $195 $3,125 
U.S. government agencies21,548 — 210 1,758 
Non-U.S. government and agencies24,217 — 2,408 6,625 
Corporate debt24,802 — 193 4,995 
Equities (a)181 — — 81 
Other marketable securities2273 — 290 563 
Total marketable securities$13,851 $— $3,296 $17,147 
Restricted cash$15 $21 $139 $175 
Cash, cash equivalents, and restricted cash in held-for-sale assets
$— $— $62 $62 
September 30, 2020
Fair Value LevelAutomotiveMobilityFord CreditConsolidated
Cash and cash equivalents  
U.S. government1$3,277 $— $1,217 $4,494 
U.S. government agencies2706 — 850 1,556 
Non-U.S. government and agencies2916 — 1,105 2,021 
Corporate debt2545 — 900 1,445 
Total marketable securities classified as cash equivalents
5,444 — 4,072 9,516 
Cash, time deposits, and money market funds7,679 62 7,006 14,747 
Total cash and cash equivalents$13,123 $62 $11,078 $24,263 
Marketable securities
U.S. government1$3,724 $— $1,275 $4,999 
U.S. government agencies23,124 — 235 3,359 
Non-U.S. government and agencies23,645 — 2,111 5,756 
Corporate debt25,292 — 313 5,605 
Equities (a)1299 — — 299 
Other marketable securities2236 — 314 550 
Total marketable securities$16,320 $— $4,248 $20,568 
Restricted cash$30 $$174 $209 
Cash, cash equivalents, and restricted cash in held-for-sale assets
$— $— $— $— 
__________
(a)Net unrealized gains/losses incurred during the reporting periods on equity securities still held at December 31, 2019 and September 30, 2020 were a $44 million loss and a $111 million gain, respectively.
11

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”) securities were as follows (in millions):
December 31, 2019
Fair Value of Securities with
Contractual Maturities
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueWithin 1 YearAfter 1 Year through
5 Years
After 5 Years
Automotive  
U.S. government$2,839 $11 $(1)$2,849 $1,028 $1,772 $49 
U.S. government agencies1,445 (1)1,446 830 589 27 
Non-U.S. government and agencies3,925 20 (1)3,944 1,546 2,398 — 
Corporate debt5,029 53 — 5,082 1,837 3,245 — 
Other marketable securities230 — 231 — 149 82 
Total
$13,468 $87 $(3)$13,552 $5,241 $8,153 $158 
 
September 30, 2020
Fair Value of Securities with
Contractual Maturities
Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueWithin 1 YearAfter 1 Year through
5 Years
After 5 Years
Automotive
U.S. government$2,660 $52 $— $2,712 $987 $1,722 $
U.S. government agencies2,187 15 (1)2,201 708 1,371 122 
Non-U.S. government and agencies2,907 39 — 2,946 1,085 1,851 10 
Corporate debt5,549 102 (2)5,649 1,727 3,897 25 
Other marketable securities206 — 209 148 59 
Total
$13,509 $211 $(3)$13,717 $4,509 $8,989 $219 

Sales proceeds and gross realized gains/losses from the sale of AFS securities for the periods ended September 30 were as follows (in millions):
Third QuarterFirst Nine Months
2019202020192020
Automotive
Sales proceeds$1,176 $2,243 $4,176 $6,560 
Gross realized gains16 44 
Gross realized losses— 10 11 
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 present fair values and gross unrealized losses for cash equivalents and marketable securities accounted for as AFS 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, 2019
Less than 1 Year1 Year or GreaterTotal
 Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Automotive  
U.S. government$183 $(1)$50 $— $233 $(1)
U.S. government agencies370 (1)344 — 714 (1)
Non-U.S. government and agencies463 — 390 (1)853 (1)
Corporate debt29 — 53 — 82 — 
Other marketable securities59 — 17 — 76 — 
Total
$1,104 $(2)$854 $(1)$1,958 $(3)
 
September 30, 2020
Less than 1 Year1 Year or GreaterTotal
Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Automotive
U.S. government$55 $— $— $— $55 $— 
U.S. government agencies170 — 42 (1)212 (1)
Non-U.S. government and agencies442 — 46 — 488 — 
Corporate debt739 (2)— 748 (2)
Other marketable securities— 13 — 17 — 
Total
$1,410 $(2)$110 $(1)$1,520 $(3)

We determine credit losses on available-for-sale debt securities using the specific identification method. During the first nine months of 2020, we did not recognize any credit loss. The unrealized losses on securities are due to changes in interest rates and market liquidity.

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash, as reported in the consolidated statements of cash flows, were as follows (in millions):
December 31,
2019
September 30,
2020
Cash and cash equivalents$17,504 $24,263 
Restricted cash (a)175 209 
Cash, cash equivalents, and restricted cash in held-for-sale assets62 — 
Total cash, cash equivalents, and restricted cash$17,741 $24,472 
__________
(a)Included in Other assets in the non-current assets section of our consolidated balance sheets.
13

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

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 are recorded at the time of origination or purchase at fair value and are subsequently reported at amortized cost, net of any allowance for credit losses.

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.

Ford Credit finance receivables, net were as follows (in millions):
 December 31,
2019
September 30,
2020
Consumer  
Retail installment contracts, gross$68,905 $73,246 
Finance leases, gross8,566 8,244 
Retail financing, gross77,471 81,490 
Unearned interest supplements(3,589)(4,091)
Consumer finance receivables73,882 77,399 
Non-Consumer  
Dealer financing33,985 21,421 
Non-Consumer finance receivables33,985 21,421 
Total recorded investment$107,867 $98,820 
Recorded investment in finance receivables$107,867 $98,820 
Allowance for credit losses(513)(1,314)
Total finance receivables, net$107,354 $97,506 
Current portion$53,651 $41,847 
Non-current portion53,703 55,659 
Total finance receivables, net$107,354 $97,506 
Net finance receivables subject to fair value (a)$99,168 $89,663 
Fair value (b)99,297 91,068 
__________
(a)Net finance receivables subject to fair value exclude finance leases.
(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. Financing revenue from finance leases for the third quarter of 2019 and 2020 was $90 million and $96 million, respectively, and for the first nine months of 2019 and 2020 was $279 million and $268 million, respectively, and is included in Ford Credit revenues on our consolidated income statements.

At December 31, 2019 and September 30, 2020, accrued interest was $251 million and $184 million, respectively, which we report in Other assets in the current assets section of our consolidated balance sheets.

Included in the recorded investment in finance receivables at December 31, 2019 and September 30, 2020, were consumer receivables of $38.3 billion and $41.1 billion, respectively, and non-consumer receivables of $26.8 billion and $17.4 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.
14

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The value of finance receivables considered held for sale at December 31, 2019 was $1.5 billion, primarily made up of $1.2 billion of Forso Nordic AB (“Forso”) related finance receivables. At September 30, 2020, there were $38 million of certain wholesale finance receivables specifically identified as held for sale. These held-for-sale values are reported in Assets held for sale on our consolidated balance sheets. See Note 17 for additional information.

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.

The credit quality analysis of consumer receivables at December 31, 2019 was as follows (in millions):
Total
Consumer
31 - 60 days past due$839 
61 - 120 days past due166 
Greater than 120 days past due35 
Total past due1,040 
Current72,842 
Total$73,882 

The credit quality analysis of consumer receivables at September 30, 2020 was as follows (in millions):
Amortized Cost Basis by Origination Year
Prior to 201620162017201820192020Total
Consumer
31 - 60 days past due$45 $58 $99 $141 $141 $76 $560 
61 - 120 days past due14 28 45 48 22 164 
Greater than 120 days past due13 43 
Total past due65 79 134 194 196 99 767 
Current1,141 3,290 8,001 15,444 22,492 26,264 76,632 
Total$1,206 $3,369 $8,135 $15,638 $22,688 $26,363 $77,399 

Non-Consumer Portfolio. Ford Credit uses a proprietary model to assign each dealer a risk rating. This model uses historical dealer performance data to identify key factors about a dealer that are considered most significant in predicting a dealer’s ability to meet its financial obligations. Ford Credit also considers numerous other financial and qualitative factors of the dealer’s operations, including capitalization and leverage, liquidity and cash flow, profitability, and credit history with Ford Credit and other creditors. The credit quality of dealer financing receivables is evaluated based on an internal dealer risk rating analysis.
15

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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 at December 31, 2019 was as follows (in millions):
Total
Dealer financing
Group I$26,281 
Group II5,407 
Group III2,108 
Group IV189 
Total (a)$33,985 
__________
(a)Total past due dealer financing receivables at December 31, 2019 were $62 million.

The credit quality analysis of dealer financing receivables at September 30, 2020 was as follows (in millions):
Amortized Cost Basis by Origination YearWholesale Loans
Dealer Loans
Prior to 201620162017201820192020TotalTotal
Group I$528 $130 $142 $132 $73 $300 $1,305 $13,823 $15,128 
Group II46 21 15 35 89 210 4,520 4,730 
Group III— 17 41 73 1,356 1,429 
Group IV— — 12 122 134 
Total (a)
$585 $154 $160 $184 $82 $435 $1,600 $19,821 $21,421 
__________
(a)Total past due dealer financing receivables at September 30, 2020 were $126 million.

Non-Accrual of Revenue. The accrual of financing revenue is discontinued at the time a receivable is determined to be uncollectible or when it is 90 days past due. Accounts may be restored to accrual status only when a customer settles all past-due deficiency balances and future payments are reasonably assured. For receivables in non-accrual status, subsequent financing revenue is recognized only to the extent a payment is received. Payments are generally applied first to outstanding interest and then to the unpaid principal balance.

Troubled Debt Restructuring (“TDR”). A restructuring of debt constitutes a TDR if a concession is granted to a debtor for economic or legal reasons related to the debtor’s financial difficulties that Ford Credit otherwise would not consider. Consumer and non-consumer receivables that have a modified interest rate below market rate or that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code, except non-consumer receivables that are current with minimal risk of loss, are considered to be TDRs. Ford Credit does not grant concessions on the principal balance of the receivables. If a receivable is modified in a reorganization proceeding, all payment requirements of the reorganization plan need to be met before remaining balances are forgiven.

Ford Credit offered various programs to provide relief to customers and dealers impacted by COVID-19.  These programs, which were broadly available to all customers and dealers during the first half of 2020, included payment extensions.  Ford Credit concluded that these programs did not meet TDR criteria. As of September 30, 2020, in the United States, Ford Credit has received payments on nearly all the pandemic extensions offered to its customers, and no dealers were delinquent on their payments. The volume of payment extensions has returned to pre-COVID-19 levels and Ford Credit continues to grant payment extensions to customers and dealers under its normal business practices.
16

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Allowance for Credit Losses

The allowance for credit losses represents an estimate of the lifetime expected credit losses inherent in finance receivables as of the balance sheet date.

Additions to the allowance for credit losses are made by recording charges to Ford Credit interest, operating, and other expenses on our consolidated income statements. The uncollectible portion of a finance receivable is charged to the allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is 120 days delinquent, taking into consideration the financial condition of the customer or borrower, the value of the collateral, recourse to guarantors, and other factors.

Charge-offs on finance receivables include uncollected amounts related to principal, interest, late fees, and other allowable charges. Recoveries on finance receivables previously charged off as uncollectible are credited to the allowance for credit losses. In the event Ford Credit repossesses the collateral, the receivable is charged off and the collateral is recorded at its estimated fair value less costs to sell and reported in Other assets on our consolidated balance sheets.

Consumer Portfolio

Receivables in this portfolio include products offered to individuals and businesses that finance the acquisition of Ford and Lincoln vehicles from dealers for personal or commercial use. Retail financing includes retail installment contracts for new and used vehicles and finance leases with retail customers, government entities, daily rental companies, and fleet customers.

For consumer receivables that share similar risk characteristics such as product type, initial credit risk, term, vintage, geography, and other relevant factors, Ford Credit estimates the lifetime expected credit loss allowance based on a collective assessment using measurement models and management judgment. The lifetime expected credit losses for the receivables is determined by applying probability of default and loss given default models to monthly expected exposures, then discounting these cash flows to present value using the receivable’s original effective interest rate or the current effective interest rate for a variable rate receivable. Probability of default models are developed from internal risk scoring models taking into account the expected probability of payment and time to default, adjusted for macroeconomic outlook and recent performance. The models consider factors such as risk evaluation at the time of origination, historical trends in credit losses (which include the impact of TDRs), and the composition and recent performance of the present portfolio (including vehicle brand, term, risk evaluation, and new / used vehicles). The loss given default is the percentage of the expected balance due at default that is not recoverable, taking into account the expected collateral value and trends in recoveries (including key metrics such as delinquencies, repossessions, and bankruptcies). Monthly exposures are equal to the receivables’ expected outstanding principal and interest balance.

The loss allowance incorporates forward-looking macroeconomic conditions for baseline, upturn, and downturn scenarios. Three separate credit loss allowances are calculated from these scenarios. They are then probability-weighted to determine the credit loss allowance recognized in the financial statements. Ford Credit uses forecasts from a third party that revert to a long-term historical average after a reasonable and supportable forecasting period, which is specific to the particular macroeconomic variable and which varies by market. Ford Credit updates the forward-looking macroeconomic forecasts quarterly.

If management does not believe these models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding observable changes in recent or expected economic trends and conditions, portfolio composition, and other relevant factors.

On an ongoing basis, Ford Credit reviews its models, including macroeconomic factors, the selection of macroeconomic scenarios, and their weighting, to ensure they reflect the risk of the portfolio.
17

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Non-Consumer Portfolio

Dealer financing includes wholesale loans to dealers to finance vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital, improvements to dealership facilities, the purchase of dealership real estate, and other dealer programs.

Dealer financing is evaluated on an individual dealer basis by segmenting dealers by risk characteristics (such as the amount of the loans, the nature of the collateral, the financial status of the dealer, and any TDR modifications) to determine if an individual dealer requires a specific allowance for credit loss. If required, the allowance is based on the present value of the expected future cash flows of the dealer’s receivables discounted at the loans’ original effective interest rate or the fair value of the collateral adjusted for estimated costs to sell.

For the remaining dealer financing, Ford Credit estimates an allowance for credit losses on a collective basis.

Wholesale Loans. Ford Credit estimates the allowance for credit losses for wholesale loans based on historical loss-to-receivable (“LTR”) ratios, expected future cash flows, and the fair value of collateral. For wholesale loans with similar risk characteristics, the allowance for credit losses is estimated on a collective basis using the LTR model and management judgment. The LTR model is based on the most recent years of history. An LTR is calculated by dividing credit losses (i.e., charge-offs net of recoveries) by average net finance receivables, excluding unearned interest supplements and allowance for credit losses. The average LTR is multiplied by the end-of-period balances, representing the lifetime expected credit loss reserve.

Dealer Loans. Ford Credit uses a weighted-average remaining maturity method to estimate the lifetime expected credit loss reserve for dealer loans. The loss model is based on the industry-wide commercial real estate credit losses, adjusted to factor in the historical credit losses for the dealer loans portfolio. The expected credit loss is calculated under different economic scenarios that are weighted to provide the total lifetime expected credit loss. 

After establishing the collective and specific allowance for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant forward-looking economic factors, an adjustment is made based on management judgment.
18

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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 2019 (a)First Nine Months 2019 (a)
 ConsumerNon-ConsumerTotalConsumerNon-ConsumerTotal
Allowance for credit losses
Beginning balance$496 $17 $513 $566 $23 $589 
Charge-offs(129)(1)(130)(383)(18)(401)
Recoveries41 — 41 129 137 
Provision for credit losses93 — 93 187 189 
Other (b)(3)(1)(4)(1)— (1)
Ending balance$498 $15 $513 $498 $15 $513 
Third Quarter 2020First Nine Months 2020
 ConsumerNon-ConsumerTotalConsumerNon-ConsumerTotal
Allowance for credit losses
Beginning balance$1,211 $74 $1,285 $496 $17 $513 
Adoption of ASU 2016-13 (c)— — — 247 252 
Charge-offs(104)(5)(109)(329)(6)(335)
Recoveries41 43 117 122 
Provision for credit losses95 (9)86 723 42 765 
Other (b)(3)— (3)
Ending balance$1,251 $63 $1,314 $1,251 $63 $1,314 
__________
(a)The comparative information has not been restated and continues to be reported under the accounting standard in effect during 2019.
(b)Primarily represents amounts related to translation adjustments.
(c)Cumulative pre-tax adjustments recorded to retained earnings as of January 1, 2020. See Note 2 for additional information.

During the third quarter and first nine months of 2020, the allowance for credit losses increased $29 million and $801 million, respectively. The change in the third quarter of 2020 reflects an increase to the reserve of $20 million associated with higher balances in Ford Credit’s finance receivables portfolio, as well as an increase for translation adjustments. The relatively moderate reserve increase in the third quarter of 2020 also reflects Ford Credit’s view that future economic conditions are largely unchanged from its assumptions at June 30, 2020. The change in the first nine months of 2020 reflects an increase to the reserve of $252 million related to the adoption of ASU 2016-13, with the remainder primarily related to economic conditions attributable to the COVID-19 pandemic.

The change to the reserve due to the impact of COVID-19 reflects economic uncertainty which, along with the expectation of continued higher unemployment, has increased the probability of default and loss given default rates used in Ford Credit’s estimate of the lifetime expected credit losses for its consumer portfolio, especially in the United States.  These economic trends and conditions are also expected to negatively impact dealers. Although net charge-offs during the third quarter and first nine months of 2020 remained low, reflecting government relief programs and customer payment deferral programs, the future impact of COVID-19 on credit losses is expected to be adverse.
19

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9. INVENTORIES

Inventories were as follows (in millions):
 December 31,
2019
September 30,
2020
Raw materials, work-in-process, and supplies$4,402 $4,401 
Finished products6,384 6,182 
Total inventories$10,786 $10,583 

NOTE 10. OTHER INVESTMENTS

We have investments in entities not accounted for under the equity method for which 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 sheets. These investments were $1.2 billion and $1.7 billion at December 31, 2019 and September 30, 2020, respectively. The increase from December 31, 2019 primarily reflects our preferred security investment in Argo AI in the second quarter of 2020. See Note 17 for additional information relating to our Argo AI and VW transaction. In the third quarter of 2020, there were no material adjustments to the fair values of these investments held at September 30, 2020.

NOTE 11. GOODWILL

The net carrying amount of goodwill was $278 million and $258 million at December 31, 2019 and September 30, 2020, respectively, and is reported in Other assets in the non-current assets section of our consolidated balance sheets.

NOTE 12. OTHER LIABILITIES AND DEFERRED REVENUE

Other liabilities and deferred revenue were as follows (in millions):
 December 31,
2019
September 30,
2020
Current
Dealer and dealers’ customer allowances and claims$13,113 $10,958 
Deferred revenue2,091 2,137 
Employee benefit plans1,857 1,434 
Accrued interest1,128 1,186 
OPEB (a)332 329 
Pension (a)185 186 
Operating lease liabilities367 331 
Other3,914 3,732 
Total current other liabilities and deferred revenue$22,987 $20,293 
Non-current  
Pension (a)$9,878 $9,718 
OPEB (a)5,740 5,684 
Dealer and dealers’ customer allowances and claims1,921 3,366 
Deferred revenue4,191 4,374 
Operating lease liabilities1,047 955 
Employee benefit plans1,104 1,125 
Other1,443 1,604 
Total non-current other liabilities and deferred revenue$25,324 $26,826 
__________
(a)Balances at September 30, 2020 reflect pension and OPEB liabilities at December 31, 2019, updated for service and interest cost, expected return on assets, curtailment and settlement gains 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 2019. Included in Other assets are pension assets of $3.2 billion and $4.1 billion at December 31, 2019 and September 30, 2020, respectively.
20

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13. 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. PlansNon-U.S. PlansWorldwide OPEB
 201920202019202020192020
Service cost$121 $130 $125 $135 $11 $12 
Interest cost381 322 170 130 53 43 
Expected return on assets(674)(699)(277)(272)— — 
Amortization of prior service costs/(credits)
22 (18)(4)
Net remeasurement (gain)/loss263 (1)43 55 — — 
Separation programs/other— 78 66 — (1)
Settlements and curtailments
(16)(19)74 — — 
Net periodic benefit cost/(income)
$104 $(246)$128 $196 $46 $50 
First Nine Months
 Pension Benefits  
 U.S. PlansNon-U.S. PlansWorldwide OPEB
 201920202019202020192020
Service cost$349 $390 $381 $393 $33 $35 
Interest cost1,199 968 519 393 158 127 
Expected return on assets(1,972)(2,097)(844)(793)— — 
Amortization of prior service costs/(credits)
65 25 25 (53)(12)
Net remeasurement (gain)/loss253 43 (177)— 58 
Separation programs/other13 322 123 — (1)
Settlements and curtailments
(66)(19)92 — (2)
Net periodic benefit cost/(income)
$(164)$(715)$427 $56 $138 $205 

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 statements.

As part of our ongoing global redesign activities, we recognized additional expense of $50 million and $92 million in the third quarter of 2019 and 2020, respectively, and $245 million and $167 million in the first nine months of 2019 and 2020, respectively, related to separation programs, settlements, and curtailments. 

The settlements and curtailments required plan remeasurements at current discount rates, asset returns, and economic conditions.  This resulted in remeasurement losses of $54 million in the third quarter and gains of $116 million in the first nine months of 2020. Until our global redesign actions are completed, we anticipate further adjustments to our plans in subsequent periods.

In the third quarter of 2020, we also recognized a settlement loss of $48 million related to a non-US pension plan.

Pension Plan Contributions

During 2020, we expect to contribute between $500 million and $700 million of cash to our global funded pension plans. We also expect to make about $350 million of benefit payments to participants in unfunded plans. In the first nine months of 2020, we contributed $429 million to our worldwide funded pension plans and made $267 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 14. DEBT
The carrying value of Automotive, Ford Credit, and Other debt was as follows (in millions):
December 31,
2019
September 30,
2020
Automotive  
Debt payable within one year
Short-term$315 $807 
Long-term payable within one year  
U.S. Department of Energy Advanced Technology Vehicles Manufacturing (“DOE ATVM”) Incentive Program (a)591 148 
Other debt540 414 
Unamortized (discount)/premium(1)(1)
Total debt payable within one year1,445 1,368 
Long-term debt payable after one year (b)  
Public unsecured debt securities (c)10,583 18,583 
Delayed draw term loan
1,500 1,500 
DOE ATVM Incentive Program (a)880 1,101 
Other debt (d)547 1,611 
Unamortized (discount)/premium(161)(239)
Unamortized issuance costs
(116)(193)
Total long-term debt payable after one year
13,233 22,363 
Total Automotive$14,678 $23,731 
Fair value of Automotive debt (e)$15,606 $25,793 
Ford Credit  
Debt payable within one year
Short-term$13,717 $10,231 
Long-term payable within one year  
Unsecured debt15,062 18,568 
Asset-backed debt23,609 20,619 
Unamortized (discount)/premium
Unamortized issuance costs
(17)(18)
Fair value adjustments (f)(1)44 
Total debt payable within one year52,371 49,447 
Long-term debt payable after one year
Unsecured debt55,148 49,946 
Asset-backed debt32,162 32,326 
Unamortized (discount)/premium(1)
Unamortized issuance costs
(197)(202)
Fair value adjustments (f)539 1,557 
Total long-term debt payable after one year87,658 83,626 
Total Ford Credit
$140,029 $133,073 
Fair value of Ford Credit debt (e)$141,678 $132,647 
Other
Long-term debt payable within one year$130 $180 
Long-term debt payable after one year
Unsecured debt474 295 
Unamortized (discount)/premium and issuance costs(4)(4)
Total long-term debt payable after one year470 291 
Total Other
$600 $471 
Fair value of Other debt$720 $549 
__________
(a)In June 2020, our DOE ATVM loan was modified, reducing quarterly principal payments from $148 million to $37 million. The deferred portion of the principal payments will be due upon original maturity in June 2022.
(b)In the first quarter of 2020, we drew $15.4 billion under our corporate credit facilities and fully repaid these facilities in the third quarter of 2020.
(c)Public unsecured debt securities increased by $8 billion reflecting our unsecured debt issuance in April 2020.
(d)Includes a £625 million five-year term loan entered into by Ford Motor Company Limited in June 2020 pursuant to U.K. Export Finance program.
(e)The fair value of debt includes $315 million and $807 million of Automotive short-term debt and $12.8 billion and $9.9 billion of Ford Credit short-term debt at December 31, 2019 and September 30, 2020, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
(f)These adjustments relate to fair value hedges. The carrying value of hedged debt was $39.4 billion and $42.8 billion at December 31, 2019 and September 30, 2020, respectively.
22

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 15. 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 QuarterFirst Nine Months
Cash flow hedges
2019202020192020
Reclassified from AOCI to Cost of sales
Foreign currency exchange contracts (a)
$(8)$$90 $(68)
Commodity contracts (b)
(10)(22)(21)(50)
Fair value hedges
Interest rate contracts
Net interest settlements and accruals on hedging instruments
— 94 (32)190 
Fair value changes on hedging instruments203 (103)927 1,119 
Fair value changes on hedged debt(194)96 (910)(1,095)
Cross-currency interest rate swap contracts (c)
Net interest settlements and accruals on hedging instruments
— (1)— (1)
Fair value changes on hedging instruments— (10)— (10)
Fair value changes on hedged debt— — 
Derivatives not designated as hedging instruments
Foreign currency exchange contracts (d)347 (349)324 (37)
Cross-currency interest rate swap contracts
(257)210 (261)213 
Interest rate contracts18 (4)(12)(90)
Commodity contracts(8)19 (9)(12)
Total$91 $(58)$96 $165 
__________
(a)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. For the third quarter and first nine months of 2020, a $132 million loss and a $684 million gain, respectively, were reported in Other comprehensive income/(loss), net of tax.
(b)For the third quarter and first nine months of 2019, a $32 million loss and a $58 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax. For the third quarter and first nine months of 2020, a $36 million gain and a $48 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax.
(c)During the third quarter of 2020, we began designating cross-currency interest rate swap contracts. We enter into cross-currency interest rate swaps to hedge our exposure to interest rate risk and foreign currency risk associated with the issuance of foreign denominated long-term debt. We report the change in fair value of the hedged debt and hedging instrument related to the change in the benchmark interest rate in Ford Credit interest, operating, and other expenses. We report the change in fair value of the hedged debt and hedging instrument related to foreign currency in Other income/(loss), net.
(d)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, respectively, and a $154 million gain and a $188 million gain were reported in Other income/(loss), net, respectively. For the third quarter and first nine months of 2020, a $242 million loss and a $97 million loss were reported in Cost of sales, respectively, and a $107 million loss and a $60 million gain were reported in Other income/(loss), net, respectively.
23

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are reported on our consolidated balance sheets 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 were as follows (in millions):
December 31, 2019September 30, 2020
NotionalFair Value of
Assets
Fair Value of
Liabilities
NotionalFair Value of
Assets
Fair Value of
Liabilities
Cash flow hedges   
Foreign currency exchange contracts
$15,349 $47 $493 $14,100 $217 $76 
Commodity contracts673 29 631 29 
Fair value hedges   
Interest rate contracts26,577 702 19 23,224 1,417 
Cross-currency interest rate swap contracts
— — — 885 — 11 
Derivatives not designated as hedging instruments
Foreign currency exchange contracts19,350 58 270 21,758 244 126 
Cross-currency interest rate swap contracts
5,849 134 67 6,285 377 20 
Interest rate contracts68,914 275 191 71,071 675 510 
Commodity contracts467 506 31 
Total derivative financial instruments, gross (a) (b)
$137,179 $1,230 $1,078 $138,460 $2,970 $781 
Current portion
$390 $772 $1,169 $517 
Non-current portion
840 306 1,801 264 
Total derivative financial instruments, gross
$1,230 $1,078 $2,970 $781 
__________
(a)At December 31, 2019 and September 30, 2020, we held collateral of $18 million and $11 million, respectively, and we posted collateral of $78 million and $103 million, respectively.
(b)At December 31, 2019 and September 30, 2020, the fair value of assets and liabilities available for counterparty netting was $269 million and $469 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.
24

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16. 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

Global Redesign

As previously announced, we are executing a global redesign of our business. Redesign-related activities, including employee separation costs, facility-related charges, payments to dealers and suppliers, and other expenses, are recorded in Cost of sales and Selling, administrative, and other expenses. See Note 17 for additional information related to assets held for sale. Below are actions we have initiated as part of the redesign.

Brazil. In February 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 ceased production at the São Bernardo do Campo plant in Brazil during 2019. In the third quarter of 2020, Ford Brazil completed a sale of the plant machinery and equipment, and also entered into a separate agreement to sell the land and buildings.

Russia. In March 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 the Ford Sollers subsidiary. Our continued involvement in Ford Sollers is accounted for as an equity method investment.

In the third quarter of 2020, we committed to a plan to sell certain manufacturing assets, which are not part of the restructured Ford Sollers joint venture.

United Kingdom. In June 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. Ford of Britain ceased production at the Bridgend plant and the facility was closed in September 2020.

India. In the third quarter of 2019, Ford committed to a plan to sell specific net assets in our India Automotive operations.

Other Global Redesign Actions. In 2018, we announced our plan to end production at the Ford Aquitaine Industries plant in Bordeaux, France. We ceased production and the facility was closed in July 2019. 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. We ceased production of the C-Max in June 2019. In addition, we are continuing to reduce our global workforce and take other restructuring actions.
25

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16. EMPLOYEE SEPARATION ACTIONS AND EXIT AND DISPOSAL ACTIVITIES (Continued)

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 QuarterFirst Nine Months
2019202020192020
Beginning balance$929 $524 $291 $734 
Changes in accruals (a)173 109 1,181 203 
Payments(334)(105)(692)(376)
Foreign currency translation(39)11 (51)(22)
Ending balance$729 $539 $729 $539 
__________
(a)Excludes pension costs of $49 million and $92 million in the third quarter of 2019 and 2020, respectively, and $244 million and $167 million in the first nine months of 2019 and 2020, respectively.

We also recorded $821 million and $64 million in the third quarter of 2019 and 2020, respectively, and $1.4 billion and $114 million in the first nine months of 2019 and 2020, respectively, for the impairment of long-lived assets, accelerated depreciation and other non-cash items. We estimate that we will incur total charges in 2020 that range between $700 million and $1.2 billion related to the actions above, primarily attributable to employee separations, accelerated depreciation, and dealer and supplier settlements.

Other Actions

United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) Voluntary Separation Packages. As agreed in the collective bargaining agreement ratified in November 2019, during the first quarter of 2020, we offered voluntary separation packages to our UAW hourly workforce who were eligible for normal or early retirement, and recorded associated costs of $201 million in Cost of sales. All separations are expected to occur before the end of the year.
26

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. HELD-FOR-SALE OPERATIONS AND CHANGES IN INVESTMENTS IN AFFILIATES

Automotive Segment

Brazil and Russia. In the third quarter of 2020, as part of our global redesign, we committed to plans to sell manufacturing assets in Brazil and Russia. As a result, we classified assets of $39 million as held for sale at September 30, 2020.

India. In the third quarter of 2019, we committed to a plan to sell specific net 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, we will sell certain India Automotive operations to the joint venture. The sale was expected to close within twelve months of the definitive agreement, but has been deferred primarily due to COVID-19 related shutdowns, which have delayed the necessary regulatory approvals and other steps required to establish the joint venture. Although completion of the transaction has extended beyond our initial expectations, our assessment of the planned sale is that it is still probable. Accordingly, as we continue to meet the held-for-sale classification criteria, 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):
December 31,
2019
September 30,
2020
Assets
Trade and other receivables, net$269 $141 
Inventories208 185 
Other assets, current147 99 
Net property279 270 
Other assets, non-current10 
Total assets of held-for-sale operations913 703 
Less: Intercompany asset balances(228)(122)
Automotive segment total assets of held-for-sale operations (a)$685 $581 
Liabilities
Payables$461 $372 
Other liabilities and deferred revenue, current71 65 
Automotive debt payable within one year90 84 
Other liabilities and deferred revenue, non-current28 25 
Total liabilities of held-for-sale operations650 546 
Less: Intercompany liability balances(169)(141)
Automotive segment total liabilities of held-for-sale operations (a)$481 $405 
__________
(a)As of December 31, 2019 and September 30, 2020, intercompany items and transactions have been eliminated on the consolidated balance sheets. Upon closing, the buyer will assume the intercompany assets and liabilities. Accordingly, we have presented those balances in the table for informational purposes.
27

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. HELD-FOR-SALE OPERATIONS AND CHANGES IN INVESTMENTS IN AFFILIATES (Continued)

We recognized pre-tax impairment charges of $804 million in 2019, of which $799 million was recorded in the third quarter of 2019, and $3 million and $21 million in the third quarter and first nine months of 2020, respectively, to adjust the carrying value of the held-for-sale assets to fair value less cost to sell. These charges are reported in Cost of sales. 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.

Mobility Segment

On June 1, 2020, we completed a transaction with VW that reduced our ownership interest in the autonomous vehicle technology company Argo AI and resulted in Ford and VW holding equal interests in Argo AI, with the remaining interest consisting of incentive units and founders’ equity. The transaction involved us selling a portion of our Argo AI equity to VW for $500 million and VW making additional investments in Argo AI, including contributing its Autonomous Intelligent Driving company. As a result of the transaction, we deconsolidated Argo AI, remeasured our retained investment in Argo AI at fair value, and recognized a $3.5 billion gain in Other income/(loss), of which $2.9 billion related to our retained investment in Argo AI. We measured the fair value of Argo AI using the income approach. The significant assumptions used in the valuation included Argo AI’s projected long-term cash flows and related terminal value, discounted at a rate typically used for a company at Argo AI’s stage of development.

Our retained investment in Argo AI immediately after the transaction consisted of an equity method investment of $2.4 billion and a preferred equity security investment of $400 million, reflected on our consolidated balance sheets in Equity in net assets of affiliated companies and Other assets, respectively. The difference between the fair value of our equity method investment and our share of the carrying value of Argo AI’s net assets primarily related to indefinite-lived assets. We also agreed to future funding of Argo AI of $600 million, subject to capital calls, which will increase our preferred equity investment.

Argo AI is a variable interest entity of which we are not the primary beneficiary. As of September 30, 2020, our maximum exposure to any potential losses associated with Argo AI is limited to our $2.8 billion of investments.
28

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. HELD-FOR-SALE OPERATIONS AND CHANGES IN INVESTMENTS IN AFFILIATES (Continued)

Ford Credit Segment

In the fourth quarter of 2019, Ford Credit committed to a plan to sell its operations in Forso, a wholly owned subsidiary of Ford Credit, which provides retail and dealer financing in Denmark, Finland, Norway, and Sweden. As a result, we classified the assets and liabilities of these operations as held for sale and recognized a pre-tax fair value impairment charge of $20 million, reported in Other income/(loss), net, in the fourth quarter of 2019.

The assets and liabilities of the Forso operations classified as held for sale at December 31, 2019 were as follows (in millions):
December 31,
2019
Assets
Cash and cash equivalents$61 
Ford Credit finance receivables, net, current516 
Trade and other receivables, net
Other assets, current106 
Ford Credit finance receivables, net, non-current715 
Net property
Deferred income taxes
Other assets, non-current
Total assets of held-for-sale operations1,418 
Less: Intercompany asset balances(2)
Ford Credit segment total assets of held-for-sale operations (a)$1,416 
Liabilities
Payables$34 
Other liabilities and deferred revenue, current
Ford Credit long-term debt1,254 
Deferred income taxes23 
Total liabilities of held-for-sale operations1,319 
Less: Intercompany liability balances(1,274)
Ford Credit segment total liabilities of held-for-sale operations (a)$45 
__________
(a)As of December 31, 2019, intercompany items and transactions have been eliminated on the consolidated balance sheets. Upon closing, the buyer assumed the intercompany assets and liabilities. Accordingly, we have presented those balances in the table for informational purposes.

On February 28, 2020, Ford Credit completed the sale of Forso recognizing a pre-tax loss of $4 million, reported in Other income/(loss), net, and cash proceeds of $1.3 billion.

29

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18. 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 QuarterFirst Nine Months
2019202020192020
Foreign currency translation
Beginning balance$(4,684)$(6,181)$(4,800)$(4,626)
Gains/(Losses) on foreign currency translation(301)(126)(169)(1,673)
Less: Tax/(Tax benefit)58 (60)74 (83)
Net gains/(losses) on foreign currency translation (359)(66)(243)(1,590)
(Gains)/Losses reclassified from AOCI to net income (a)(1)(3)(1)(34)
Other comprehensive income/(loss), net of tax(360)(69)(244)(1,624)
Ending balance$(5,044)$(6,250)$(5,044)$(6,250)
Marketable securities
Beginning balance$63 $184 $(59)$71 
Gains/(Losses) on available for sale securities15 (8)169 157 
Less: Tax/(Tax benefit)(2)40 36 
Net gains/(losses) on available for sale securities11 (6)129 121 
(Gains)/Losses reclassified from AOCI to net income(3)(15)(33)
Less: Tax/(Tax benefit)— (4)(8)
Net (gains)/losses reclassified from AOCI to net income
(3)(11)(25)
Other comprehensive income/(loss), net of tax(17)130 96 
Ending balance$71 $167 $71 $167 
Derivative instruments
Beginning balance$(128)$180 $201 $(488)
Gains/(Losses) on derivative instruments(100)(96)(442)636 
Less: Tax/(Tax benefit)(17)(15)(95)135 
Net gains/(losses) on derivative instruments(83)(81)(347)501 
(Gains)/Losses reclassified from AOCI to net income18 16 (69)118 
Less: Tax/(Tax benefit)(18)22 
Net (gains)/losses reclassified from AOCI to net income (b)14 10 (51)96 
Other comprehensive income/(loss), net of tax(69)(71)(398)597 
Ending balance$(197)$109 $(197)$109 
Pension and other postretirement benefits
Beginning balance$(2,687)$(2,654)$(2,708)$(2,685)
Amortization and recognition of prior service costs/(credits)
12 29 37 55 
Less: Tax/(Tax benefit)10 
Net prior service costs/(credits) reclassified from AOCI to net income
10 23 30 45 
Translation impact on non-U.S. plans
(8)
Other comprehensive income/(loss), net of tax15 15 36 46 
Ending balance$(2,672)$(2,639)$(2,672)$(2,639)
Total AOCI ending balance at September 30$(7,842)$(8,613)$(7,842)$(8,613)
__________
(a)Reclassified to Other income/(loss), net.
(b)Reclassified to Cost of sales. During the next twelve months we expect to reclassify existing net gains on cash flow hedges of $155 million. See Note 15 for additional information.
30

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. COMMITMENTS AND CONTINGENCIES

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

Guarantees and Indemnifications

Financial Guarantees. Financial guarantees and indemnifications are recorded at fair value at their inception. Subsequent to initial recognition, the guarantee liability is adjusted at each reporting period to reflect the current estimate of expected payments resulting from possible default events over the remaining life of the guarantee. The probability of default is applied to the expected exposure at the time of default less recoveries to determine the expected payments. Factors to consider when estimating the probability of default include the obligor’s financial position, forecasted economic environment, historical loss rates, and other communications. The liability recorded represents Ford’s exposure to credit risk. The maximum potential payments for financial guarantees were $162 million and $437 million at December 31, 2019 and September 30, 2020, respectively. The carrying value of recorded liabilities related to financial guarantees was $33 million and $40 million at December 31, 2019 and September 30, 2020, respectively.

Our financial guarantees consist of 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.

Non-Financial Guarantees. Non-financial 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. The maximum potential payments for non-financial guarantees were $587 million and $266 million at December 31, 2019 and September 30, 2020, respectively. The carrying value of recorded liabilities related to non-financial guarantees was $200 million and $59 million at December 31, 2019 and September 30, 2020, respectively.

We guarantee the resale value of vehicles sold in certain arrangements to daily rental companies. The maximum potential payment of $260 million as of September 30, 2020 represents the total proceeds we guarantee the rental company will receive on resale.  Reflecting our present estimate of proceeds the rental companies will receive on resale from third parties, we have recorded $58 million as our best estimate of the amount we will have to pay under the guarantee.

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 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.
31

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. COMMITMENTS AND CONTINGENCIES (Continued)

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.

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 $900 million.

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.
32

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. COMMITMENTS AND CONTINGENCIES (Continued)

Warranty and Field Service Actions

We accrue the estimated cost of both base warranty coverages and field service actions at the time of sale. We establish our estimate of base warranty obligations using a patterned estimation model, using historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. We establish our estimates of field service action obligations using a patterned estimation model, using historical information regarding the nature, frequency, severity, and average cost of claims for each model year. In addition, from time to time, we issue extended warranties at our expense, the estimated cost of which is accrued at the time of issuance. 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, net 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
 20192020
Beginning balance$5,137 $5,702 
Payments made during the period(3,395)(2,913)
Changes in accrual related to warranties issued during the period2,180 2,419 
Changes in accrual related to pre-existing warranties1,355 1,451 
Foreign currency translation and other(57)(75)
Ending balance$5,220 $6,584 

Changes to our estimated costs are reported as changes in accrual related to pre-existing warranties in the table above.
33

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. SEGMENT INFORMATION

We report segment information consistent with the way our chief operating decision maker evaluates the operating results and performance of the Company. Accordingly, we analyze the results of our business through the following segments: Automotive, Mobility, and Ford Credit. 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 (including Taiwan), and
the International Markets Group.

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. 

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.
34

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. SEGMENT INFORMATION (Continued)

Key financial information for the periods ended or at September 30 was as follows (in millions):
 AutomotiveMobilityFord CreditCorporate
Other
Interest
on Debt
Special ItemsAdjustmentsTotal
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)— — — — (16)
Cash, cash equivalents, marketable securities, and restricted cash
22,194 135 15,160 — — — — 37,489 
Total assets101,865 1,193 160,322 — — — (5,223)(a)258,157 
Third Quarter 2020     
Revenues$34,707 $20 $2,774 $— $— $— $— $37,501 
Income/(loss) before income taxes
2,644 (281)1,123 158 (498)(390)— 2,756 
Equity in net income/(loss) of affiliated companies
115 (58)— — (3)— 58 
Cash, cash equivalents, marketable securities, and restricted cash
29,473 67 15,500 — — — — 45,040 
Total assets107,097 4,082 153,799 — — — (5,035)(a)259,943 
 AutomotiveMobilityFord CreditCorporate
Other
Interest
on Debt
Special ItemsAdjustmentsTotal
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 
First Nine Months 2020     
Revenues$82,669 $43 $8,480 $— $— $— $— $91,192 
Income/(loss) before income taxes
378 (947)1,696 (61)(1,175)2,803 — 2,694 
Equity in net income/(loss) of affiliated companies
59 (70)12 — — (9)— (8)
__________
(a)Includes eliminations of intersegment transactions occurring in the ordinary course of business and deferred tax netting.
35


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

RECENT DEVELOPMENTS

The impact of COVID-19 has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.  Although restrictions have been eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities, which presently includes areas within Mexico and Europe.

Remote Work Arrangements and Resumption of Manufacturing Operations

The remote work arrangements that we implemented earlier this year remain in place in most locations. Our remote work arrangements have been designed to allow for continued operation of non-production business-critical functions, including financial reporting systems and internal control. Our controls and procedures have incorporated remote work arrangements using appropriate digital tools.

A successful phased restart of our manufacturing plants, supply network, and other dependent functions occurred in the second quarter of 2020. In significant regions, we have returned to pre-COVID-19 production levels.

Liquidity

We ended the third quarter of 2020 with $45 billion of liquidity, including nearly $30 billion of cash. During the third quarter, we fully repaid the drawn amounts under our $15.5 billion corporate revolvers.

Enhanced Safety Standards

When we returned to work, we established new protocols to help protect the health and safety of our workforce.  Those measures remain in place today, including a daily, online health self-certification, a no-touch temperature scan upon entering our facilities, a policy requiring the use of face masks in our facilities, and measures to provide additional personal protective equipment, including face shields, when employees’ jobs do not allow them to socially distance. We have also enhanced our cleaning protocols and adjusted our operating patterns and breaks to reduce potential employee interaction where possible.

Medical Supplies

We continue to produce medical masks for our employees and dealers. In addition, we have donated 25 million medical-grade face masks to communities in need across the United States, a quarter of the way to reaching our goal of donating 100 million masks through 2021.

Forward Looking Information

The full impact of COVID-19 on future results depends on future developments, such as the ultimate duration and scope of the outbreak, its impact on our customers, dealers, and suppliers, and the rate at which economic conditions return to pre-COVID-19 levels. Despite the successful restart of our manufacturing operations in the second quarter of 2020 and the strong results we delivered in the third quarter of 2020, we expect our full year 2020 results of operations to be adversely affected by COVID-19. Moreover, new restrictions, such as those that are presently in effect in Mexico and Europe, could have an adverse effect on production, supply chains, distribution, and demand for vehicles. For additional information on the impact and potential impact of COVID-19 on us, please see Item 1A. Risk Factors on page 74.
36

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

RESULTS OF OPERATIONS

In the third quarter of 2020, the net income attributable to Ford Motor Company was $2,385 million, and Company adjusted EBIT was $3,644 million.

Net income/(loss) includes certain items (“special items”) that are excluded from Company adjusted EBIT. These items are discussed in more detail in Note 20 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 QuarterFirst Nine Months
2019202020192020
Global Redesign
Europe excl. Russia$(215)$(211)$(1,039)$(410)
India(799)(3)(799)(21)
South America(43)(52)(479)(70)
Russia24 (358)18 
China— (3)(2)(9)
Separations and Other (not included above)(10)— (91)(1)
Subtotal Global Redesign$(1,043)$(268)$(2,768)$(493)
Other Items
Gain on transaction with Argo AI and VW$— $— $— $3,454 
Other incl. Focus Cancellation, Transit Connect Customs Ruling,
North America Hourly Buyouts, and Chariot (a)
(187)(20)(270)(226)
Subtotal Other Items$(187)$(20)$(270)$3,228 
Pension and OPEB Gain/(Loss)
Pension and OPEB remeasurement$(306)$(54)$(295)$116 
Pension settlements and curtailments — (48)— (48)
Subtotal Pension and OPEB Gain/(Loss)$(306)$(102)$(295)$68 
Total EBIT Special Items$(1,536)$(390)$(3,333)$2,803 
Cash effect of Global Redesign (incl. separations)$(334)$(105)$(692)$(376)
Tax special items (b)$605 $159 $828 $(1,583)
__________
(a)Transit Connect impact of $187 million was accrued in the third quarter of 2019 and paid in the second half of 2020.
(b)Includes related tax effect on special items and tax special items.

We recorded $390 million of pre-tax special item charges in the third quarter of 2020, primarily reflecting global redesign actions in Europe.

In Note 20 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.
37

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 2020 key metrics for the Company, compared to a year ago.
Third QuarterFirst Nine Months
20192020H / (L)20192020H / (L)
GAAP Financial Measures
Cash Flows from Operating Activities ($B)$4.7 $11.1 $6.4 $14.7 $19.7 $5.0 
Revenue ($M)36,990 37,501 %116,185 91,192 (22)%
Net Income/(Loss) ($M)425 2,385 1,960 1,719 1,509 (210)
Net Income/(Loss) Margin (%)1.1 %6.4 %5.2 ppts1.5 %1.7 %0.2 ppts
EPS (Diluted)$0.11 $0.60 $0.49 $0.43 $0.38 $(0.05)
Non-GAAP Financial Measures (a)
Company Adj. Free Cash Flow ($B)$0.2 $6.3 $6.1 $2.3 $(1.2)$(3.5)
Company Adj. EBIT ($M)1,793 3,644 1,851 5,894 1,066 (4,828)
Company Adj. EBIT Margin (%)4.8 %9.7 %4.9 ppts5.1 %1.2 %(3.9) ppts
Adjusted EPS (Diluted)$0.34 $0.65 $0.31 $1.06 $0.07 $(0.99)
Adjusted ROIC (Trailing Four Quarters)9.0 %(0.4)%(9.4) ppts
__________
(a)See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

In the third quarter of 2020, our diluted earnings per share of Common and Class B Stock was $0.60 and our diluted adjusted earnings per share was $0.65.

Net income/(loss) margin was 6.4% in the third quarter of 2020, up 5.2 percentage points from a year ago. Company adjusted EBIT margin was 9.7% in the third quarter of 2020, up 4.9 percentage points from a year ago.

The year-over-year increases of $1,960 million in net income/(loss) and $1,851 million in Company adjusted EBIT in the third quarter of 2020 were driven by improvements in Automotive EBIT and Ford Credit EBT.

Our results in the third quarter of 2020, particularly in North America, were largely due to short-term offsets to the negative impact COVID-19 has had on our operations and the automotive industry in general. Specifically, demand for new vehicles was higher than expected, and with inventories limited due to the suspension of production in the first half of the year, pricing was healthy and incentives were lower.

The table below shows our third quarter 2020 net income/(loss) attributable to Ford and Company adjusted EBIT by segment.
Third QuarterFirst Nine Months
20192020H / (L)20192020H / (L)
Automotive$1,329 $2,644 $1,315 $4,711 $378 $(4,333)
Mobility(290)(281)(842)(947)(105)
Ford Credit736 1,123 387 2,368 1,696 (672)
Corporate Other18 158 140 (343)(61)282 
Company Adjusted EBIT (a)1,793 3,644 1,851 5,894 1,066 (4,828)
Interest on Debt(276)(498)222 (765)(1,175)410 
Special Items(1,536)(390)(1,146)(3,333)2,803 (6,136)
Taxes / Noncontrolling Interests444 (371)815 (77)(1,185)1,108 
Net Income/(Loss)$425 $2,385 $1,960 $1,719 $1,509 $(210)
__________
(a)See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
38

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

Automotive Segment

The table below shows our third quarter 2020 Automotive segment EBIT by business unit (in millions).
Third QuarterFirst Nine Months
20192020H / (L)20192020H / (L)
North America$2,012 $3,178 $1,166 $5,912 $2,550 $(3,362)
South America(165)(108)57 (527)(386)141 
Europe(144)(440)(296)51 (1,247)(1,298)
China (including Taiwan)(281)(58)223 (565)(435)130 
International Markets Group(93)72 165 (160)(104)56 
Automotive Segment$1,329 $2,644 $1,315 $4,711 $378 $(4,333)

The tables below and on the following pages provide third quarter 2020 key metrics and the change in third quarter 2020 EBIT compared with third quarter 2019 by causal factor for our Automotive segment and its regional business units: North America, South America, Europe, China (including Taiwan), and the International Markets Group. For a description of these causal factors, see Definitions and Information Regarding Automotive Causal Factors.
Third QuarterFirst Nine Months
Key Metrics20192020H / (L)20192020H / (L)
Market Share (%)6.0 %6.0 %— ppts6.1 %6.0 %(0.1) ppts
Wholesale Units (000)1,244 1,178 (66)4,034 2,949 (1,084)
Revenue ($M)$33,931 $34,707 $776 $106,928 $82,669 $(24,259)
EBIT ($M)1,329 2,644 1,315 4,711 378 (4,333)
EBIT Margin (%)3.9 %7.6 %3.7 ppts4.4 %0.5 %(3.9) ppts

Change in EBIT by Causal Factor (in millions)
Third Quarter 2019 EBIT$1,329 
Volume / Mix(198)
Net Pricing1,461 
Cost(61)
Exchange(39)
Other152 
Third Quarter 2020 EBIT$2,644 

In the third quarter of 2020, wholesales were down 5 percent driven by lower industry volume. Third quarter 2020 revenue was up 2 percent, driven by favorable mix and higher net pricing, partially offset by lower volume.

Our third quarter 2020 Automotive segment EBIT was $2.6 billion, up $1.3 billion from a year ago, and our third quarter 2020 Automotive EBIT margin was 7.6 percent. The higher EBIT was driven by higher net pricing and lower structural cost, partially offset by higher material cost related to product updates and lower volume and mix.
39

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

North America
Third QuarterFirst Nine Months
Key Metrics20192020H / (L)20192020H / (L)
Market Share (%)12.6 %13.6 %1.0 ppts13.3 %13.8 %0.5 ppts
Wholesale Units (000)639 651 11 2,085 1,541 (544)
Revenue ($M)$23,379 $25,333 $1,954 $72,738 $58,084 $(14,654)
EBIT ($M)2,012 3,178 1,166 5,912 2,550 (3,362)
EBIT Margin (%)8.6 %12.5 %3.9 ppts8.1 %4.4 %(3.7) ppts
Change in EBIT by Causal Factor (in millions)
Third Quarter 2019 EBIT$2,012 
Volume / Mix362 
Net Pricing931 
Cost(95)
Exchange(28)
Other(4)
Third Quarter 2020 EBIT$3,178 

In North America, third quarter 2020 wholesales increased 2 percent from a year ago, reflecting higher production to replenish dealer inventories and meet customer demand. Third quarter 2020 revenue increased 8 percent, driven by favorable mix, higher net pricing on new products, and lower industry incentive spending.

North America’s third quarter 2020 EBIT improved $1.2 billion from a year ago with an EBIT margin of 12.5 percent. The EBIT improvement was primarily driven by higher net pricing, improved product mix, and lower cost as a result of COVID-19, partially offset by increased product cost.

South America
Third QuarterFirst Nine Months
Key Metrics20192020H / (L)20192020H / (L)
Market Share (%)7.1 %5.7 %(1.4) ppts7.4 %6.3 %(1.1) ppts
Wholesale Units (000)79 48 (30)222 122 (100)
Revenue ($M)$1,037 $630 $(407)$2,938 $1,601 $(1,337)
EBIT ($M)(165)(108)57 (527)(386)141 
EBIT Margin (%)(15.9)%(17.1)%(1.2) ppts(17.9)%(24.1)%(6.2) ppts

Change in EBIT by Causal Factor (in millions)
Third Quarter 2019 EBIT$(165)
Volume / Mix(43)
Net Pricing170 
Cost21 
Exchange(105)
Other14 
Third Quarter 2020 EBIT$(108)

In South America, third quarter 2020 wholesales declined 39 percent from a year ago, driven by COVID-related lower industry volume, coupled with our decision to exit unprofitable fleet sales in Brazil. Third quarter 2020 revenue decreased 39 percent, driven by lower volume and weaker currencies, partially offset by higher net pricing.

South America’s third quarter 2020 EBIT loss improved $57 million from a year ago with an EBIT margin of negative 17.1 percent. The EBIT improvement reflects aggressive pricing to mitigate high inflation and currency weakening as well as cost reduction efforts. This was South America’s fourth consecutive quarter of year-over-year EBIT improvement.
40

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

Europe
Third QuarterFirst Nine Months
Key Metrics20192020H / (L)20192020H / (L)
Market Share (%)7.3 %7.8 %0.5 ppts7.3 %7.3 %— ppts
Wholesale Units (000) (a)298 239 (60)1,048 681 (368)
Revenue ($M)$6,340 $5,694 $(646)$21,117 $15,555 $(5,562)
EBIT ($M)(144)(440)(296)51 (1,247)(1,298)
EBIT Margin (%)(2.3)%(7.7)%(5.5) ppts0.2 %(8.0)%(8.3) ppts
__________
(a)Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Turkey (about 6,000 units in Q3 2019 and 26,000 units in Q3 2020). Revenue does not include these sales.

Change in EBIT by Causal Factor (in millions)
Third Quarter 2019 EBIT$(144)
Volume / Mix(501)
Net Pricing341 
Cost(200)
Exchange101 
Other(37)
Third Quarter 2020 EBIT$(440)

In Europe, third quarter 2020 wholesales declined 20 percent from a year ago, driven by COVID-related lower industry volume and production. Third quarter 2020 revenue decreased 10 percent year over year, driven by lower volume, partially offset by higher net pricing, reflecting yield management actions and product pricing.

Europe’s third quarter 2020 EBIT decreased $296 million year over year with an EBIT margin of negative 7.7 percent. The lower EBIT was mainly driven by lower volume and about $400 million of cost associated with Kuga PHEV (including warranty, CO2 pooling, and other expenses), partially mitigated by higher net pricing and lower structural cost.
41

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

China (Including Taiwan)
Third QuarterFirst Nine Months
Key Metrics20192020H / (L)20192020H / (L)
Market Share (%)2.3 %2.4 %0.1 ppts2.2 %2.4 %0.2 ppts
Wholesale Units (000) (a)134 164 30 375 415 40 
Revenue ($M)$878 $1,011 $133 $2,652 $2,407 $(245)
EBIT ($M)(281)(58)223 (565)(435)130 
EBIT Margin (%)(32.0)%(5.7)%26.3 ppts(21.3)%(18.1)%3.2 ppts
China Unconsolidated Affiliates
Wholesales (000)116 146 30 323 374 51 
Ford Equity Income/(Loss) ($M)$(112)$55 $167 $(146)$(26)$120 
__________
(a)Includes 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 2019 EBIT$(281)
Volume / Mix
Net Pricing(1)
Cost51 
Exchange(13)
Other (Including Joint Ventures)179 
Third Quarter 2020 EBIT$(58)

In China, third quarter 2020 wholesales increased 22 percent from a year ago, driven by recent product launches, including localizations.

China’s third quarter 2020 EBIT loss improved $223 million from a year ago with an EBIT margin of negative 5.7 percent. This was our lowest EBIT loss in China since the fourth quarter of 2017. The improved EBIT primarily reflects favorable product mix, including the all-new Corsair, Aviator, Escape, and Explorer, and cost improvement.
42

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

International Markets Group
Third QuarterFirst Nine Months
Key Metrics20192020H / (L)20192020H / (L)
Market Share (%)1.8 %1.7 %(0.1) ppts2.0 %1.7 %(0.3) ppts
Wholesale Units (000) (a)93 76 (17)303 191 (112)
Revenue ($M)$2,297 $2,039 $(258)$7,483 $5,022 $(2,461)
EBIT ($M)(93)72 165 (160)(104)56 
EBIT Margin (%)(4.0)%3.5 %7.6 ppts(2.1)%(2.1)%0.1 ppts
__________
(a)Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Russia (about 4,000 units in Q3 2019 and 4,000 units in Q3 2020). Revenue after Q2 2019 does not include these sales.
Change in EBIT by Causal Factor (in millions)
Third Quarter 2019 EBIT$(93)
Volume / Mix(23)
Net Pricing20 
Cost162 
Exchange
Other— 
Third Quarter 2020 EBIT$72 

In our International Markets Group, third quarter 2020 wholesales declined 18 percent from a year ago, primarily reflecting COVID-related lower industry volume. Third quarter 2020 revenue decreased 11 percent, driven by lower industry volume, partially offset by favorable share performance and Ranger mix.

Our International Market Group’s third quarter 2020 EBIT was $165 million higher than a year ago with an EBIT margin of 3.5 percent. The higher EBIT was driven by lower cost, higher net pricing, and favorable mix, partially offset by lower industry volume.
43

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 wholesale units):
Volume and Mix – primarily measures EBIT variance from changes in wholesale unit 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 unit 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
44

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 our Mobility segment, our third quarter 2020 EBIT loss was $281 million, a $9 million improvement from a year ago.
45

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 2020 key metrics and the change in third quarter 2020 EBT compared with third quarter 2019 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 QuarterFirst Nine Months
GAAP Financial Measures20192020H / (L)20192020H / (L)
Net Receivables ($B)$140 $131 (6)%$140 $131 (6)%
Loss-to-Receivables (bps) (a)51 30 (21)48 35 (13)
Auction Values (b)$20,130 $21,045 %$19,525 $19,890 %
EBT ($M)$736 $1,123 $387 $2,368 $1,696 $(672)
ROE (%)15 %24 %9 ppts16 %12 %(4) ppts
Other Balance Sheet Metrics
Debt ($B)$139 $133 (4)%
Net Liquidity ($B)35 31 (11)%
Financial Statement Leverage (to 1)9.8 9.3 (0.5)
__________
(a)U.S. retail financing only.
(b)U.S. 36-month off-lease third quarter auction values at Q3 2020 mix and YTD amounts at 2020 YTD mix.
First Nine Months
Non-GAAP Financial Measures20192020H / (L)
Managed Receivables ($B) (a)$149 $141 (5)%
Managed Leverage (to 1) (b)8.8 8.2 (0.6)
__________
(a)See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
(b)See Liquidity and Capital Resources - Ford Credit Segment section for reconciliation to GAAP.

Change in EBT by Causal Factor (in millions)
Third Quarter 2019 EBT$736 
Volume / Mix(49)
Financing Margin
Credit Loss
Lease Residual344 
Exchange(2)
Other85 
Third Quarter 2020 EBT$1,123 

Ford Credit’s loss-to-receivables ratio remained at a low level in the third quarter of 2020, at 0.30 percent, which was 21 basis points lower than a year ago. U.S. auction values in the third quarter of 2020 were 5 percent higher than a year ago. Full year 2020 auction values are now forecasted to be up about 2 percent, consistent with third party estimates.

Ford Credit’s third quarter 2020 EBT of $1,123 million was $387 million higher than a year ago, primarily reflecting favorable auction performance on off-lease vehicles, a higher gain in market valuation adjustments to derivatives, and lower operating costs, partially offset by unfavorable volume resulting from lower receivables.
46

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 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 forward looking macroeconomic conditions. For additional information, refer to the “Critical Accounting Estimates” section

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. Accumulated depreciation 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 2019 Form 10-K Report

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

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
47

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

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 sheets. 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

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

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

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 sheets 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
48

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 2020, Corporate Other had a $158 million profit, compared with an $18 million profit a year ago. The improvement is primarily explained by mark-to-market gains on our investments, partially offset by lower interest income and the nonrecurrence of Pivotal Software mark-to-market gains in the third quarter of 2019.

Interest on Debt

Interest on Debt consists of interest expense on Automotive and Other debt. Third quarter 2020 interest expense on Automotive and Other debt was $498 million, which is $222 million higher than a year ago, more than explained by higher U.S. debt interest expense.

Taxes

In the third quarter and first nine months of 2020, we recognized tax provisions of $366 million and $1.2 billion, respectively. This resulted in effective tax rates of 13.3% and 43.8%, respectively. Our effective tax rate for the first nine months includes tax expense of $1 billion for valuation allowances against certain tax credits recorded as deferred tax assets.

Our third quarter and first nine months of 2020 adjusted effective tax rates, which exclude special items, were 16.7% and 371%, respectively.
49

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

LIQUIDITY AND CAPITAL RESOURCES

COVID-19 has created significant volatility in the global economy, led to reduced economic activity, and adversely affected our operations in the first half of 2020. Moreover, our suspension of production earlier this year put pressure on our Automotive liquidity. By May 2020, we restarted manufacturing operations in a phased manner at locations around the world, and in significant regions, we have returned to pre-COVID-19 production levels. Throughout, we demonstrated discipline in the management of our balance sheet and continued to maintain strong liquidity to ensure financial flexibility in these uncertain times. As discussed in more detail below, we ended the third quarter of 2020 with $45.5 billion of liquidity, including $29.5 billion of cash.

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,
2019
September 30,
2020
Balance Sheets ($B)
Company Cash$22.3 $29.5 
Liquidity35.4 45.5 
Debt(15.3)(24.2)
Cash Net of Debt7.0 5.3 
Pension Funded Status ($B) (a)
Funded Plans$(0.4)$0.8 
Unfunded Plans(6.4)(6.6)
Total Global Pension$(6.8)$(5.8)
Total Funded Status OPEB$(6.1)$(6.0)
__________
(a)Balances at September 30, 2020 reflect net underfunded status at December 31, 2019, updated for service and interest cost, expected return on assets, curtailment and settlement gains 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 2019.

Liquidity. At September 30, 2020, we had Company cash of $29.5 billion, an increase of $7.2 billion compared with December 31, 2019, primarily due to our unsecured debt issuance in the second quarter of 2020. At September 30, 2020, about 91% of Company cash was 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.

At September 30, 2020, we had Company liquidity of $45.5 billion, an increase of $10.1 billion from December 31, 2019, primarily explained by our higher cash balance and our improved cash flow as discussed below under “Changes in Company Cash.”
50

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 of generally about 45 days. As a result, our cash flow tends to improve as wholesale volumes increase, but can deteriorate when wholesale volumes decrease. Our resumption of manufacturing operations and return to pre-COVID-19 production levels at most of our assembly plants resulted in an improvement of our cash flow as described below. Even in normal economic conditions, 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.

A financial institution offers a supply chain finance (“SCF”) program that enables our suppliers, at their sole discretion, to sell their Ford receivables (i.e., our payment obligations to the suppliers) to the financial institution on a non-recourse basis in order to be paid earlier than our payment terms provide. Our suppliers’ voluntary inclusion of invoices in the SCF program has no bearing on our payment terms, the amounts we pay, or our liquidity. We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the SCF financial institution. Moreover, we do not provide any guarantees in connection with the SCF program. As of September 30, 2020, the outstanding amount of Ford receivables that suppliers elected to sell to the SCF financial institution was $153 million. The amount settled through the SCF program during the third quarter of 2020 was $251 million.

Changes in Company cash excluding Ford Credit are summarized below (in billions):
Third QuarterFirst Nine Months
2019202020192020
Company Excluding Ford Credit
Company Adjusted EBIT excluding Ford Credit (a)$1.1 $2.5 $3.5 $(0.6)
Capital spending$(1.8)$(1.2)$(5.3)$(4.2)
Depreciation and tooling amortization1.4 1.3 4.1 4.0 
Net spending$(0.4)$0.1 $(1.2)$(0.2)
Receivables$(0.2)$(0.2)$(0.2)$0.3 
Inventory(0.6)(0.1)(1.8)— 
Trade Payables(0.6)4.3 1.0 1.6 
Changes in working capital$(1.4)$3.9 $(1.0)$1.9 
Ford Credit distributions$1.1 $0.6 $2.4 $1.1 
All other and timing differences(0.1)(0.8)(1.4)(3.4)
Company adjusted free cash flow (a)$0.2 $6.3 $2.3 $(1.2)
Global Redesign (including separations)$(0.3)$(0.1)$(0.7)$(0.4)
Changes in debt0.4 (15.8)0.7 8.8 
Funded pension contributions(0.2)(0.1)(0.6)(0.4)
Shareholder distributions(0.8)— (2.0)(0.6)
All other (including acquisitions and divestitures)(0.1)— (0.4)1.0 
Change in cash$(0.9)$(9.7)$(0.8)$7.2 
__________
(a)See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
Note: Numbers may not sum due to rounding.
51

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

Our third quarter 2020 Net cash provided by/(used in) operating activities was up $6.4 billion year over year. This improvement is more than explained by the Company excluding Ford Credit operating cash flow, which is up $6.7 billion year over year. Our Company adjusted free cash flow was positive $6.3 billion, which was $6.1 billion higher than a year ago, driven by rebuilding the payables depleted in the first half of 2020 due to the COVID-related suspension of production, which was worth about $4 billion, and higher adjusted EBIT in the third quarter of 2020.

Capital spending was $1.2 billion in the third quarter of 2020, $0.6 billion lower than a year ago. We expect full year 2020 capital spending to be between $5.9 billion and $6.4 billion, down from our prior expectation of $6.1 billion to $6.6 billion, and down between $1.2 billion and $1.7 billion from the $7.6 billion of capital spending in 2019.

Third quarter 2020 working capital was $3.9 billion positive, more than explained by the rebuilding of payables, which were depleted in the first half 2020 due to the COVID-related suspension of production. Higher receivables and inventory balances provided a partial offset.

Third quarter 2020 all other and timing differences were $0.8 billion negative, reflecting assorted timing differences including differences between accrual-based EBIT and the associated cash flows (e.g., marketing incentive and warranty payments to dealers), interest payments on Automotive and Other debt, and cash taxes.

In the third quarter and first nine months of 2020, we contributed $147 million and $429 million, respectively, to our worldwide funded pension plans. We continue to expect to contribute between $500 million and $700 million to our funded plans (most of which are mandatory contributions).

There were no shareholder distributions in the third quarter of 2020.

Available Credit Lines. Total Company committed credit lines excluding Ford Credit at September 30, 2020 were $18.5 billion, consisting of $13.5 billion of our corporate credit facility, $2 billion of our supplemental revolving credit facility, $1.5 billion of our delayed draw term loan facility, and $1.5 billion of local credit facilities. In the first quarter of 2020, we submitted borrowing notices to our lenders for the full amounts of both our corporate credit facility and our supplemental revolving credit facility. On July 27, 2020, we repaid $5.7 billion of our corporate credit facility and the full $2 billion under our supplemental revolving credit facility, and on September 24, 2020, we repaid the remaining $7.7 billion outstanding under our corporate credit facility. At September 30, 2020, the utilized portion of the corporate credit facility was $27 million, representing amounts utilized for letters of credit, and no portion of the supplemental revolving credit facility was utilized. The $1.5 billion delayed draw term loan facility was drawn in full in 2019 and remains outstanding. In addition, $900 million of committed Company credit lines excluding Ford Credit was utilized under local credit facilities for our affiliates as of September 30, 2020.

Our corporate and supplemental revolving credit facilities were amended in the third quarter of 2020 to extend the maturity dates by one year for a portion of the commitments under each facility. Following the corporate credit facility amendment, $0.4 billion of commitments mature on April 30, 2022, $3 billion of commitments mature on July 27, 2023, and $10.1 billion of commitments mature on April 30, 2024. Following the supplemental revolving credit facility amendment, $0.2 billion of commitments mature on April 30, 2022 and $1.8 billion of commitments mature on July 27, 2023.

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 or trigger early repayment. 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. Further, the terms of the corporate and supplemental revolving credit facilities prohibit share repurchases (with limited exceptions) while any portion of either facility is outstanding and the payment of dividends on our common or Class B stock while more than 50% of the aggregate amount of commitments under the two facilities is utilized. The terms and conditions of the delayed draw term loan (other than the restrictions on share repurchases and dividends) and the supplemental revolving credit facility are consistent with our corporate credit facility.
52

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

Each of the corporate credit facility, supplemental revolving credit facility, delayed draw term loan, and our Loan Arrangement and Reimbursement Agreement with the U.S. Department of Energy (the “DOE”) include a covenant that requires us to provide guarantees from certain of our subsidiaries in the event that our senior, unsecured, long-term debt does not maintain at least two investment grade ratings from Fitch, Moody’s, and S&P. The following subsidiaries have provided unsecured guarantees to the lenders under the credit facilities and to the DOE: Ford Component Sales, LLC; Ford European Holdings LLC; Ford Global Technologies, LLC; Ford Holdings LLC (the parent company of Ford Credit); Ford International Capital LLC; Ford Mexico Holdings LLC; Ford Motor Service Company; Ford Smart Mobility LLC; and Ford Trading Company, LLC.

In the second quarter of 2020, Ford Motor Company Limited, our operating subsidiary in the United Kingdom (“Ford of Britain”), entered into, and drew in full, a £625 million term loan credit facility with a syndicate of banks to support Ford of Britain’s general export activities.  Accordingly, U.K. Export Finance (“UKEF”) provided a £500 million guarantee of the credit facility under its new Export Development Guarantee scheme, which supports high value commercial lending to U.K. exporters. We have also guaranteed Ford of Britain’s obligations under the credit facility to the lenders.  As of September 30, 2020, the full £625 million remained outstanding. This five-year, non-amortizing loan matures on June 30, 2025.

Debt. As shown in Note 14 of the Notes to the Financial Statements, at September 30, 2020, Company debt excluding Ford Credit was $24.2 billion, including Automotive debt of $23.7 billion. These September 30, 2020 balances were $8.9 billion and $9.1 billion, respectively, higher than at December 31, 2019, primarily reflecting our $8 billion unsecured debt issuance in April 2020, and $15.8 billion lower than at June 30, 2020, primarily reflecting the full repayment of our corporate and supplemental revolving credit facilities in the third quarter of 2020.

Leverage. We manage Company debt (excluding Ford Credit) levels with a leverage framework that targets investment grade credit ratings through a normal business cycle; however, during these uncertain times, we have increased our debt balance and prioritized actions that preserve or improve our cash balance. The leverage framework includes a ratio of total company debt (excluding Ford Credit), underfunded pension liabilities, operating leases, and other adjustments, divided by Company adjusted EBIT (excluding Ford Credit EBT), and further adjusted to exclude depreciation and tooling amortization (excluding Ford Credit).

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.
53

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

Ford Credit Segment

Ford Credit ended the third quarter of 2020 with $31.3 billion of liquidity. During the quarter, Ford Credit completed $7 billion of public term funding. Lower expected originations as a result of COVID-19 are projected to decrease the size of Ford Credit’s balance sheet and reduce Ford Credit’s funding requirements in 2020. Ford Credit expects to modestly increase ABS mix and prudently issue unsecured debt going forward.

Key elements of Ford Credit’s funding strategy include:

Maintain strong liquidity; continue to renew and expand committed ABS capacity
Prudently access public markets
Flexibility to increase ABS mix as needed; preserving assets and committed capacity
Target managed leverage of 8:1 to 9:1
Maintain self-liquidating balance sheet

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 regularly 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,
2019
December 31,
2019
September 30,
2020
Term Debt (incl. Bank Borrowings)$74 $73 $73 
Term Asset-Backed Securities55 57 53 
Commercial Paper
Ford Interest Advantage / Deposits
Other
Equity14 14 14 
Adjustments for Cash(14)(12)(15)
Total Managed Receivables (a)$149 $152 $141 
Securitized Funding as Percent of Managed Receivables37 %38 %38 %
__________
(a)See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

Managed receivables were $141 billion at September 30, 2020, and were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 38% at the end of the third quarter of 2020. Ford Credit expects the ABS mix to increase modestly going forward. The calendarization of the funding plan will result in quarterly fluctuations of the securitized funding percentage.
54

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

Public Term Funding Plan. The following table shows Ford Credit’s issuances for full year 2018 and 2019, planned issuances for full year 2020, and its global public term funding issuances through October 27, 2020, excluding short-term funding programs (in billions):
2018
Actual
2019
Actual
2020
Forecast
Through
October 27
Unsecured$13 $17 $ 8 - 11$
Securitizations (a)14 14                   12 - 1311 
Total public$27 $31 $ 21 - 24$20 
__________
(a)See Definitions and Information Regarding Ford Credit Causal Factors section.
Note: Numbers may not sum due to rounding.

For 2020, Ford Credit now projects full year public term funding in the range of $21 billion to $24 billion. Through October 27, 2020, Ford Credit has completed $20 billion of public term issuances.

Liquidity. The following table shows Ford Credit’s liquidity sources and utilization (in billions):
September 30,
2019
December 31,
2019
September 30,
2020
Liquidity Sources (a)
Cash$14.3 $11.7 $14.6 
Committed asset-backed facilities35.2 36.6 37.4 
Other unsecured credit facilities2.6 3.0 2.4 
Ford corporate credit facility allocation3.0 3.0 — 
Total liquidity sources$55.1 $54.3 $54.4 
Utilization of Liquidity (a)
Securitization cash$(2.9)$(3.5)$(3.3)
Committed asset-backed facilities(14.4)(17.3)(17.4)
Other unsecured credit facilities(0.5)(0.8)(0.5)
Ford corporate credit facility allocation— — — 
Total utilization of liquidity$(17.8)$(21.6)$(21.2)
Gross liquidity$37.3 $32.7 $33.2 
Adjustments (b)(1.9)0.4 (1.9)
Net liquidity available for use$35.4 $33.1 $31.3 
__________
(a)See Definitions and Information Regarding Ford Credit Causal Factors section.
(b)Includes asset-backed capacity in excess of eligible receivables and cash related to the Ford Credit Revolving Extended Variable-utilization program (“FordREV”), which can be accessed through future sales of receivables.

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.

At September 30, 2020, Ford Credit’s net liquidity available for use was $31.3 billion, $1.8 billion lower than year-end 2019. Ford Credit’s sources of liquidity include cash, committed asset-backed facilities, and unsecured credit facilities. At September 30, 2020, Ford Credit’s liquidity sources including cash totaled $54.4 billion, up $0.1 billion from year-end 2019.
55

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

Balance Sheet Liquidity Profile. Ford Credit defines its balance sheet liquidity profile as the cumulative maturities, including the impact of expected prepayments and allowance for credit losses, of its finance receivables, investment in operating leases, and cash, less the cumulative debt maturities over upcoming annual periods. Ford Credit’s balance sheet is inherently liquid because of the short-term nature of its finance receivables, investment in operating leases, and cash. Ford Credit ensures its cumulative debt maturities have a longer tenor than its cumulative asset maturities. This positive maturity profile is intended to provide additional liquidity after all of its assets have been funded and is in addition to its liquidity stress test.

The following table shows Ford Credit’s cumulative maturities for assets and total debt for the periods presented and unsecured long-term debt maturities in the individual periods presented (in billions):
October - December
2020
202120222023 and Beyond
Balance Sheet Liquidity Profile
Assets (a)$49 $84 $112 $153 
Total debt (b)21 67 90 132 
Memo: Unsecured Long-Term Debt Maturities17 14 34 
__________
(a)Includes gross finance receivables less the allowance for credit losses (including certain finance receivables that are reclassified in consolidation to Trade and other receivables), investment in operating leases net of accumulated depreciation, cash and cash equivalents, and marketable securities (excluding amounts related to insurance activities). Amounts shown include the impact of expected prepayments.
(b)Excludes unamortized debt (discount) / premium, unamortized issuance costs, and fair value adjustments.

Maturities of investment in operating leases consist primarily of the portion of rental payments attributable to depreciation over the remaining life of the lease and the expected residual value at lease termination. Maturities of finance receivables and investment in operating leases in the table above include expected prepayments for Ford Credit’s retail installment sale contracts and investment in operating leases. The table above also reflects adjustments to debt maturities to match the asset-backed debt maturities with the underlying asset maturities. All wholesale securitization transactions and wholesale receivables are shown maturing in the next 12 months, even if the maturities extend beyond third quarter 2021. The retail securitization transactions under certain committed asset-backed facilities are assumed to amortize immediately rather than amortizing after the expiration of the commitment period. As of September 30, 2020, Ford Credit had $153 billion of assets, $77 billion of which were unencumbered.

Funding and Liquidity Risks. Ford Credit’s funding plan is subject to risks and uncertainties, many of which are beyond its control, including disruption in the capital markets (such as from the impact of COVID-19) and the effects of regulatory changes on the financial markets.

Despite Ford Credit’s diverse sources of funding and liquidity, its ability to maintain liquidity may be affected by, among others, the following factors (not necessarily listed in order of importance or probability of occurrence):

Prolonged disruption of the debt and securitization markets;
Global capital market volatility;
Market capacity for Ford- and Ford Credit-sponsored investments;
General demand for the type of securities Ford Credit offers;
Ford Credit’s ability to continue funding through asset-backed financing structures;
Performance of the underlying assets within Ford Credit’s asset-backed financing structures;
Inability to obtain hedging instruments;
Accounting and regulatory changes (including LIBOR); and
Ford Credit’s ability to maintain credit facilities and committed asset-backed facilities.
56

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,
2019
December 31,
2019
September 30,
2020
Leverage Calculation
Debt$139.3 $140.0 $133.1 
Adjustments for cash(14.3)(11.7)(14.6)
Adjustments for derivative accounting (a)(0.8)(0.5)(1.6)
Total adjusted debt$124.2 $127.8 $116.9 
Equity (b)$14.2 $14.3 $14.3 
Adjustments for derivative accounting (a)— — 0.1 
Total adjusted equity$14.2 $14.3 $14.4 
Financial statement leverage (to 1) (GAAP)9.8 9.8 9.3 
Managed leverage (to 1) (Non-GAAP)8.8 8.9 8.2 
__________
(a)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.
(b)Total shareholder’s interest reported on Ford Credit’s balance sheets.

Ford Credit plans its managed leverage by considering market conditions and the risk characteristics of its business. At September 30, 2020, Ford Credit’s financial statement leverage was 9.3:1, and its managed leverage was 8.2:1. Ford Credit targets managed leverage in the range of 8:1 to 9:1.
57

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, 2020, our total Company pension underfunded status reported on our consolidated balance sheets was $5.8 billion and reflects the net underfunded status at December 31, 2019, updated for service and interest cost, expected return on assets, curtailment and settlement gains, 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 2019.

Return on Invested Capital (“ROIC”). We analyze total Company performance using an adjusted 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,
2019
September 30,
2020
Adjusted Net Operating Profit After Cash Tax
Net income/(loss) attributable to Ford$1.6 $(0.2)
Add: Noncontrolling interest— — 
Less: Income tax(0.1)(0.4)
Add: Cash tax(0.7)(0.3)
Less: Interest on debt(1.1)(1.4)
Less: Total pension/OPEB income/(cost)(1.2)(1.8)
Add: Pension/OPEB service costs(1.1)(1.1)
Net operating profit/(loss) after cash tax$2.3 $2.0 
Less: Special items (excl. pension/OPEB) pre-tax(3.3)2.3 
Adjusted net operating profit after cash tax$5.6 $(0.3)
Invested Capital
Equity$35.4 $33.2 
Redeemable noncontrolling interest— — 
Debt (excl. Ford Credit)14.8 24.2 
Net pension and OPEB liability10.9 11.9 
Invested capital (end of period)$61.1 $69.2 
Average invested capital$62.1 $69.4 
ROIC (a)3.6 %2.9 %
Adjusted ROIC (Non-GAAP) (b)9.0 %(0.4)%
__________
(a)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.
(b)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.
58

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, 2020:

On August 11, 2020, S&P affirmed the credit ratings for Ford and Ford Credit at BB+, removed the ratings from CreditWatch with negative implications, and revised the outlook to negative.

The following table summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:
NRSRO RATINGS
FordFord CreditNRSROs
Issuer
Default /
Corporate /
Issuer Rating
Long-Term Senior UnsecuredOutlook / TrendLong-Term Senior UnsecuredShort-Term
Unsecured
Outlook / TrendMinimum Long-Term Investment Grade Rating
DBRSBB (high)BB (high)NegativeBB (high)R-4NegativeBBB (low)
FitchBB+BB+NegativeBB+BNegativeBBB-
Moody’sN/ABa2NegativeBa2NPNegativeBaa3
S&PBB+BB+NegativeBB+BNegativeBBB-

59

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

OUTLOOK

We provided 2020 Company guidance in our earnings release furnished on Form 8-K dated October 28, 2020. The guidance is based on our expectations as of October 28, 2020 and assumes no material change to the current economic environment, continued steady improvement in the stability of the global automotive supply base, and no further significant COVID-19-related disruptions to production or distribution since the third quarter of 2020. 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 our 2019 Form 10-K Report and as updated by our subsequent filings with the SEC, including the updates in Item 1A of this 10-Q Report.
2020 Guidance
Total Company
Adjusted EBIT (a)
Q4$(0.5) - $0.0 billion
Full Year$0.6 - $1.1 billion
Capital spending$5.9 - $6.4 billion
Pension contributions$0.5 - $0.7 billion
Global Redesign EBIT charges$0.7 - $1.2 billion
Global Redesign cash effects$0.7 - $1.2 billion
Ford Credit
Auction valuesUp about 2% (b)
Total public funding issuances$21 - $24 billion
(a)When we provide guidance for Adjusted EBIT we do not provide guidance for net income/(loss), the most comparable GAAP measure, because, as described in more detail below in “Non-GAAP Measures That Supplement GAAP Measures,” it includes items that are difficult to predict with reasonable certainty prior to year-end, including pension and OPEB remeasurement gains and losses.
(b)On average compared with full year 2019 at constant mix.

For fourth quarter 2020, we expect Company adjusted EBIT to be between a loss of $0.5 billion and breakeven. The key drivers behind the lower expected quarter-over-quarter Company adjusted EBIT are described below.

First, we expect a reduction in wholesales of about 100,000 units associated with the F-150 changeover. The approximate 100,000 unit impact in the fourth quarter of 2020 is expected to outweigh the effect of our UAW ratification bonus in the fourth quarter of 2019, which was about $600 million.

Second, we expect higher structural and other costs due to manufacturing launch activities for the Mustang Mach-E and Bronco Sport, advertising launch activities for new products, including the all-new Bronco brand, and higher material and other costs.

Third, we expect Ford Credit’s EBT to be lower, driven by strong but lower auction values and lower disposals at auction, but higher than a year ago.

For full year 2020, we expect Company adjusted EBIT to be in the range of $0.6 billion to $1.1 billion.
60

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 and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19;
Ford’s long-term competitiveness depends on the successful execution of global redesign and fitness actions;
Ford’s vehicles could be affected by defects that result in delays in new model launches, recall campaigns, or increased warranty costs;
Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, or new business strategies;
Operational systems, security systems, and vehicles could be affected by cyber incidents;
Ford’s production, as well as Ford’s suppliers’ production, could be disrupted by labor issues, 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;
Ford’s ability to attract and retain talented, diverse, and highly skilled employees is critical to its success and competitiveness;
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;
With a global footprint, Ford’s results could be adversely affected by economic, geopolitical, protectionist trade policies, or other events, including tariffs and Brexit;
Industry sales volume in any of our key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event;
Ford may face increased price competition or a reduction in demand for its products resulting from industry excess capacity, currency fluctuations, competitive actions, or other factors;
Fluctuations in commodity prices, foreign currency exchange rates, interest rates, and market value of our investments can have a significant effect on results;
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’s receipt of government incentives could be subject to reduction, termination, or clawback;
Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles;
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;
Pension and other postretirement liabilities could adversely affect Ford’s liquidity and financial condition;
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 may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations that may change in the future;
Ford and Ford Credit could be affected by the continued development of more stringent privacy, data use, and data protection laws and regulations as well as consumer expectations for the safeguarding of personal information; and
Ford Credit could be subject to new or increased credit regulations, consumer 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 2019 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
61

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, global redesign (including separations), and other items that are considered operating cash flows 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.
62

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

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 (“Adjusted 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.

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.
63

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 QuarterFirst Nine Months
2019202020192020
Net income/(loss) attributable to Ford (GAAP)$425 $2,385 $1,719 $1,509 
Income/(Loss) attributable to noncontrolling interests(2)37 
Net income/(loss)$423 $2,390 $1,756 $1,515 
Less: (Provision for)/Benefit from income taxes442 (366)(40)(1,179)
Income/(Loss) before income taxes$(19)$2,756 $1,796 $2,694 
Less: Special items pre-tax(1,536)(390)(3,333)2,803 
Income/(Loss) before special items pre-tax$1,517 $3,146 $5,129 $(109)
Less: Interest on debt(276)(498)(765)(1,175)
Adjusted EBIT (Non-GAAP)$1,793 $3,644 $5,894 $1,066 
Memo:
Revenue ($B)$37.0 $37.5 $116.2 $91.2 
Net income/(loss) margin (%)1.1 %6.4 %1.5 %1.7 %
Adjusted EBIT margin (%)4.8 %9.7 %5.1 %1.2 %

Earnings per Share Reconciliation to Adjusted Earnings per Share
Third QuarterFirst Nine Months
2019202020192020
Diluted After-Tax Results ($M)
Diluted after-tax results (GAAP)$425 $2,385 $1,719 $1,509 
Less: Impact of pre-tax and tax special items(931)(231)(2,505)1,220 
Less: Noncontrolling interests impact of Russia restructuring— — (35)— 
Adjusted net income/(loss) – diluted (Non-GAAP)$1,356 $2,616 $4,259 $289 
Basic and Diluted Shares (M)
Basic shares (average shares outstanding)3,970 3,976 3,976 3,971 
Net dilutive options, unvested restricted stock units and restricted stock37 29 30 26 
Diluted shares4,007 4,005 4,006 3,997 
Earnings per share – diluted (GAAP)$0.11 $0.60 $0.43 $0.38 
Less: Net impact of adjustments(0.23)(0.05)(0.63)0.31 
Adjusted earnings per share – diluted (Non-GAAP)$0.34 $0.65 $1.06 $0.07 
64

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 QuarterFirst Nine Months
2019202020192020Memo:
FY 2019
Pre-Tax Results ($M)
Income/(Loss) before income taxes (GAAP)$(19)$2,756 $1,796 $2,694 $(640)
Less: Impact of special items(1,536)(390)(3,333)2,803 (5,999)
Adjusted earnings before taxes (Non-GAAP)$1,517 $3,146 $5,129 $(109)$5,359 
Taxes ($M)
(Provision for)/Benefit from income taxes (GAAP)$442 $(366)$(40)$(1,179)$724 
Less: Impact of special items (a)605 159 828 (1,583)1,323 
Adjusted (provision for) / benefit from income taxes (Non-GAAP)$(163)$(525)$(868)$404 $(599)
Tax Rate (%)
Effective tax rate (GAAP)2,326 %13.3 %2.2 %43.8 %113.1 %
Adjusted effective tax rate (Non-GAAP)10.7 %16.7 %16.9 %370.6 %11.2 %
__________
(a)Includes $(1,028) million year to date for the establishment of a valuation allowance on U.S. tax credits.

Net Cash Provided by/(Used in) Operating Activities Reconciliation to Company Adjusted Free Cash Flow ($M)
Third QuarterFirst Nine Months
2019202020192020
Net cash provided by / (used in) operating activities (GAAP)$4,732 $11,088 $14,739 $19,730 
Less: Items not included in Company Adjusted Free Cash Flows
Ford Credit operating cash flows$4,523 $4,161 $10,908 $17,707 
Funded pension contributions(211)(147)(611)(429)
Global Redesign (including separations)(334)(105)(692)(376)
Ford Credit tax payments / (refunds) under tax sharing agreement— 300 98 1,344 
Other, net(124)(431)(69)(624)
Add: Items included in Company Adjusted Free Cash Flows
Automotive and Mobility capital spending$(1,787)$(1,247)$(5,318)$(4,182)
Ford Credit distributions1,100 575 2,425 1,125 
Settlement of derivatives16 (336)76 (300)
Company adjusted free cash flow (Non-GAAP)$207 $6,302 $2,288 $(1,249)
65

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,
2019
December 31,
2019
September 30,
2020
Ford Credit finance receivables, net (GAAP) (a)$104.7 $107.4 $97.5 
Net investment in operating leases (GAAP) (a)27.5 27.6 26.6 
Consolidating adjustments (b)8.1 7.0 7.4 
Total net receivables$140.3 $142.0 $131.5 
Held-for-sale receivables (GAAP)$— $1.5 $— 
Ford Credit unearned interest supplements and residual support6.8 6.7 6.7 
Allowance for credit losses0.5 0.5 1.3 
Other, primarily accumulated supplemental depreciation1.1 1.0 1.1 
Total managed receivables (Non-GAAP)$148.7 $151.7 $140.6 
__________
(a)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 sheets 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.
(b)Primarily includes Automotive segment receivables purchased by Ford Credit which are classified to Trade and other receivables on our consolidated balance sheets. Also includes eliminations of intersegment transactions.
66

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, 2020
First Nine Months
Cash flows from operating activitiesCompany excluding Ford CreditFord CreditEliminationsConsolidated
Net income/(loss)$228 $1,287 $— $1,515 
Depreciation and tooling amortization4,065 2,605 — 6,670 
Other amortization58 (996)— (938)
Held-for-sale impairment charges21 — — 21 
Provision for credit and insurance losses19 847 — 866 
Pension and OPEB expense/(income)(454)— — (454)
Equity investment dividends received in excess of (earnings)/losses144 (12)— 132 
Foreign currency adjustments(153)(63)— (216)
Net (gain)/loss on changes in investments in affiliates(3,479)(4)— (3,483)
Stock compensation165 — 170 
Provision for deferred income taxes744 234 — 978 
Decrease/(Increase) in finance receivables (wholesale and other)— 11,006 — 11,006 
Decrease/(Increase) in intersegment receivables/payables396 (396)— — 
Decrease/(Increase) in accounts receivable and other assets82 (8)— 74 
Decrease/(Increase) in inventory(202)— — (202)
Increase/(Decrease) in accounts payable and accrued and other liabilities4,056 (198)— 3,858 
Other(308)41 — (267)
Interest supplements and residual value support to Ford Credit(3,359)3,359 — — 
Net cash provided by/(used in) operating activities$2,023 $17,707 $— $19,730 
Cash flows from investing activitiesCompany excluding Ford CreditFord CreditEliminationsConsolidated
Capital spending$(4,182)$(29)$— $(4,211)
Acquisitions of finance receivables and operating leases — (43,473)— (43,473)
Collections of finance receivables and operating leases— 36,536 — 36,536 
Proceeds from sale of business— 1,340 1,340 
Purchases of marketable and other investments(20,444)(6,957)— (27,401)
Sales and maturities of marketable securities and other investments18,373 6,029 — 24,402 
Settlements of derivatives(300)(107)— (407)
Other344 — — 344 
Investing activity (to)/from other segments1,125 110 (1,235)— 
Net cash provided by/(used in) investing activities$(5,084)$(6,551)$(1,235)$(12,870)
Cash flows from financing activitiesCompany excluding Ford CreditFord CreditEliminationsConsolidated
Cash payments for dividends and dividend equivalents$(596)$— $— $(596)
Purchases of common stock— — — — 
Net changes in short-term debt516 (3,331)— (2,815)
Proceeds from issuance of long-term debt24,157 30,168 — 54,325 
Principal payments on long-term debt(15,834)(34,807)— (50,641)
Other(163)(79)— (242)
Financing activity to/(from) other segments(110)(1,125)1,235 — 
Net cash provided by/(used in) financing activities$7,970 $(9,174)$1,235 $31 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash$(162)$$— $(160)
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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, 2020
Third Quarter
Company excluding Ford Credit
AutomotiveMobility Other (a)SubtotalFord CreditConsolidated
Revenues$34,707 $20 $— $34,727 $2,774 $37,501 
Total costs and expenses32,839 277 373 33,489 1,661 35,150 
Operating income/(loss)1,868 (257)(373)1,238 1,113 2,351 
Interest expense on Automotive debt— — 487 487 — 487 
Interest expense on Other debt— — 11 11 — 11 
Other income/(loss), net661 34 144 839 845 
Equity in net income/(loss) of affiliated companies115 (58)(3)54 58 
Income/(Loss) before income taxes2,644 (281)(730)1,633 1,123 2,756 
Provision for/(Benefit from) income taxes412 (69)(241)102 264 366 
Net income/(loss)2,232 (212)(489)1,531 859 2,390 
Less: Income/(Loss) attributable to noncontrolling interests— — — 
Net income/(loss) attributable to Ford Motor Company
$2,227 $(212)$(489)$1,526 $859 $2,385 
For the period ended September 30, 2020
First Nine Months
Company excluding Ford Credit
AutomotiveMobility Other (a)SubtotalFord CreditConsolidated
Revenues$82,669 $43 $— $82,712 $8,480 $91,192 
Total costs and expenses84,248 1,019 1,073 86,340 6,818 93,158 
Operating income/(loss)(1,579)(976)(1,073)(3,628)1,662 (1,966)
Interest expense on Automotive debt— — 1,140 1,140 — 1,140 
Interest expense on Other debt— — 35 35 — 35 
Other income/(loss), net1,898 99 3,824 5,821 22 5,843 
Equity in net income/(loss) of affiliated companies59 (70)(9)(20)12 (8)
Income/(Loss) before income taxes378 (947)1,567 998 1,696 2,694 
Provision for/(Benefit from) income taxes(289)(228)1,287 770 409 1,179 
Net income/(loss)667 (719)280 228 1,287 1,515 
Less: Income/(Loss) attributable to noncontrolling interests— — — 
Net income/(loss) attributable to Ford Motor Company
$661 $(719)$280 $222 $1,287 $1,509 
__________
(a)Other includes Corporate Other, Interest on Debt, and Special Items.
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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, 2020
AssetsCompany excluding Ford CreditFord CreditEliminationsConsolidated
Cash and cash equivalents$13,185 $11,078 $— $24,263 
Marketable securities16,320 4,248 — 20,568 
Ford Credit finance receivables, net— 41,847 — 41,847 
Trade and other receivables, net3,338 6,776 — 10,114 
Inventories10,583 — — 10,583 
Assets held for sale638 38 — 676 
Other assets2,045 1,669 — 3,714 
Receivable from other segments180 2,485 (2,665)— 
   Total current assets46,289 68,141 (2,665)111,765 
Ford Credit finance receivables, net— 55,659 — 55,659 
Net investment in operating leases1,288 26,607 — 27,895 
Net property35,905 213 — 36,118 
Equity in net assets of affiliated companies4,619 122 — 4,741 
Deferred income taxes13,091 151 (2,335)10,907 
Other assets9,979 2,879 — 12,858 
Receivable from other segments27 (35)— 
   Total assets$111,179 $153,799 $(5,035)$259,943 
LiabilitiesCompany excluding Ford CreditFord CreditEliminationsConsolidated
Payables$20,412 $1,054 $— $21,466 
Other liabilities and deferred revenue18,812 1,481 — 20,293 
Automotive debt payable within one year1,368 — — 1,368 
Ford Credit debt payable within one year— 49,447 — 49,447 
Other debt payable within one year180 — — 180 
Liabilities held for sale405 — — 405 
Payable to other segments2,665 — (2,665)— 
   Total current liabilities43,842 51,982 (2,665)93,159 
Other liabilities and deferred revenue25,650 1,176 — 26,826 
Automotive long-term debt 22,363 — — 22,363 
Ford Credit long-term debt — 83,626 — 83,626 
Other long-term debt291 — — 291 
Deferred income taxes121 2,731 (2,335)517 
Payable to other segments35 — (35)— 
   Total liabilities$92,302 $139,515 $(5,035)$226,782 

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

Selected Other Information.

Equity. At September 30, 2020, total equity attributable to Ford was $33.1 billion, a decrease of $60 million compared with December 31, 2019. The detail for this change is shown below (in billions):
Increase/
(Decrease)
Net income$1.5 
Common stock issued0.1 
Shareholder distributions(0.6)
Adoption of accounting standards(0.2)
Other comprehensive income(0.9)
Total$(0.1)

U.S. Sales by Type. The following table shows third quarter 2020 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. SalesU.S. Wholesales
Trucks311,751 310,149 
SUVs191,803 213,707 
Cars48,242 46,374 
Total Vehicles 551,796 570,230 

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

CRITICAL ACCOUNTING ESTIMATES

As a result of the January 1, 2020 adoption of the current expected credit loss (“CECL”) standard (ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments), we updated our Critical Accounting Estimate disclosure. For additional information on our Allowance for Credit Losses Critical Accounting Estimate, see “Critical Accounting Estimates” in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

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 to our financial statements or financial statement disclosures. For additional information, see Note 2 of the Notes to the Financial Statements.
ASUEffective Date (a)
2019-12Simplifying the Accounting for Income TaxesJanuary 1, 2021
2020-06Accounting for Convertible Instruments and Contracts in an Entity’s Own EquityJanuary 1, 2022
2018-12Targeted Improvements to the Accounting for Long Duration ContractsJanuary 1, 2022
__________
(a)Early adoption for each of the standards is permitted.
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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, 2020, was an asset of $244 million, compared with a liability of $596 million as of December 31, 2019. The potential decrease in fair value from a 10% adverse change in the underlying exchange rates, in U.S. dollar terms, would have been $2.3 billion at both September 30, 2020 and December 31, 2019.

Commodity Price Risk. The net fair value of commodity forward contracts (including adjustments for credit risk) as of September 30, 2020, was an asset of $3 million, compared with a liability of $24 million at December 31, 2019. The potential decrease in fair value from a 10% adverse change in the underlying commodity prices would have been $114 million at September 30, 2020, compared with $112 million at December 31, 2019.

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, 2020, all else constant, such an increase in interest rates would increase its pre-tax cash flow by $4 million over the next 12 months, compared with a decrease of $26 million at December 31, 2019. 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 D. Farley, Jr., our Chief Executive Officer (“CEO”), and John T. Lawler, 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, 2020, 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. Effective October 1, 2020, James D. Farley, Jr., formerly our Chief Operating Officer, succeeded James P. Hackett as our President and Chief Executive Officer. Mr. Hackett will serve as Advisor to the Company until his retirement on March 31, 2021. Also effective October 1, 2020, John T. Lawler, formerly our CEO of Ford Autonomous Vehicles and Vice President, Mobility Partnerships, succeeded Tim Stone as our Chief Financial Officer. Mr. Stone elected to resign from the Company to pursue a new opportunity.
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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

OTHER MATTERS

Brazilian Tax Matters (as previously reported on page 23 of our 2019 Form 10-K Report, on page 72 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and on page 72 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020). One Brazilian state (São Paulo) and the Brazilian federal tax authority currently have outstanding substantial tax assessments against Ford Brazil related to state and federal tax incentives Ford Brazil receives for its operations in the Brazilian state of Bahia. All assessments have been appealed to the relevant administrative court of each jurisdiction. In the State of Minas Gerais, one case that had been pending at the administrative level was dismissed on April 1, 2020, and on July 13, 2020, the other two cases that were on appeal to the judicial court were dismissed. Our appeals with the State of São Paulo and the federal tax authority remain at the administrative level. To proceed with an appeal within the judicial court system, an appellant may be required to post collateral, which would likely be significant. To date we have not been required to post any collateral.

The state assessments are part of a broader conflict among various states in Brazil. The federal legislature enacted laws designed to encourage the states to end that conflict, and in 2017 the states reached an agreement on a framework for resolution. Ford Brazil continues to pursue a resolution under the framework and expects the amount of any remaining assessments by the states to be resolved under that framework. The federal assessments are outside the scope of the legislation.

Emissions Certification (as previously reported on page 23 of our 2019 Form 10-K Report). Beginning in 2018 and continuing into 2020, the Company investigated a potential concern involving its U.S. emissions certification process. The matter focused on issues related to road load estimations, including analytical modeling and coastdown testing. The potential concern did not involve the use of defeat devices (see page 8 of our 2019 Form 10-K Report for a definition of defeat devices). We voluntarily disclosed this matter to the U.S. Environmental Protection Agency (“EPA”) and the California Air Resources Board (“CARB”) on February 18, 2019 and February 21, 2019, respectively. Subsequently, the U.S. Department of Justice (“DOJ”) opened a criminal investigation into the matter. In addition, we notified a number of other state and federal agencies. We cooperated fully with these government agencies. We received notifications from CARB and DOJ that these agencies have closed their inquiries into the matter referenced above and do not intend to take any further action. Reviews opened by EPA and Environment and Climate Change Canada remain open.
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ITEM 1A. Risk Factors.

The following risk factor supplements the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and should be read in conjunction with the risk factors described in our 2019 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K:

Ford and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19.  We face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the deadly global outbreak of COVID-19. The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To the extent cases surge in any locations, stringent limitations on daily activities that may have been eased previously could be reinstated in those areas.

Consistent with the actions taken by governmental authorities, in late March 2020, we idled our manufacturing operations in regions around the world other than China, where manufacturing operations were suspended in January and February before beginning to resume operations in March. By May 2020, taking a phased approach and after introducing new safety protocols at our plants, we resumed manufacturing operations around the world.

The economic slowdown attributable to COVID-19 led to a global decrease in vehicle sales in markets around the world. As described in more detail under “Industry sales volume in any of our key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, a sustained decline in vehicle sales would have a substantial adverse effect on our financial condition, results of operations, and cash flow.

The predominant share of Ford Credit’s business consists of financing Ford and Lincoln vehicles, and the duration or reemergence of COVID-19 or similar public health issues may negatively impact the level of originations at Ford Credit. For example, Ford’s suspension of manufacturing operations, a significant decline in dealer showroom traffic, and / or a reduction of operations at dealers may lead to a significant decline in Ford Credit’s consumer and non-consumer originations. Moreover, a sustained decline in sales could have a significant adverse effect on dealer profitability and creditworthiness. Further, COVID-19 has had a significant negative impact on many businesses and unemployment rates have increased sharply from pre-COVID-19 levels. Ford Credit expects the economic uncertainty and higher unemployment to result in higher defaults in its consumer portfolio, and prolonged unemployment is expected to have a negative impact on both new and used vehicle demand.

The global economic slowdown and stay-at-home orders enacted across the United States disrupted auction activity in many locations, which adversely impacted and caused delays in realizing the resale value for off-lease and repossessed vehicles. Although auction performance has improved, future or additional restrictions could have a similar adverse impact on Ford Credit. For more information about the impact of higher credit losses and lower residual values on Ford Credit’s business, see “Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

As described in more detail under “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” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, the volatility created by COVID-19 adversely affected Ford Credit’s access to the debt and securitization markets and its cost of funding, and any volatility in the capital markets as a result of a surge in cases of COVID-19 or for any other reason could have an adverse impact on Ford Credit’s access to those markets and its cost of funding.
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Item 1A. Risk Factors (Continued)
The full impact of COVID-19 on our financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the outbreak (including any potential second wave or future waves), its impact on our customers, dealers, and suppliers, how quickly normal economic conditions, operations, and the demand for our products can resume, the duration and severity of the current recession, and any permanent behavioral changes that the pandemic may cause. For example, in the event manufacturing operations are again suspended, fully ramping up our production schedule to prior levels may take longer than the prior resumption and will depend, in part, on whether our suppliers and dealers have resumed normal operations. Our automotive operations generally do not realize revenue while our manufacturing operations are suspended, but we continue to incur operating and non-operating expenses, resulting in a deterioration of our cash flow. Accordingly, any significant future disruption to our production schedule, whether as a result of our own or a supplier’s suspension of operations, could have a substantial adverse effect on our financial condition, liquidity, and results of operations. Further, government-sponsored liquidity or stimulus programs in response to COVID-19 may not be available to our customers, suppliers, dealers, or us, and if available, may nevertheless be insufficient to address the impacts of COVID-19. Moreover, our supply and distribution chains may be disrupted by supplier or dealer bankruptcies or their permanent discontinuation of operations. We continue to expect our full year 2020 results of operations to be adversely affected by COVID-19.

The COVID-19 pandemic may also exacerbate other risks disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, including, but not limited to, our competitiveness, demand or market acceptance for our products, and shifting consumer preferences.

ITEM 6. Exhibits.
DesignationDescriptionMethod of Filing
Agreement between Ford Motor Company and James D. Farley, Jr. dated August 3, 2020.Filed with this Report.
Annual Incentive Compensation Plan, as amended and restated effective as of September 9, 2020.Filed with this Report.
Executive Separation Waiver and Release Agreement between Ford Motor Company and Tim Stone dated September 30, 2020.Filed with this Report.
Form of Stock Option Terms and Conditions for Long-Term Incentive Plan.Filed with this Report.
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.INSInteractive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (“Inline XBRL”).(a)
Exhibit 101.SCHXBRL Taxonomy Extension Schema Document.(a)
Exhibit 101.CALXBRL Taxonomy Extension Calculation Linkbase Document.(a)
Exhibit 101.LABXBRL Taxonomy Extension Label Linkbase Document.(a)
Exhibit 101.PREXBRL Taxonomy Extension Presentation Linkbase Document.(a)
Exhibit 101.DEFXBRL Taxonomy Extension Definition Linkbase Document.(a)
Exhibit 104Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).(a)
__________
(a)Submitted electronically with this Report.
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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 28, 2020

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