Annual Statements Open main menu

FORD MOTOR CO - Quarter Report: 2020 June (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 June 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)
Delaware
 
38-0549190
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
 
One American Road
 
 
Dearborn,
Michigan
 
48126
(Address of principal executive offices)
 
(Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
F
 
New York Stock Exchange
6.200% Notes due June 1, 2059
 
FPRB
 
New York Stock Exchange
6.000% Notes due December 1, 2059
 
FPRC
 
New York Stock Exchange


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

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

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

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

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

As of July 24, 2020, Ford had outstanding 3,907,536,920 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 June 30, 2020
 
Table of Contents
 
Page
 
Part I - Financial Information
 
 
Item 1
Financial 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 2
Management’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 3
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4
Controls and Procedures
 
 
 
 
 
 
Part II - Other Information
 
 
Item 1
Legal Proceedings
 
Item 1A
Risk Factors
 
Item 6
Exhibits
 
 
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 June 30,
 
2019
 
2020
 
First Half
 
(unaudited)
Cash flows from operating activities
 
 
 
Net income/(loss)
$
1,333

 
$
(875
)
Depreciation and tooling amortization
4,988

 
4,802

Other amortization
(587
)
 
(590
)
Held-for-sale impairment charges

 
18

Provision for credit and insurance losses
166

 
779

Pension and other post-retirement employee benefits (“OPEB”) expense/(income)
123

 
(454
)
Equity investment dividends received in excess of (earnings)/losses
21

 
169

Foreign currency adjustments
(92
)
 
113

Net (gain)/loss on changes in investments in affiliates
(2
)
 
(3,480
)
Stock compensation
169

 
107

Provision for deferred income taxes
200

 
655

Decrease/(Increase) in finance receivables (wholesale and other)
715

 
9,772

Decrease/(Increase) in accounts receivable and other assets
(962
)
 
220

Decrease/(Increase) in inventory
(1,180
)
 
66

Increase/(Decrease) in accounts payable and accrued and other liabilities
4,929

 
(2,485
)
Other
186

 
(175
)
Net cash provided by/(used in) operating activities
10,007

 
8,642

 
 
 
 
Cash flows from investing activities
 
 
 
Capital spending
(3,553
)
 
(2,955
)
Acquisitions of finance receivables and operating leases
(26,202
)
 
(27,113
)
Collections of finance receivables and operating leases
24,974

 
22,923

Proceeds from sale of business (Note 17)

 
1,340

Purchases of marketable securities and other investments
(7,670
)
 
(19,624
)
Sales and maturities of marketable securities and other investments
8,540

 
10,804

Settlements of derivatives
83

 
73

Other
4

 
337

Net cash provided by/(used in) investing activities
(3,824
)
 
(14,215
)
 
 
 
 
Cash flows from financing activities
 
 
 
Cash payments for dividends and dividend equivalents
(1,196
)
 
(596
)
Purchases of common stock

 

Net changes in short-term debt
71

 
(789
)
Proceeds from issuance of long-term debt
26,233

 
44,303

Principal payments on long-term debt
(25,767
)
 
(23,345
)
Other
(149
)
 
(182
)
Net cash provided by/(used in) financing activities
(808
)
 
19,391

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
24

 
(378
)
 
 
 
 
Net increase/(decrease) in cash, cash equivalents, and restricted cash
$
5,399

 
$
13,440

 
 
 
 
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 cash
5,399

 
13,440

Cash, cash equivalents, and restricted cash at end of period (Note 7)
$
22,306

 
$
31,181


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 June 30,
 
2019
 
2020
 
2019
 
2020
 
Second Quarter
 
First Half
 
(unaudited)
Revenues
 
 
 
 
 
 
 
Automotive
$
35,758

 
$
16,622

 
$
72,997

 
$
47,962

Ford Credit
3,089

 
2,739

 
6,186

 
5,706

Mobility
6

 
10

 
12

 
23

Total revenues (Note 3)
38,853

 
19,371


79,195


53,691

 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Cost of sales
33,657

 
17,932

 
67,599

 
48,454

Selling, administrative, and other expenses
2,725

 
1,965

 
5,568

 
4,397

Ford Credit interest, operating, and other expenses
2,381

 
2,233

 
4,736

 
5,157

Total costs and expenses
38,763

 
22,130

 
77,903

 
58,008

Operating income/(loss)
90

 
(2,759
)
 
1,292

 
(4,317
)
 
 
 
 
 
 
 
 
Interest expense on Automotive debt
230

 
439

 
461

 
653

Interest expense on Other debt
14

 
11

 
28

 
24

 
 
 
 
 
 
 
 
Other income/(loss), net (Note 4)
272

 
4,318

 
900

 
4,998

Equity in net income/(loss) of affiliated companies
87

 
(25
)
 
112

 
(66
)
Income/(Loss) before income taxes
205

 
1,084


1,815


(62
)
Provision for/(Benefit from) income taxes
55


(34
)

482


813

Net income/(loss)
150

 
1,118

 
1,333

 
(875
)
Less: Income/(Loss) attributable to noncontrolling interests
2


1


39


1

Net income/(loss) attributable to Ford Motor Company
$
148


$
1,117


$
1,294


$
(876
)
 
 
 
 
 
 
 
 
EARNINGS PER SHARE ATTRIBUTABLE TO FORD MOTOR COMPANY COMMON AND CLASS B STOCK (Note 6)
Basic income/(loss)
$
0.04

 
$
0.28

 
$
0.33

 
$
(0.22
)
Diluted income/(loss)
0.04

 
0.28

 
0.32

 
(0.22
)
 
 
 
 
 
 
 
 
Weighted-average shares used in computation of earnings per share
 
 
 
 
 
 
 
Basic shares
3,984

3,975

3,979

3,969
Diluted shares
4,013
 
3,992
 
4,005
 
3,969

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
For the periods ended June 30,
 
2019
 
2020
 
2019
 
2020
 
Second Quarter
 
First Half
 
(unaudited)
Net income/(loss)
$
150

 
$
1,118

 
$
1,333

 
$
(875
)
Other comprehensive income/(loss), net of tax (Note 18)
 
 
 
 
 
 
 
Foreign currency translation
(127
)
 
(102
)
 
116

 
(1,555
)
Marketable securities
59

 
99

 
122

 
113

Derivative instruments
117

 
(24
)
 
(329
)
 
668

Pension and other postretirement benefits
16

 
17

 
21

 
31

Total other comprehensive income/(loss), net of tax
65

 
(10
)
 
(70
)
 
(743
)
Comprehensive income/(loss)
215

 
1,108

 
1,263

 
(1,618
)
Less: Comprehensive income/(loss) attributable to noncontrolling interests
2

 
1

 
39

 
1

Comprehensive income/(loss) attributable to Ford Motor Company
$
213

 
$
1,107

 
$
1,224

 
$
(1,619
)

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
 
June 30,
2020
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents (Note 7)
$
17,504

 
$
30,989

Marketable securities (Note 7)
17,147

 
26,141

Ford Credit finance receivables, net of allowance for credit losses of $162 and $396 (Note 8)
53,651

 
42,720

Trade and other receivables, less allowances of $63 and $75
9,237

 
9,107

Inventories (Note 9)
10,786

 
10,220

Assets held for sale (Note 17)
2,383

 
720

Other assets
3,339

 
4,214

Total current assets
114,047

 
124,111

 
 
 
 
Ford Credit finance receivables, net of allowance for credit losses of $351 and $889 (Note 8)
53,703

 
53,987

Net investment in operating leases
29,230

 
27,716

Net property
36,469

 
35,276

Equity in net assets of affiliated companies
2,519

 
4,651

Deferred income taxes
11,863

 
11,066

Other assets
10,706

 
12,559

Total assets
$
258,537

 
$
269,366

 
 
 
 
LIABILITIES
 
 
 
Payables
$
20,673

 
$
16,360

Other liabilities and deferred revenue (Note 12)
22,987

 
20,792

Automotive debt payable within one year (Note 14)
1,445

 
2,084

Ford Credit debt payable within one year (Note 14)
52,371

 
53,260

Other debt payable within one year (Note 14)
130

 

Liabilities held for sale (Note 17)
526

 
284

Total current liabilities
98,132

 
92,780

 
 
 
 
Other liabilities and deferred revenue (Note 12)
25,324

 
25,391

Automotive long-term debt (Note 14)
13,233

 
37,409

Ford Credit long-term debt (Note 14)
87,658

 
82,007

Other long-term debt (Note 14)
470

 
470

Deferred income taxes
490

 
454

Total liabilities
225,307

 
238,511

 
 
 
 
EQUITY
 
 
 
Common Stock, par value $.01 per share (4,025 million shares issued of 6 billion authorized)
40

 
40

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

 
1

Capital in excess of par value of stock
22,165

 
22,210

Retained earnings
20,320

 
18,645

Accumulated other comprehensive income/(loss) (Note 18)
(7,728
)
 
(8,471
)
Treasury stock
(1,613
)
 
(1,601
)
Total equity attributable to Ford Motor Company
33,185

 
30,824

Equity attributable to noncontrolling interests
45

 
31

Total equity
33,230

 
30,855

Total liabilities and equity
$
258,537

 
$
269,366

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
 
June 30,
2020
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
3,202

 
$
3,204

Ford Credit finance receivables, net
58,478

 
49,806

Net investment in operating leases
14,883

 
14,462

Other assets
12

 
1

LIABILITIES
 
 
 
Other liabilities and deferred revenue
$
19

 
$
94

Debt
50,865

 
45,908


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 Stock
 
Cap. In Excess of Par Value of Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss) (Note 18)
 
Treasury Stock
 
Total
 
Equity Attributable to Non-controlling Interests
 
Total
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

 

 
1,146

 

 

 
1,146

 
37

 
1,183

Other comprehensive income/(loss), net

 

 

 
(135
)
 

 
(135
)
 

 
(135
)
Common stock issued (a)

 
20

 

 

 

 
20

 

 
20

Treasury stock/other 

 

 

 

 
23

 
23

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

 

 
(601
)
 

 

 
(601
)
 

 
(601
)
Balance at March 31, 2019
$
41

 
$
22,026

 
$
23,226

 
$
(7,501
)
 
$
(1,394
)
 
$
36,398

 
$
36

 
$
36,434

Net income

 

 
148

 

 

 
148

 
2

 
150

Other comprehensive income/(loss), net

 

 

 
65

 

 
65

 

 
65

Common stock issued (a)

 
85

 

 

 

 
85

 

 
85

Treasury stock/other 

 

 

 

 
6

 
6

 
1

 
7

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

 

 
(605
)
 

 

 
(605
)
 

 
(605
)
Balance at June 30, 2019
$
41

 
$
22,111

 
$
22,769

 
$
(7,436
)
 
$
(1,388
)
 
$
36,097

 
$
39

 
$
36,136

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Attributable to Ford Motor Company
 
 
 
 
 
Capital Stock
 
Cap. In Excess of Par Value of Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss) (Note 18)
 
Treasury Stock
 
Total
 
Equity Attributable to Non-controlling Interests
 
Total
Equity
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 

 

 

 

 
6

 
6

 
3

 
9

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

 
1,118

Other comprehensive income/(loss), net

 

 

 
(10
)
 

 
(10
)
 

 
(10
)
Common stock issued (a)

 
60

 

 

 

 
60

 

 
60

Treasury stock/other 

 

 

 

 
6

 
6

 
(18
)
 
(12
)
Dividends and dividend equivalents declared

 

 
1

 

 

 
1

 

 
1

Balance at June 30, 2020
$
41

 
$
22,210

 
$
18,645

 
$
(8,471
)
 
$
(1,601
)
 
$
30,824

 
$
31

 
$
30,855

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

The accompanying notes are part of the consolidated financial statements.

4

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

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

5

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  PRESENTATION

For purposes of this report, “Ford,” the “Company,” “we,” “our,” “us,” or similar references mean Ford Motor Company, our consolidated subsidiaries, and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise. We also make reference to Ford Motor Credit Company LLC, herein referenced to as Ford Credit. Our 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. Although restrictions have been eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities.

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. We have since returned to pre-COVID-19 production levels in several major markets.

Our results include adjustments to our assets and liabilities made due to the impact of COVID-19, the most significant of which were a valuation allowance on certain deferred tax assets of $228 million and $1.1 billion for the second quarter and first half of 2020, respectively (see Note 5), and a charge to the provision for credit losses on Ford Credit’s finance receivables of $46 million and $532 million during the second quarter and first half of 2020, respectively (see Note 8). Our assessments of the effect of COVID-19 on our financial statements, including estimates, are based on a variety of factors and are subject to many uncertainties.

The impact of the COVID-19 pandemic on our full year financial results will depend on future developments, such as the ultimate duration and scope of the outbreak, its impact on our operations, customers, dealers, and suppliers, and the rate at which economic conditions return to pre-COVID-19 levels.


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 2016-13
 
Balance at
January 1, 2020
Assets
 
 
 
 
 
 
Ford Credit finance receivables, net, current
 
$
53,651

 
$
(69
)
 
$
53,582

Trade and other receivables, net
 
9,237

 
(3
)
 
9,234

Ford Credit finance receivables, net, non-current
 
53,703

 
(183
)
 
53,520

Equity in net assets of affiliated companies
 
2,519

 
(7
)
 
2,512

Deferred income taxes
 
11,863

 
2

 
11,865

Liabilities
 
 
 
 
 
 
Deferred income taxes
 
490

 
(58
)
 
432

Equity
 
 
 
 
 
 
Retained earnings
 
20,320

 
(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 June 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:
ASU
 
Effective Date
2020-01
Clarifying the Interaction between Equity Securities, Equity Method and Joint Ventures, and Derivatives and Hedging
 
January 1, 2020
2018-18
Clarifying the Interaction between Collaborative Arrangements and Revenue from Contracts with Customers
 
January 1, 2020
2018-15
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
 
January 1, 2020

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 June 30 (in millions):
 
Second Quarter 2019
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
34,235

 
$

 
$

 
$
34,235

Used vehicles
842

 

 

 
842

Extended service contracts
348

 

 

 
348

Other revenue
219

 
6

 
55

 
280

Revenues from sales and services
35,644

 
6

 
55

 
35,705

 
 
 
 
 
 
 
 
Leasing income
114

 

 
1,472

 
1,586

Financing income

 

 
1,521

 
1,521

Insurance income

 

 
41

 
41

Total revenues
$
35,758

 
$
6

 
$
3,089

 
$
38,853

 
 
 
 
 
 
 
 
 
Second Quarter 2020
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
15,406

 
$

 
$

 
$
15,406

Used vehicles
533

 

 

 
533

Extended service contracts
346

 

 

 
346

Other revenue
252

 
10

 
44

 
306

Revenues from sales and services
16,537

 
10

 
44

 
16,591

 
 
 
 
 
 
 
 
Leasing income
85

 

 
1,401

 
1,486

Financing income

 

 
1,261

 
1,261

Insurance income

 

 
33

 
33

Total revenues
$
16,622

 
$
10

 
$
2,739

 
$
19,371

 
 
 
 
 
 
 
 
 
First Half 2019
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
69,811

 
$

 
$

 
$
69,811

Used vehicles
1,862

 

 

 
1,862

Extended service contracts
681

 

 

 
681

Other revenue
432

 
12

 
106

 
550

Revenues from sales and services
72,786

 
12

 
106

 
72,904

 
 
 
 
 
 
 
 
Leasing income
211

 

 
2,949

 
3,160

Financing income

 

 
3,049

 
3,049

Insurance income

 

 
82

 
82

Total revenues
$
72,997

 
$
12

 
$
6,186

 
$
79,195

 
 
 
 
 
 
 
 
 
First Half 2020
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Vehicles, parts, and accessories
$
45,247

 
$

 
$

 
$
45,247

Used vehicles
1,464

 

 

 
1,464

Extended service contracts
710

 

 

 
710

Other revenue
398

 
23

 
85

 
506

Revenues from sales and services
47,819

 
23

 
85

 
47,927

 
 
 
 
 
 
 
 
Leasing income
143

 

 
2,860

 
3,003

Financing income

 

 
2,686

 
2,686

Insurance income

 

 
75

 
75

Total revenues
$
47,962

 
$
23

 
$
5,706

 
$
53,691


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 $350 million in the second quarter of 2019 and an increase in revenue of $48 million in the second 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 billion of unearned revenue associated with outstanding contracts reported in Other liabilities and deferred revenue at December 31, 2019 and June 30, 2020, respectively. We expect to recognize approximately $600 million of the unearned amount in the remainder of 2020, $1.1 billion in 2021, and $2.3 billion thereafter. We recognized $285 million and $276 million of unearned amounts as revenue during the second quarter of 2019 and 2020, respectively, and $590 million and $606 million in the first half 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 $276 million in deferred costs as of December 31, 2019 and June 30, 2020, respectively. We recognized $20 million and $19 million of amortization during the second quarter of 2019 and 2020, respectively, and $39 million in the first half of both 2019 and 2020.

NOTE 4. OTHER INCOME/(LOSS)

The amounts included in Other income/(loss), net for the periods ended June 30 were as follows (in millions):
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Net periodic pension and OPEB income/(cost), excluding service cost
$
111

 
$
544

 
$
383

 
$
995

Investment-related interest income
207

 
122

 
410

 
284

Interest income/(expense) on income taxes
(1
)
 
12

 
(21
)
 
(11
)
Realized and unrealized gains/(losses) on cash equivalents, marketable securities, and other investments
(187
)
 
47

 
(120
)
 
15

Gains/(Losses) on changes in investments in affiliates (a)
(1
)
 
3,465

 
2

 
3,480

Gains/(Losses) on extinguishment of debt
(53
)
 
(1
)
 
(53
)
 
(1
)
Royalty income
108

 
94

 
192

 
183

Other
88

 
35

 
107

 
53

Total
$
272

 
$
4,318

 
$
900

 
$
4,998


__________
(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 $228 million and $1.1 billion during the second quarter and first half of 2020, respectively, 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 have changed our priorities due to the effects of COVID-19 on our operations. We continue to balance preservation of cash against long-term tax planning actions that could have resulted in cash outlays to preserve some of our 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):
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Basic and Diluted Income/(Loss) Attributable to Ford Motor Company
 
 
 
 
 
 
 
Basic income/(loss)
$
148

 
$
1,117

 
$
1,294

 
$
(876
)
Diluted income/(loss)
148

 
1,117

 
1,294

 
(876
)
 
 
 
 
 
 
 
 
Basic and Diluted Shares
 

 
 

 
 
 
 
Basic shares (average shares outstanding)
3,984

 
3,975

 
3,979

 
3,969

Net dilutive options, unvested restricted stock units, and unvested restricted stock shares (a)
29

 
17

 
26

 

Diluted shares
4,013

 
3,992

 
4,005

 
3,969


__________
(a)
Not included in the calculation of diluted earnings per share, due to their antidilutive effect, are 25 million shares for the first half of 2020.

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 acquisition. 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 Level
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
520

 
$

 
$

 
$
520

U.S. government agencies
2
 
125

 

 

 
125

Non-U.S. government and agencies
2
 
601

 

 
350

 
951

Corporate debt
2
 
642

 

 
604

 
1,246

Total marketable securities classified as cash equivalents
 
 
1,888

 

 
954

 
2,842

Cash, time deposits, and money market funds
 
 
6,432

 
117

 
8,113

 
14,662

Total cash and cash equivalents
 
 
$
8,320

 
$
117

 
$
9,067

 
$
17,504

 
 
 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
2,930

 
$

 
$
195

 
$
3,125

U.S. government agencies
2
 
1,548

 

 
210

 
1,758

Non-U.S. government and agencies
2
 
4,217

 

 
2,408

 
6,625

Corporate debt
2
 
4,802

 

 
193

 
4,995

Equities (a)
1
 
81

 

 

 
81

Other marketable securities
2
 
273

 

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2020
 
Fair Value Level
 
Automotive
 
Mobility
 
Ford Credit
 
Consolidated
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
4,307

 
$

 
$
1,568

 
$
5,875

U.S. government agencies
2
 
1,950

 

 
825

 
2,775

Non-U.S. government and agencies
2
 
1,578

 

 
1,352

 
2,930

Corporate debt
2
 
719

 

 
992

 
1,711

Total marketable securities classified as cash equivalents
 
 
8,554

 

 
4,737

 
13,291

Cash, time deposits, and money market funds
 
 
9,540

 
57

 
8,101

 
17,698

Total cash and cash equivalents
 
 
$
18,094

 
$
57

 
$
12,838

 
$
30,989

 
 
 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
6,879

 
$

 
$
1,924

 
$
8,803

U.S. government agencies
2
 
5,118

 

 
410

 
5,528

Non-U.S. government and agencies
2
 
3,451

 

 
2,215

 
5,666

Corporate debt
2
 
5,358

 

 
223

 
5,581

Equities (a)
1
 
49

 

 

 
49

Other marketable securities
2
 
250

 

 
264

 
514

Total marketable securities
 
 
$
21,105

 
$

 
$
5,036

 
$
26,141

 
 
 
 
 
 
 
 
 
 
Restricted cash
 
 
$
21

 
$
6

 
$
165

 
$
192

 
 
 
 
 
 
 
 
 
 
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 June 30, 2020 were a $44 million loss and a $29 million loss, 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 Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Within 1 Year
 
After 1 Year through
5 Years
 
After 5 Years
Automotive
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
2,839

 
$
11

 
$
(1
)
 
$
2,849

 
$
1,028

 
$
1,772

 
$
49

U.S. government agencies
1,445

 
2

 
(1
)
 
1,446

 
830

 
589

 
27

Non-U.S. government and agencies
3,925

 
20

 
(1
)
 
3,944

 
1,546

 
2,398

 

Corporate debt
5,029

 
53

 

 
5,082

 
1,837

 
3,245

 

Other marketable securities
230

 
1

 

 
231

 

 
149

 
82

Total
$
13,468

 
$
87

 
$
(3
)
 
$
13,552

 
$
5,241

 
$
8,153

 
$
158

 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
June 30, 2020
 
 
 
 
 
 
 
 
 
Fair Value of Securities with
Contractual Maturities
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Within 1 Year
 
After 1 Year through
5 Years
 
After 5 Years
Automotive
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
2,978

 
$
64

 
$

 
$
3,042

 
$
1,072

 
$
1,935

 
$
35

U.S. government agencies
1,938

 
15

 

 
1,953

 
704

 
1,126

 
123

Non-U.S. government and agencies
2,849

 
48

 

 
2,897

 
1,192

 
1,704

 
1

Corporate debt
5,751

 
106

 
(5
)
 
5,852

 
2,157

 
3,668

 
27

Other marketable securities
212

 
3

 

 
215

 

 
144

 
71

Total
$
13,728

 
$
236

 
$
(5
)
 
$
13,959

 
$
5,125

 
$
8,577

 
$
257



Sales proceeds and gross realized gains/losses from the sale of AFS securities for the periods ended June 30 were as follows (in millions):
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Automotive
 
 
 
 
 
 
 
Sales proceeds
$
1,858

 
$
2,452

 
$
3,000

 
$
4,317

Gross realized gains
3

 
21

 
5

 
28

Gross realized losses
5

 
3

 
10

 
10



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 Year
 
1 Year or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Automotive
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
183

 
$
(1
)
 
$
50

 
$

 
$
233

 
$
(1
)
U.S. government agencies
370

 
(1
)
 
344

 

 
714

 
(1
)
Non-U.S. government and agencies
463

 

 
390

 
(1
)
 
853

 
(1
)
Corporate debt
29

 

 
53

 

 
82

 

Other marketable securities
59

 

 
17

 

 
76

 

Total
$
1,104

 
$
(2
)
 
$
854

 
$
(1
)
 
$
1,958

 
$
(3
)
 
 

 
 
 
 
 
 
 
 
 
 
 
June 30, 2020
 
Less than 1 Year
 
1 Year or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Automotive
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
357

 
$

 
$

 
$

 
$
357

 
$

U.S. government agencies
25

 

 
42

 

 
67

 

Non-U.S. government and agencies
319

 

 
36

 

 
355

 

Corporate debt
783

 
(4
)
 
11

 
(1
)
 
794

 
(5
)
Other marketable securities
7

 

 
16

 

 
23

 

Total
$
1,491

 
$
(4
)
 
$
105

 
$
(1
)
 
$
1,596

 
$
(5
)


We determine credit losses on available-for-sale debt securities using the specific identification method. During the first half 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
 
June 30,
2020
Cash and cash equivalents (a)
$
17,504

 
$
30,989

Restricted cash (b)
175

 
192

Cash, cash equivalents, and restricted cash in held-for-sale assets
62

 

Total cash, cash equivalents, and restricted cash
$
17,741

 
$
31,181

__________
(a)
Includes a $290 million cash compensating balance at June 30, 2020 in an interest-bearing savings account related to a $498 million debt obligation.
(b)
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
 
June 30,
2020
Consumer
 
 
 
Retail installment contracts, gross
$
68,905

 
$
70,773

Finance leases, gross
8,566

 
7,879

Retail financing, gross
77,471

 
78,652

Unearned interest supplements
(3,589
)
 
(3,844
)
Consumer finance receivables
73,882

 
74,808

Non-Consumer
 

 
 

Dealer financing
33,985

 
23,184

Non-Consumer finance receivables
33,985

 
23,184

Total recorded investment
$
107,867

 
$
97,992

 
 
 
 
Recorded investment in finance receivables
$
107,867

 
$
97,992

Allowance for credit losses
(513
)
 
(1,285
)
Total finance receivables, net
$
107,354

 
$
96,707

 
 
 
 
Current portion
$
53,651

 
$
42,720

Non-current portion
53,703

 
53,987

Total finance receivables, net
$
107,354

 
$
96,707

 
 
 
 
Net finance receivables subject to fair value (a)
$
99,168

 
$
89,207

Fair value (b)
99,297

 
90,298

__________
(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 second quarter of 2019 and 2020 was $97 million and $77 million, respectively, and for the first half of 2019 and 2020 was $189 million and $172 million, respectively, and is included in Ford Credit revenues on our consolidated income statements.

At December 31, 2019 and June 30, 2020, accrued interest was $251 million and $215 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 June 30, 2020, were consumer receivables of $38.3 billion and $42.1 billion, respectively, and non-consumer receivables of $26.8 billion and $17.8 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 June 30, 2020, there were $50 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 due
 
166

Greater than 120 days past due
 
35

Total past due
 
1,040

Current
 
72,842

Total
 
$
73,882


The credit quality analysis of consumer receivables at June 30, 2020 was as follows (in millions):
 
 
Amortized Cost Basis by Origination Year
 
 
 
 
Prior to 2016
 
2016
 
2017
 
2018
 
2019
 
2020
 
Total
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31 - 60 days past due
 
$
45

 
$
60

 
$
98

 
$
135

 
$
124

 
$
31

 
$
493

61 - 120 days past due
 
9

 
17

 
33

 
44

 
40

 
10

 
153

Greater than 120 days past due
 
14

 
7

 
8

 
9

 
6

 

 
44

Total past due
 
68

 
84

 
139

 
188

 
170

 
41

 
690

Current
 
1,631

 
4,199

 
9,581

 
17,452

 
24,396

 
16,859

 
74,118

Total
 
$
1,699

 
$
4,283

 
$
9,720

 
$
17,640

 
$
24,566

 
$
16,900

 
$
74,808


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 II
 
5,407

Group III
 
2,108

Group IV
 
189

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 June 30, 2020 was as follows (in millions):
 
 
Amortized Cost Basis by Origination Year
 
Wholesale Loans
 
 
 
 
Dealer Loans
 
 
 
 
 
Prior to 2016
 
2016
 
2017
 
2018
 
2019
 
2020
 
Total
 
 
Total
Group I
 
$
608

 
$
132

 
$
159

 
$
221

 
$
98

 
$
237

 
$
1,455

 
$
14,102

 
$
15,557

Group II
 
38

 
32

 
17

 
18

 
7

 
72

 
184

 
5,317

 
5,501

Group III
 
9

 

 
4

 
17

 
6

 
28

 
64

 
1,908

 
1,972

Group IV
 
2

 
3

 

 

 
2

 
4

 
11

 
143

 
154

Total (a)
 
$
657

 
$
167

 
$
180

 
$
256

 
$
113

 
$
341

 
$
1,714

 
$
21,470

 
$
23,184

__________
(a)
Total past due dealer financing receivables at June 30, 2020 were $143 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 has offered various programs to provide relief to customers and dealers impacted by COVID-19.  These programs, which were broadly available to customers and dealers, included payment extensions.  Ford Credit concluded that these programs did not meet TDR criteria. As of June 30, 2020, in the United States, Ford Credit has received payments on 88% of the pandemic extensions offered to its customers, and no dealers are delinquent on their payments.

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 June 30 was as follows (in millions):
 
Second Quarter 2019 (a)
 
First Half 2019 (a)
 
Consumer
 
Non-Consumer
 
Total
 
Consumer
 
Non-Consumer
 
Total
Allowance for credit losses
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
496

 
$
17

 
$
513

 
$
566

 
$
23

 
$
589

Charge-offs
(117
)
 

 
(117
)
 
(254
)
 
(17
)
 
(271
)
Recoveries
45

 
6

 
51

 
88

 
8

 
96

Provision for credit losses
70

 
(7
)
 
63

 
94

 
2

 
96

Other (c)
2

 
1

 
3

 
2

 
1

 
3

Ending balance
$
496

 
$
17

 
$
513

 
$
496

 
$
17

 
$
513

 
Second Quarter 2020
 
First Half 2020
 
Consumer
 
Non-Consumer
 
Total
 
Consumer
 
Non-Consumer
 
Total
Allowance for credit losses
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,157

 
$
74

 
$
1,231

 
$
496

 
$
17

 
$
513

Adoption of ASU 2016-13 (b)

 

 

 
247

 
5

 
252

Charge-offs (c)
(80
)
 

 
(80
)
 
(225
)
 
(1
)
 
(226
)
Recoveries (c)
33

 
1

 
34

 
76

 
3

 
79

Provision for credit losses
94

 
(1
)
 
93

 
628

 
51

 
679

Other (d)
7

 

 
7

 
(11
)
 
(1
)
 
(12
)
Ending balance
$
1,211

 
$
74

 
$
1,285

 
$
1,211

 
$
74

 
$
1,285

__________
(a)
The comparative information has not been restated and continues to be reported under the accounting standard in effect during 2019.
(b)
Cumulative pre-tax adjustments recorded to retained earnings as of January 1, 2020. See Note 2 for additional information.
(c)
Charge-offs and recoveries were lower in the second quarter of 2020 reflecting program extensions and decision to temporarily suspend involuntary repossessions due to COVID-19.
(d)
Primarily represents amounts related to translation adjustments.

During the second quarter and first half of 2020, the allowance for credit losses increased $54 million and $772 million, respectively. The change in the second quarter reflects an increase of $46 million, primarily attributable to COVID-19, and an increase for translation adjustments. The change in the first half reflects an increase to the reserve of $252 million related to the adoption of ASU 2016-13 and an increase of $532 million, primarily attributable to COVID-19, offset by a decrease for translation adjustments. The first half change to the reserve reflects economic uncertainty which, along with the expectation of continued higher unemployment, is expected to increase the probability of default and loss given default rates in our consumer portfolio, especially in the United States.  These economic trends and conditions are also expected to negatively impact the dealers.  The relatively moderate reserve increase in the second quarter reflects Ford Credit's view that future economic conditions are largely unchanged from its assumptions at March 31.  Although net charge-offs during the second quarter and first half of 2020 remained low, reflecting government relief programs, customer payment deferral programs, and Ford Credit's decision to temporarily suspend involuntary repossessions, 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
 
June 30,
2020
Raw materials, work-in-process, and supplies
$
4,402

 
$
4,367

Finished products
6,384

 
5,853

Total inventories
$
10,786

 
$
10,220



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 $1.6 billion at December 31, 2019 and June 30, 2020, respectively. The increase from December 31, 2019 primarily reflects our preferred security investment in Argo AI. See Note 17 for additional information relating to our Argo AI and VW transaction. In the second quarter of 2020, there were no material adjustments to the fair values of these investments held at June 30, 2020.

NOTE 11. GOODWILL

The net carrying amount of goodwill was $278 million and $254 million at December 31, 2019 and June 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
 
June 30,
2020
Current
 
 
 
Dealer and dealers’ customer allowances and claims
$
13,113

 
$
11,632

Deferred revenue
2,091

 
2,021

Employee benefit plans
1,857

 
1,483

Accrued interest
1,128

 
1,117

OPEB (a)
332

 
327

Pension (a)
185

 
184

Operating lease liabilities
367

 
339

Other
3,914

 
3,689

Total current other liabilities and deferred revenue
$
22,987

 
$
20,792

Non-current
 

 
 

Pension (a)
$
9,878

 
$
9,487

OPEB (a)
5,740

 
5,661

Dealer and dealers’ customer allowances and claims
1,921

 
2,464

Deferred revenue
4,191

 
4,257

Operating lease liabilities
1,047

 
914

Employee benefit plans
1,104

 
1,105

Other
1,443

 
1,503

Total non-current other liabilities and deferred revenue
$
25,324

 
$
25,391

__________
(a)
Balances at June 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 $3.8 billion at December 31, 2019 and June 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 June 30 were as follows (in millions):
 
Second Quarter
 
Pension Benefits
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Worldwide OPEB
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
Service cost
$
114

 
$
130

 
$
127

 
$
127

 
$
11

 
$
11

Interest cost
409

 
323

 
173

 
130

 
52

 
41

Expected return on assets
(649
)
 
(699
)
 
(281
)
 
(254
)
 

 

Amortization of prior service costs/(credits)
21

 
1

 
9

 
8

 
(17
)
 
(4
)
Net remeasurement (gain)/loss
(10
)
 
4

 

 
(152
)
 

 

Separation programs/other

 
3

 
232

 
33

 

 
1

Settlements and curtailments
(50
)
 
4

 

 
17

 

 

Net periodic benefit cost/(income)
$
(165
)
 
$
(234
)
 
$
260

 
$
(91
)
 
$
46

 
$
49

 
 
 
 
 
 
 
 
 
 
 
 
 
First Half
 
Pension Benefits
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Worldwide OPEB
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
Service cost
$
228

 
$
260

 
$
256

 
$
258

 
$
22

 
$
23

Interest cost
818

 
646

 
349

 
263

 
105

 
84

Expected return on assets
(1,298
)
 
(1,398
)
 
(567
)
 
(521
)
 

 

Amortization of prior service costs/(credits)
43

 
2

 
17

 
17

 
(35
)
 
(8
)
Net remeasurement (gain)/loss
(10
)
 
4

 

 
(232
)
 

 
58

Separation programs/other
1

 
13

 
244

 
57

 

 

Settlements and curtailments
(50
)
 
4

 

 
18

 

 
(2
)
Net periodic benefit cost/(income)
$
(268
)
 
$
(469
)
 
$
299

 
$
(140
)
 
$
92

 
$
155



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 $232 million and $51 million in the second quarter of 2019 and 2020, respectively, and $245 million and $75 million in the first half of 2019 and 2020, respectively, related to separation programs. 

In addition, in the second quarter, we recognized settlements and curtailments, which required plan remeasurements at current discount rates, asset returns, and economic conditions.  This resulted in remeasurement gains of $148 million and $170 million in the second quarter and first half of 2020, respectively. Until our global redesign actions are completed, we anticipate further adjustments to our plans in subsequent periods.

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 half of 2020, we contributed $282 million to our worldwide funded pension plans and made $176 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
 
June 30,
2020
Automotive
 
 
 
Debt payable within one year
 
 
 
Short-term
$
315

 
$
1,172

Long-term payable within one year
 

 
 

Credit facilities (a)

 
292

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

 
148

Other debt
540

 
472

Unamortized (discount)/premium
(1
)
 

Total debt payable within one year
1,445

 
2,084

Long-term debt payable after one year
 

 
 

Public unsecured debt securities (c)
10,583

 
18,583

Credit facilities (a)

 
15,068

Delayed draw term loan
1,500

 
1,500

DOE ATVM Incentive Program (b)
880

 
1,138

Other debt (d)
547

 
1,559

Unamortized (discount)/premium
(161
)
 
(242
)
Unamortized issuance costs
(116
)
 
(197
)
Total long-term debt payable after one year
13,233

 
37,409

Total Automotive
$
14,678

 
$
39,493

Fair value of Automotive debt (e)
$
15,606

 
$
38,280

Ford Credit
 

 
 

Debt payable within one year
 

 
 

Short-term
$
13,717

 
$
11,681

Long-term payable within one year
 

 
 

Unsecured debt
15,062

 
18,567

Asset-backed debt
23,609

 
22,997

Unamortized (discount)/premium
1

 
1

Unamortized issuance costs
(17
)
 
(19
)
Fair value adjustments (f)
(1
)
 
33

Total debt payable within one year
52,371

 
53,260

Long-term debt payable after one year
 
 
 
Unsecured debt
55,148

 
49,711

Asset-backed debt
32,162

 
30,794

Unamortized (discount)/premium
6

 
4

Unamortized issuance costs
(197
)
 
(186
)
Fair value adjustments (f)
539

 
1,684

Total long-term debt payable after one year
87,658

 
82,007

Total Ford Credit
$
140,029

 
$
135,267

Fair value of Ford Credit debt (e)
$
141,678

 
$
132,836

Other
 
 
 
Long-term debt payable within one year
$
130

 
$

Long-term debt payable after one year
 
 
 
Unsecured debt
474

 
474

Unamortized (discount)/premium and issuance costs
(4
)
 
(4
)
Total long-term debt payable after one year
470

 
470

Total Other
$
600

 
$
470

Fair value of Other debt
$
720

 
$
534

__________
(a)
We drew $15.4 billion under our corporate credit facility and supplemental revolving credit facility in the first quarter of 2020. On July 27, 2020, we repaid $5.7 billion of our corporate credit facility and the full $2 billion outstanding under our supplemental revolving credit facility.
(b)
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.
(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 $1.2 billion of Automotive short-term debt and $12.8 billion and $10.9 billion of Ford Credit short-term debt at December 31, 2019 and June 30, 2020, respectively, carried at cost, which approximates fair value. All 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 $42.5 billion at December 31, 2019 and June 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 June 30 were as follows (in millions):
 
Second Quarter
 
First Half
Cash flow hedges (a)
2019
 
2020
 
2019
 
2020
Reclassified from AOCI to Cost of sales
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
44

 
$
(4
)
 
$
98

 
$
(74
)
Commodity contracts
(6
)
 
(14
)
 
(11
)
 
(28
)
Fair value hedges
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
Net interest settlements and accruals on hedging instruments
(12
)
 
68

 
(32
)
 
96

Fair value changes on hedging instruments
474

 
112

 
724

 
1,222

Fair value changes on hedged debt
(463
)
 
(98
)
 
(716
)
 
(1,191
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Foreign currency exchange contracts (b)
5

 
(274
)
 
(23
)
 
312

Cross-currency interest rate swap contracts
141

 
154

 
(4
)
 
3

Interest rate contracts
(3
)
 
(12
)
 
(30
)
 
(86
)
Commodity contracts
(12
)
 
12

 
(1
)
 
(31
)
Total
$
168

 
$
(56
)
 
$
5

 
$
223

__________
(a)
For the second quarter and first half of 2019, a $205 million gain and a $316 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax related to foreign currency exchange contracts. For the second quarter and first half of 2020, an $81 million loss and an $816 million gain, respectively, were reported in Other comprehensive income/(loss), net of tax related to foreign currency exchange contracts. For the second quarter and first half of 2019, a $37 million loss and a $26 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax related to commodity contracts. For the second quarter and first half of 2020, a $17 million gain and an $84 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax related to commodity contracts.
(b)
For the second quarter and first half of 2019, a $35 million loss and a $57 million loss were reported in Cost of sales, respectively, and a $40 million gain and a $34 million gain were reported in Other income/(loss), net, respectively. For the second quarter and first half of 2020, a $231 million loss and a $145 million gain were reported in Cost of sales, respectively, and a $43 million loss and a $167 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, 2019
 
June 30, 2020
 
Notional
 
Fair Value of
Assets
 
Fair Value of
Liabilities
 
Notional
 
Fair Value of
Assets
 
Fair Value of
Liabilities
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
15,349

 
$
47

 
$
493

 
$
12,966

 
$
371

 
$
55

Commodity contracts
673

 
5

 
29

 
617

 
2

 
69

Fair value hedges
 

 
 

 
 

 
 
 
 
 
 
Interest rate contracts
26,577

 
702

 
19

 
24,434

 
1,682

 

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
19,350

 
58

 
270

 
20,075

 
225

 
238

Cross-currency interest rate swap contracts
5,849

 
134

 
67

 
5,611

 
163

 
53

Interest rate contracts
68,914

 
275

 
191

 
71,075

 
752

 
573

Commodity contracts
467

 
9

 
9

 
450

 
12

 
29

Total derivative financial instruments, gross (a) (b)
$
137,179

 
$
1,230

 
$
1,078

 
$
135,228

 
$
3,207

 
$
1,017

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
 
 
$
390

 
$
772

 
 
 
$
1,239

 
$
683

Non-current portion
 
 
840

 
306

 
 
 
1,968

 
334

Total derivative financial instruments, gross
 
 
$
1,230

 
$
1,078

 
 
 
$
3,207

 
$
1,017


__________
(a)
At December 31, 2019 and June 30, 2020, we held collateral of $18 million and $20 million, and we posted collateral of $78 million and $91 million, respectively.
(b)
At December 31, 2019 and June 30, 2020, the fair value of assets and liabilities available for counterparty netting was $269 million and $600 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, payments to dealers and suppliers, and other charges, are recorded in Cost of sales and Selling, administrative, and other expenses. Below are actions we have initiated as part of the redesign.

Brazil. 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.

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.

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.

India. In the third quarter of 2019, Ford committed to a plan to sell specific net assets in our India Automotive operations. See Note 17 for additional information concerning this plan.

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

The following table summarizes the redesign-related activities for the periods ended June 30, which are recorded in Other liabilities and deferred revenue (in millions):
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Beginning balance
$
414

 
$
601

 
$
291

 
$
734

Changes in accruals (a)
741

 
26

 
1,008

 
94

Payments
(222
)
 
(99
)
 
(358
)
 
(271
)
Foreign currency translation
(4
)
 
(4
)
 
(12
)
 
(33
)
Ending balance
$
929

 
$
524

 
$
929

 
$
524

__________
(a)    Excludes pension costs of $182 million and $51 million in the second quarter of 2019 and 2020, respectively, and $195 million and $75 million in the first half of 2019 and 2020, respectively.

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)

We also recorded $291 million and $36 million in the second quarter of 2019 and 2020, respectively, and $542 million and $50 million in the first half of 2019 and 2020, respectively, for 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.

NOTE 17. HELD-FOR-SALE OPERATIONS AND CHANGES IN INVESTMENTS IN AFFILIATES

Automotive Segment

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, which is expected to close in 2020, we will sell certain India Automotive operations to the joint venture. Accordingly, we have reported the assets and liabilities of these operations as held for sale and ceased depreciation and amortization of those assets.

The assets and liabilities of our India Automotive operations classified as held for sale were as follows (in millions):
 
December 31,
2019
 
June 30,
2020
Assets
 
 
 
Trade and other receivables, net
$
269

 
$
101

Inventories
208

 
244

Other assets, current
147

 
108

Net property
279

 
263

Other assets, non-current
10

 
8

Total assets of held-for-sale operations
913

 
724

Less: Intercompany asset balances
(228
)
 
(54
)
Automotive segment total assets of held-for-sale operations (a)
$
685

 
$
670

 
 
 
 
Liabilities
 
 
 
Payables
$
461

 
$
263

Other liabilities and deferred revenue, current
71

 
53

Automotive debt payable within one year
90

 
83

Other liabilities and deferred revenue, non-current
28

 
25

Total liabilities of held-for-sale operations
650

 
424

Less: Intercompany liability balances
(169
)
 
(140
)
Automotive segment total liabilities of held-for-sale operations (a)
$
481

 
$
284

__________
(a)
As of December 31, 2019 and June 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.

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 (Continued)

We recognized pre-tax impairment charges of $804 million in 2019, and $15 million and $18 million in the second quarter and first half 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 consists 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 the carrying value of Argo AI’s net assets is primarily related to indefinite-lived assets. We also have 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 June 30, 2020, our maximum exposure to any potential losses associated with Argo AI is limited to our $2.8 billion of investments.

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)

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, current
516

Trade and other receivables, net
8

Other assets, current
106

Ford Credit finance receivables, net, non-current
715

Net property
2

Deferred income taxes
9

Other assets, non-current
1

Total assets of held-for-sale operations
1,418

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
8

Ford Credit long-term debt
1,254

Deferred income taxes
23

Total liabilities of held-for-sale operations
1,319

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.


28

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 June 30 were as follows (in millions):
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Foreign currency translation
 
 
 
 
 
 
 
Beginning balance
$
(4,557
)
 
$
(6,079
)
 
$
(4,800
)
 
$
(4,626
)
Gains/(Losses) on foreign currency translation
(139
)
 
(141
)
 
132

 
(1,547
)
Less: Tax/(Tax benefit)
(12
)
 
(50
)
 
16

 
(23
)
Net gains/(losses) on foreign currency translation
(127
)
 
(91
)
 
116

 
(1,524
)
(Gains)/Losses reclassified from AOCI to net income (a)

 
(11
)
 

 
(31
)
Other comprehensive income/(loss), net of tax
(127
)
 
(102
)
 
116

 
(1,555
)
Ending balance
$
(4,684
)
 
$
(6,181
)
 
$
(4,684
)
 
$
(6,181
)
 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Beginning balance
$
4

 
$
85

 
$
(59
)
 
$
71

Gains/(Losses) on available for sale securities
74

 
146

 
154

 
165

Less: Tax/(Tax benefit)
17

 
33

 
36

 
38

Net gains/(losses) on available for sale securities
57

 
113

 
118

 
127

(Gains)/Losses reclassified from AOCI to net income
2

 
(18
)
 
5

 
(18
)
Less: Tax/(Tax benefit)

 
(4
)
 
1

 
(4
)
Net (gains)/losses reclassified from AOCI to net income
2

 
(14
)
 
4

 
(14
)
Other comprehensive income/(loss), net of tax
59

 
99

 
122

 
113

Ending balance
$
63

 
$
184

 
$
63

 
$
184

 
 
 
 
 
 
 
 
Derivative instruments
 
 
 
 
 
 
 
Beginning balance
$
(245
)
 
$
204

 
$
201

 
$
(488
)
Gains/(Losses) on derivative instruments
168

 
(64
)
 
(342
)
 
732

Less: Tax/(Tax benefit)
24

 
(23
)
 
(78
)
 
150

Net gains/(losses) on derivative instruments
144

 
(41
)
 
(264
)
 
582

(Gains)/Losses reclassified from AOCI to net income
(38
)
 
18

 
(87
)
 
102

Less: Tax/(Tax benefit)
(11
)
 
1

 
(22
)
 
16

Net (gains)/losses reclassified from AOCI to net income (b)
(27
)
 
17

 
(65
)
 
86

Other comprehensive income/(loss), net of tax
117

 
(24
)
 
(329
)
 
668

Ending balance
$
(128
)
 
$
180

 
$
(128
)
 
$
180

 
 
 
 
 
 
 
 
Pension and other postretirement benefits
 
 
 
 
 
 
 
Beginning balance
$
(2,703
)
 
$
(2,671
)
 
$
(2,708
)
 
$
(2,685
)
Amortization and recognition of prior service costs/(credits)
13

 
22

 
25

 
26

Less: Tax/(Tax benefit)
3

 
3

 
5

 
4

Net prior service costs/(credits) reclassified from AOCI to net income
10

 
19

 
20

 
22

Translation impact on non-U.S. plans
6

 
(2
)
 
1

 
9

Other comprehensive income/(loss), net of tax
16

 
17

 
21

 
31

Ending balance
$
(2,687
)
 
$
(2,654
)
 
$
(2,687
)
 
$
(2,654
)
 
 
 
 
 
 
 
 
Total AOCI ending balance at June 30
$
(7,436
)
 
$
(8,471
)
 
$
(7,436
)
 
$
(8,471
)
__________
(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 $165 million. See Note 15 for additional information.

29

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 $429 million at December 31, 2019 and June 30, 2020, respectively. The carrying value of recorded liabilities related to financial guarantees was $33 million and $43 million at December 31, 2019 and June 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 $415 million at December 31, 2019 and June 30, 2020, respectively. The carrying value of recorded liabilities related to non-financial guarantees was $200 million and $110 million at December 31, 2019 and June 30, 2020, respectively.

We guarantee the resale value of vehicles sold in certain arrangements to daily rental companies. The maximum potential payment of $410 million as of June 30, 2020 represents the total proceeds we guarantee the rental company will receive on re-sale.  Reflecting our present estimate of proceeds the rental companies will receive on resale from third parties, we have recorded $109 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.

30

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 $400 million. In addition, we have a reasonably possible risk of loss for an emission certification matter. At this stage, we cannot estimate the risk of loss or predict the outcome, and cannot provide reasonable assurance that it will not have a material adverse effect on us.

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

31

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 June 30 was as follows (in millions):
 
First Half
 
2019
 
2020
Beginning balance
$
5,137

 
$
5,702

Payments made during the period
(2,192
)
 
(1,945
)
Changes in accrual related to warranties issued during the period
1,424

 
1,253

Changes in accrual related to pre-existing warranties
715

 
1,183

Foreign currency translation and other
23

 
(112
)
Ending balance
$
5,107

 
$
6,081



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

32

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 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.

33

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 June 30 was as follows (in millions):
 
Automotive
 
Mobility
 
Ford Credit
 
Corporate
Other
 
Interest
on Debt
 
Special Items
 
Adjustments
 
Total
Second Quarter 2019
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
35,758

 
$
6

 
$
3,089

 
$

 
$

 
$

 
$

 
$
38,853

Income/(loss) before income taxes
1,373

 
(264
)
 
831

 
(286
)
 
(244
)
 
(1,205
)
 

 
205

Equity in net income/(loss) of affiliated companies
72

 
7

 
8

 

 

 

 

 
87

Cash, cash equivalents, marketable securities, and restricted cash
23,106

 
142

 
14,989

 

 

 

 

 
38,237

Total assets
102,641

 
1,153

 
163,141

 

 

 

 
(4,751
)
(a)
262,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Second Quarter 2020
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
16,622

 
$
10

 
$
2,739

 
$

 
$

 
$

 
$

 
$
19,371

Income/(loss) before income taxes
(2,089
)
 
(332
)
 
543

 
(68
)
 
(450
)
 
3,480

 

 
1,084

Equity in net income/(loss) of affiliated companies
(9
)
 
(12
)
 
2

 

 

 
(6
)
 

 
(25
)
Cash, cash equivalents, marketable securities, and restricted cash
39,220

 
63

 
18,039

 

 

 

 

 
57,322

Total assets
114,414

 
4,112

 
154,674

 

 

 

 
(3,834
)
(a)
269,366

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 
Mobility
 
Ford Credit
 
Corporate
Other
 
Interest
on Debt
 
Special Items
 
Adjustments
 
Total
First Half 2019
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
72,997

 
$
12

 
$
6,186

 
$

 
$

 
$

 
$

 
$
79,195

Income/(loss) before income taxes
3,382

 
(552
)
 
1,632

 
(361
)
 
(489
)
 
(1,797
)
 

 
1,815

Equity in net income/(loss) of affiliated companies
89

 
9

 
14

 

 

 

 

 
112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Half 2020
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

Revenues
$
47,962

 
$
23

 
$
5,706

 
$

 
$

 
$

 
$

 
$
53,691

Income/(loss) before income taxes
(2,266
)
 
(666
)
 
573

 
(219
)
 
(677
)
 
3,193

 

 
(62
)
Equity in net income/(loss) of affiliated companies
(56
)
 
(12
)
 
8

 

 

 
(6
)
 

 
(66
)

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

34


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

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.

Remote Work Arrangements and Resumption of Manufacturing Operations

We released our first quarter 2020 results on April 28, 2020. At that time, our non-production personnel had been working remotely in almost all locations globally for over a month, and we had suspended our manufacturing operations in North America, Europe, and other regions.

The remote work arrangements that we implemented in the first quarter remain in place. 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 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. For example, by the end of the second quarter, North America was operating at 96 percent of pre-COVID-19 production levels.

Liquidity

We ended the second quarter of 2020 with $39.8 billion of liquidity, including $39.3 billion of cash. On July 27, 2020, we repaid $7.7 billion of our outstanding $15.4 billion corporate revolvers. We believe our liquidity of almost $40 billion is sufficient to maintain or exceed our target cash balance of $20 billion through the second half of this year even if global demand declines or there is another widespread suspension of manufacturing operations in the second half of the year due to COVID-19.

Enhanced Safety Standards

We established new protocols to help protect the health and safety of our workforce.  The actions include a daily, online health self-certification, a no-touch temperature scan upon entering our premises, a policy requiring the use of face masks in our facilities, and measures to provide additional personal protective equipment, such as gloves and face shields or goggles, in instances where employees’ jobs do not allow them to follow social distancing guidelines.  We have also scheduled more time between shifts to minimize potential interaction between employees and allow for additional cleaning between shifts.

Medical Supplies

During the second quarter, we worked with medical equipment makers, including GE Healthcare and 3M, to produce medical equipment and supplies.  Among other things, we produced ventilators, powered air-purifying respirators, and face shields, as well as medical masks and reusable gowns for health care workers.  We also worked with Thermo Fisher Scientific to produce COVID-19 test kits.  We continue to produce ventilators, face shields, and medical masks.

35

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

 

Forward Looking Information

Due to the successful restart of our manufacturing operations, our strong liquidity, and the repayment of $7.7 billion of Automotive debt, we will consider paying, as early as October 2020, the accumulated deferred salary amounts that have been deferred since May 1, 2020.   

The full impact of COVID-19 on our full year financial results will depend 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. Accordingly, the ultimate impact on us cannot be determined at this time; however, despite the uncertainty of the COVID-19 situation, we expect our full year 2020 results of operations to be adversely affected. For additional information on the impact and potential impact of COVID-19 on us, please see Item 1A. Risk Factors on page 73.

RESULTS OF OPERATIONS

In the second quarter of 2020, the net income attributable to Ford Motor Company was $1,117 million, and Company adjusted EBIT was a loss of $1,946 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):
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Global Redesign
 
 
 
 
 
 
 
Europe excl. Russia
$
(707
)
 
$
(94
)
 
$
(822
)
 
$
(199
)
India

 
(15
)
 

 
(18
)
South America
(235
)
 
(1
)
 
(436
)
 
(18
)
Russia
(211
)
 
(3
)
 
(385
)
 
17

China
(2
)
 
(6
)
 
(2
)
 
(6
)
Separations and Other (not included above)
(56
)
 

 
(80
)
 
(1
)
Subtotal Global Redesign
$
(1,211
)
 
$
(119
)
 
$
(1,725
)
 
$
(225
)
Other Items
 
 
 
 
 
 
 
Gain on transaction with Argo AI and VW
$

 
$
3,454

 
$

 
$
3,454

Other incl. Focus Cancellation, Transit Connect Customs Ruling*,
UAW Retirement Buyout, and Chariot
(5
)
 
(3
)
 
(83
)
 
(206
)
Subtotal Other Items
$
(5
)
 
$
3,451

 
$
(83
)
 
$
3,248

Pension and OPEB Gain/(Loss)
 
 
 
 
 
 
 
Pension and OPEB remeasurement
$
10

 
$
148

 
$
10

 
$
170

Pension curtailment

 

 

 

Subtotal Pension and OPEB Gain/(Loss)
$
10

 
$
148

 
$
10

 
$
170

Total EBIT Special Items
$
(1,205
)
 
$
3,480

 
$
(1,797
)
 
$
3,193

 
 
 
 
 
 
 
 
Cash effect of Global Redesign (incl. separations)
$
(222
)
 
$
(99
)
 
$
(358
)
 
$
(271
)
 
 
 
 
 
 
 
 
Tax special items**
$
216

 
$
(955
)
 
$
223

 
$
(1,742
)
__________
*
Transit Connect impact of $187 million was accrued in the third quarter of 2019.
**
Includes related tax effect on special items and tax special items.

We recorded $3.5 billion of pre-tax special items in the second quarter of 2020, primarily reflecting the gain on our investment in Argo AI as a result of the transaction with Argo AI and Volkswagen. Tax special item charges of $955 million in the quarter included the impact of Volkswagen’s investment in Argo AI and an additional valuation allowance related to certain deferred tax assets.

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.

36

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

 

COMPANY KEY METRICS

The table below shows our second quarter 2020 key metrics for the Company, compared to a year ago.
 
Second Quarter
 
First Half
 
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
GAAP Financial Measures
 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Operating Activities ($B)
$
6.5

 
$
9.1

 
$
2.7

 
$
10.0

 
$
8.6

 
$
(1.4
)
Revenue ($M)
38,853

 
19,371

 
(50
)%
 
79,195

 
53,691

 
(32
)%
Net Income/(Loss) ($M)
148

 
1,117

 
969

 
1,294

 
(876
)
 
(2,170
)
Net Income/(Loss) Margin (%)
0.4
%
 
5.8
%
 
5.4 ppts

 
1.6
%
 
(1.6
)%
 
(3.3) ppts

EPS (Diluted)
$
0.04

 
$
0.28

 
$
0.24

 
$
0.32

 
$
(0.22
)
 
$
(0.54
)
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Financial Measures *
 
 
 
 
 
 
 
 
 
 
 
Company Adj. Free Cash Flow ($B)
$
0.2

 
$
(5.3
)
 
$
(5.5
)
 
$
2.1

 
$
(7.6
)
 
$
(9.6
)
Company Adj. EBIT ($M)
1,654

 
(1,946
)
 
(3,600
)
 
4,101

 
(2,578
)
 
(6,679
)
Company Adj. EBIT Margin (%)
4.3
%
 
(10.0
)%
 
(14.3) ppts

 
5.2
%
 
(4.8
)%
 
(10.0) ppts

Adjusted EPS (Diluted)
$
0.28

 
$
(0.35
)
 
$
(0.63
)
 
$
0.72

 
$
(0.59
)
 
$
(1.31
)
Adjusted ROIC (Trailing Four Quarters)
8.5
%
 
(3.1
)%
 
(11.6) ppts

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

In the second quarter of 2020, our diluted earnings per share of Common and Class B Stock was $0.28 and our diluted adjusted earnings per share was a loss of $0.35.

Net income/(loss) margin was 5.8% in the second quarter of 2020, up 5.4 percentage points from a year ago. Company adjusted EBIT margin was negative 10.0% in the second quarter of 2020, down 14.3 percentage points from a year ago.

The $969 million year-over-year increase in net income/(loss) in the second quarter of 2020 reflects the gain on our investment in Argo AI as a result of the Volkswagen transaction, partially offset by lower Automotive EBIT driven by the impact of COVID-19. The $3.6 billion decline in Company adjusted EBIT in the second quarter of 2020 was driven by lower Automotive EBIT.

The table below shows our second quarter 2020 net income/(loss) attributable to Ford and Company adjusted EBIT by segment.
 
 
Second Quarter
 
First Half
 
 
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Automotive
 
$
1,373

 
$
(2,089
)
 
$
(3,462
)
 
$
3,382

 
$
(2,266
)
 
$
(5,648
)
Mobility
 
(264
)
 
(332
)
 
(68
)
 
(552
)
 
(666
)
 
(114
)
Ford Credit
 
831

 
543

 
(288
)
 
1,632

 
573

 
(1,059
)
Corporate Other
 
(286
)
 
(68
)
 
218

 
(361
)
 
(219
)
 
142

Company Adjusted EBIT *
 
1,654

 
(1,946
)
 
(3,600
)
 
4,101

 
(2,578
)
 
(6,679
)
Interest on Debt
 
(244
)
 
(450
)
 
206

 
(489
)
 
(677
)
 
188

Special Items
 
(1,205
)
 
3,480

 
(4,685
)
 
(1,797
)
 
3,193

 
(4,990
)
Taxes / Noncontrolling Interests
 
(57
)
 
33

 
(90
)
 
(521
)
 
(814
)
 
293

Net Income/(Loss)
 
$
148

 
$
1,117

 
$
969

 
$
1,294

 
$
(876
)
 
$
(2,170
)
__________
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

37

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

 

Automotive Segment

The table below shows our second quarter 2020 Automotive segment EBIT by business unit (in millions).
 
 
Second Quarter

First Half
 
 
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
North America
 
$
1,696

 
$
(974
)
 
$
(2,670
)
 
$
3,900

 
$
(628
)
 
$
(4,528
)
South America
 
(205
)
 
(165
)
 
40

 
(362
)
 
(278
)
 
84

Europe
 
110

 
(664
)
 
(774
)
 
195

 
(807
)
 
(1,002
)
China (including Taiwan)
 
(155
)
 
(136
)
 
19

 
(283
)
 
(377
)
 
(94
)
International Markets Group
 
(73
)
 
(150
)
 
(77
)
 
(68
)
 
(176
)
 
(108
)
Automotive Segment
 
$
1,373

 
$
(2,089
)
 
$
(3,462
)
 
$
3,382

 
$
(2,266
)
 
$
(5,648
)

The tables below and on the following pages provide second quarter 2020 key metrics and the change in second quarter 2020 EBIT compared with second 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.
 
Second Quarter

First Half
Key Metrics
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Market Share (%)
6.2
%
 
5.9
%
 
(0.3) ppts

 
6.1
%
 
5.9
%
 
(0.2) ppts

Wholesale Units (000)
1,364

 
645

 
(719
)
 
2,789

 
1,771

 
(1,018
)
Revenue ($M)
$
35,758

 
$
16,622

 
$
(19,136
)
 
$
72,997

 
$
47,962

 
$
(25,035
)
EBIT ($M)
1,373

 
(2,089
)
 
(3,462
)
 
3,382

 
(2,266
)
 
(5,648
)
EBIT Margin (%)
3.8
%
 
(12.6
)%
 
(16.4) ppts

 
4.6
%
 
(4.7
)%
 
(9.4) ppts

Change in EBIT by Causal Factor (in millions)
 
 
Second Quarter 2019 EBIT
 
$
1,373

Volume / Mix
 
(5,671
)
Net Pricing
 
1,330

Cost
 
1,096

Exchange
 
(118
)
Other
 
(99
)
Second Quarter 2020 EBIT
 
$
(2,089
)

In the second quarter of 2020, both wholesales and revenue were down due to the suspension of our manufacturing operations.

Our second quarter 2020 Automotive segment EBIT was a loss of $2.1 billion, down $3.5 billion from a year ago, and our second quarter 2020 Automotive EBIT margin was negative 12.6 percent. The lower EBIT was driven by the decline in volume, but was partially offset by an over $1 billion improvement in both net pricing and cost. The cost improvement reflects lower structural costs due to suspended production and one-time cost actions (e.g., reduced marketing activity), partially offset by higher material costs for new products and regulatory compliance as well as higher warranty. For the full year, we expect warranty to be up year over year.

38

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

 

North America
 
Second Quarter

First Half
Key Metrics
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Market Share (%)
13.8
%
 
14.2
%
 
0.4 ppts

 
13.7
%
 
13.8
%
 
0.1 ppts

Wholesale Units (000)
693

 
272

 
(421
)
 
1,446

 
890

 
(556
)
Revenue ($M)
$
23,970

 
$
10,943

 
$
(13,027
)
 
$
49,359

 
$
32,752

 
$
(16,607
)
EBIT ($M)
1,696

 
(974
)
 
(2,670
)
 
3,900

 
(628
)
 
(4,528
)
EBIT Margin (%)
7.1
%
 
(8.9
)%
 
(16.0) ppts

 
7.9
%
 
(1.9
)%
 
(9.8) ppts

Change in EBIT by Causal Factor (in millions)
 
 
Second Quarter 2019 EBIT
 
$
1,696

Volume / Mix
 
(4,330
)
Net Pricing
 
813

Cost
 
758

Exchange
 
30

Other
 
59

Second Quarter 2020 EBIT
 
$
(974
)

In North America, second quarter 2020 wholesales declined 61 percent from a year ago, primarily reflecting lower industry volume and suspended production through May 17, 2020. Second quarter 2020 revenue decreased 54 percent year over year, driven by lower volume, partially offset by higher net pricing on new products.

North America’s second quarter 2020 EBIT was down $2.7 billion from a year ago with an EBIT margin of negative 8.9 percent. The lower EBIT was driven by lower volume, higher new model material cost, and higher warranty, partially offset by higher net pricing, lower structural cost arising from suspended production, reduced marketing activity, and other one-time cost actions.

South America
 
Second Quarter

First Half
Key Metrics
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Market Share (%)
7.4
%
 
6.5
%
 
(0.9) ppts

 
7.5
%
 
6.8
%
 
(0.7) ppts

Wholesale Units (000)
75

 
14

 
(61
)
 
143

 
73

 
(70
)
Revenue ($M)
$
976

 
$
242

 
$
(734
)
 
$
1,901

 
$
970

 
$
(931
)
EBIT ($M)
(205
)
 
(165
)
 
40

 
(362
)
 
(278
)
 
84

EBIT Margin (%)
(21.0
)%
 
(68.3
)%
 
(47.3) ppts

 
(19.1
)%
 
(28.6
)%
 
(9.6) ppts

Change in EBIT by Causal Factor (in millions)
 
 
Second Quarter 2019 EBIT
 
$
(205
)
Volume / Mix
 
(93
)
Net Pricing
 
103

Cost
 
50

Exchange
 
(6
)
Other
 
(14
)
Second Quarter 2020 EBIT
 
$
(165
)

In South America, second quarter 2020 wholesales declined 81 percent from a year ago, primarily reflecting lower industry volume and suspended production for most of the quarter. Second quarter 2020 revenue decreased 75 percent year over year, driven by lower volume and weaker currencies, partially offset by higher net pricing.

South America’s second quarter 2020 EBIT loss improved $40 million from a year ago with an EBIT margin of negative 68.3 percent. EBIT improved despite a significant wholesale reduction. South America’s higher net pricing, cost performance (including lower headcount), and favorable vehicle mix more than offset inflationary cost increases.


39

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

 

Europe
 
Second Quarter

First Half
Key Metrics
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Market Share (%)
7.0
%
 
7.1
%
 
0.1 ppts

 
7.3
%
 
7.0
%
 
(0.3) ppts

Wholesale Units * (000)
368

 
154

 
(214
)
 
750

 
442

 
(308
)
Revenue ($M)
$
7,329

 
$
3,613

 
$
(3,716
)
 
$
14,777

 
$
9,860

 
$
(4,917
)
EBIT ($M)
110

 
(664
)
 
(774
)
 
195

 
(807
)
 
(1,002
)
EBIT Margin (%)
1.5
%
 
(18.4
)%
 
(19.9) ppts

 
1.3
%
 
(8.2
)%
 
(9.5) ppts

__________
*
Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Turkey (about 7,000 units in Q2 2019 and 9,000 units in Q2 2020). Revenue does not include these sales.
Change in EBIT by Causal Factor (in millions)
 
 
Second Quarter 2019 EBIT
 
$
110

Volume / Mix
 
(957
)
Net Pricing
 
392

Cost
 
38

Exchange
 
(106
)
Other
 
(141
)
Second Quarter 2020 EBIT
 
$
(664
)

In Europe, second quarter 2020 wholesales declined 58 percent from a year ago, primarily reflecting lower industry volume and suspended production. Second quarter 2020 revenue decreased 51 percent year over year, driven by lower volume and weaker currencies, partially offset by higher net pricing and favorable series/option mix.

Europe’s second quarter 2020 EBIT decreased $774 million year over year with an EBIT margin of negative 18.4 percent. The lower EBIT was more than explained by lower volume. Higher net pricing and cost improvement from personnel reduction actions were partially offset by regulatory (CO2) product actions and warranty expense.

40

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

 

China (Including Taiwan)
 
Second Quarter

First Half
Key Metrics
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Market Share (%)
2.3
%
 
2.5
%
 
0.2 ppts

 
2.2
%
 
2.4
%
 
0.2 ppts

Wholesale Units * (000)
126

 
169

 
43

 
241

 
251

 
10

Revenue ($M)
$
915

 
$
803

 
$
(112
)
 
$
1,774

 
$
1,396

 
$
(378
)
EBIT ($M)
(155
)
 
(136
)
 
19

 
(283
)
 
(377
)
 
(94
)
EBIT Margin (%)
(17.0
)%
 
(17.0
)%
 
— ppts

 
(16.0
)%
 
(27.0
)%
 
(11.0) ppts

 
 
 
 
 
 
 
 
 
 
 
 
China Unconsolidated Affiliates
 
 
 
 
 
 
 
 
 
 
 
Wholesales (000)
108

 
156

 
48

 
207

 
228

 
21

Ford Equity Income/(Loss) ($M)
$
7

 
$
3

 
$
(4
)
 
$
(34
)
 
$
(88
)
 
$
(54
)
__________
*
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)
 
 
Second Quarter 2019 EBIT
 
$
(155
)
Volume / Mix
 
(34
)
Net Pricing
 
(12
)
Cost
 
59

Exchange
 
(34
)
Other (Including Joint Ventures)
 
40

Second Quarter 2020 EBIT
 
$
(136
)

In China, second quarter 2020 wholesales increased 34 percent from a year ago, reflecting the newly launched Corsair and Escape and strong commercial vehicle sales. Second quarter 2020 revenue at our consolidated operations was down 12 percent, reflecting the planned transition of Lincoln to local production at our Changan Ford joint venture.

China’s second quarter 2020 EBIT loss improved $19 million from a year ago with an EBIT margin of negative 17 percent. The improvement in EBIT was driven by volume growth at our joint ventures and structural cost improvements.


41

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

 

International Markets Group
 
Second Quarter
 
First Half
Key Metrics
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Market Share (%)
2.1
%
 
1.7
%
 
(0.4) ppts

 
2.0
%
 
1.6
%
 
(0.4) ppts

Wholesale Units * (000)
103

 
36

 
(66
)
 
210

 
114

 
(96
)
Revenue ($M)
$
2,568

 
$
1,021

 
$
(1,547
)
 
$
5,186

 
$
2,983

 
$
(2,203
)
EBIT ($M)
(73
)
 
(150
)
 
(77
)
 
(68
)
 
(176
)
 
(108
)
EBIT Margin (%)
(2.8
)%
 
(14.7
)%
 
(11.8) ppts

 
(1.3
)%
 
(5.9
)%
 
(4.6) ppts

__________
*
Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Russia (about 11,000 units in Q2 2019 and 2,000 units in Q2 2020). Revenue after Q2 2019 does not include these sales.
Change in EBIT by Causal Factor (in millions)
 
 
Second Quarter 2019 EBIT
 
$
(73
)
Volume / Mix
 
(256
)
Net Pricing
 
33

Cost
 
191

Exchange
 
(2
)
Other
 
(43
)
Second Quarter 2020 EBIT
 
$
(150
)

In our International Markets Group, second quarter 2020 wholesales declined 64 percent from a year ago, primarily reflecting lower industry volume, suspended production, and a revised commercial vehicle offering strategy with our Russian joint venture. Second quarter 2020 revenue decreased 60 percent year over year, driven by lower volume and weaker currencies.

Our International Market Group’s second quarter 2020 EBIT was $77 million lower than a year ago with an EBIT margin of negative 14.7 percent. The higher EBIT loss was driven by lower volume, partially offset by lower structural costs.

42

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

43

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 second quarter 2020 EBIT loss was $332 million, a $68 million higher loss than a year ago. Our strategic investments in vehicle and business model development for our autonomous vehicle platform and future growth opportunities in mobility services continue, in line with a disciplined approach.

On June 1, 2020, Ford, Volkswagen AG, and Argo AI completed the previously announced transaction for Volkswagen to join Ford in investing in Argo AI. This collaboration allows Volkswagen and Ford to better serve our future autonomous vehicle customers while improving cost and capital efficiencies. The companies will both work with Argo AI to form distinct, highly capable autonomous-vehicle businesses based on Argo AI’s self-driving technology. This Volkswagen/Ford alliance does not include cross-ownership between the companies, which will remain competitors in the marketplace. As a result of this transaction, we have reported a gain on our investment in Argo AI of $3.5 billion, which has been treated as a special item in our results for the second quarter of 2020.

Effective June 1, 2020, Argo AI was deconsolidated from Ford. Despite the deconsolidation, we expect our investments in autonomous vehicles to continue at similar levels and will continue to be reflected in our Mobility segment results.



44

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 second quarter and year-to-date 2020 key metrics and the change in second quarter 2020 EBT compared with second 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.
 
Second Quarter
 
First Half
GAAP Financial Measures
2019
 
2020
 
H / (L)
 
2019
 
2020
 
H / (L)
Net Receivables ($B)
$
143

 
$
130

 
(9
)%
 
$
143

 
$
130

 
(9
)%
Loss-to-Receivables * (bps)
39

 
15

 
(24
)
 
48

 
37

 
(11
)
Auction Values **
$
20,115

 
$
19,755

 
(2
)%
 
$
19,525

 
$
19,435

 
(1
)%
EBT ($M)
$
831

 
$
543

 
$
(288
)
 
$
1,632

 
$
573

 
$
(1,059
)
ROE (%)
16
%
 
12
%
 
(4) ppts

 
16
%
 
6
%
 
(10) ppts

 
 
 
 
 
 
 
 
 
 
 
 
Other Balance Sheet Metrics
 
 
 
 
 
 
 
 
 
 
 
Debt ($B)
 
 
 
 
 
 
$
141

 
$
135

 
(4
)%
Net Liquidity ($B)
 
 
 
 
 
 
34

 
32

 
(6
)%
Financial Statement Leverage (to 1)
 
 
 
 
 
 
9.5

 
9.8

 
0.3

__________
*
U.S. retail financing only.
**
U.S. 36-month off-lease second quarter auction values at Q2 2020 mix and YTD amounts at 2020 YTD mix.
 
First Half
Non-GAAP Financial Measures
2019
 
2020
 
H / (L)
Managed Receivables * ($B)
$
152

 
$
139

 
(9
)%
Managed Leverage ** (to 1)
8.6

 
8.5

 
(0.1
)
__________
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
**
See Liquidity and Capital Resources - Ford Credit Segment section for reconciliation to GAAP.
Change in EBT by Causal Factor (in millions)
 
 
Second Quarter 2019 EBT
 
$
831

Volume / Mix
 
(46
)
Financing Margin
 
(13
)
Credit Loss
 
(33
)
Lease Residual
 
(127
)
Exchange
 
(6
)
Other
 
(63
)
Second Quarter 2020 EBT
 
$
543


Ford Credit’s loss-to-receivables ratio remained at a low level in the second quarter of 2020, at 0.15 percent, which was 24 basis points lower than a year ago. U.S. auction values in the second quarter of 2020 were 2 percent lower than a year ago. Full year 2020 auction values are now forecasted to be down about 5 percent, consistent with third party estimates.

Ford Credit’s second quarter 2020 EBT of $543 million was $288 million lower than a year ago, primarily reflecting higher supplemental depreciation on operating leases, lower derivative market valuation gains (reflected in Other), unfavorable volume and mix driven by lower average receivables, and an increase in the credit loss reserve during the quarter. Favorable year-over-year off-lease auction performance and credit losses were partial offsets.


45

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

46

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

47

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 second quarter of 2020, Corporate Other had a $68 million loss, compared with a $286 million loss a year ago. The improvement is more than explained by the nonrecurrence of the mark-to-market loss on our investment in Pivotal Software we had in the second quarter of 2019, as well as mark-to-market gains on other investments this quarter, partially offset by lower interest income.

Interest on Debt

Interest on Debt consists of interest expense on Automotive and Other debt. Second quarter 2020 interest expense on Automotive and Other debt was $450 million, which is $206 million higher than a year ago, more than explained by higher U.S. debt interest expense.

Taxes

In the second quarter of 2020, we recognized a tax benefit of $34 million. For the first half of 2020, we recognized a tax provision of $813 million. This resulted in negative effective tax rates of 3.1% and 1,311%, respectively.

Our second quarter and first half of 2020 adjusted effective tax rates, which exclude special items, were 41.3% and 28.5%, respectively.


48

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. Moreover, our suspension of production earlier this year put pressure on our Automotive liquidity. Beginning in May 2020, taking a phased approach and after introducing new safety protocols at our plants, we resumed manufacturing operations around the world, and by July 2020, we returned to pre-COVID-19 production levels in North America, Europe, and China. 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 second quarter of 2020 with $39.8 billion of liquidity, including $39.3 billion of cash. During the quarter we issued almost $10 billion of new debt, including the $8 billion unsecured issuance we completed in April.

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
 
June 30,
2020
Balance Sheets ($B)
 
 
 
Company Cash *
$
22.3

 
$
39.3

Liquidity
35.4

 
39.8

Debt
(15.3
)
 
(40.0
)
Cash Net of Debt
7.0

 
(0.7
)
 
 
 
 
Pension Funded Status ($B) **
 
 
 
Funded Plans
$
(0.4
)
 
$
0.4

Unfunded Plans
(6.4
)
 
(6.2
)
Total Global Pension
$
(6.8
)
 
$
(5.8
)
 
 
 
 
Total Funded Status OPEB
$
(6.1
)
 
$
(6.0
)
__________
*
Includes a $290 million cash compensating balance at June 30, 2020 in an interest-bearing savings account related to a $498 million debt obligation.
**
Balances at June 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 June 30, 2020, we had Company cash of $39.3 billion, an increase of $17 billion compared with December 31, 2019. Company cash at June 30, 2020 includes $15.4 billion of the loan proceeds we received in March and April 2020 under our corporate and supplemental revolving credit facilities, a portion of which was repaid on July 27, 2020, as described in more detail below, and $8 billion from our unsecured debt issuance, which settled on April 22, 2020. At June 30, 2020, about 90% of Company cash was held by consolidated entities domiciled in the United States. With our restart of production in mid-May 2020, we believe we have sufficient liquidity to maintain or exceed our Company cash target of $20 billion through the second half of this year even if global demand declines or there is another widespread suspension of manufacturing operations.

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.

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).

49

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

 

With respect to “Changes in working capital,” in general we carry relatively low Automotive segment trade receivables compared with our trade payables because the majority of our Automotive wholesales are financed (primarily by Ford Credit) immediately upon sale of vehicles to dealers, which generally occurs shortly after being produced. In contrast, our Automotive trade payables are based primarily on industry-standard production supplier payment terms generally ranging between 30 days to 45 days. As a result, our cash flow tends to improve as wholesale volumes increase, but can deteriorate when wholesale volumes decrease. The suspension of production at most of our assembly plants and lower industry volumes due to COVID-19 resulted in a deterioration of our cash flow as described below. Moreover, 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.

Changes in Company cash excluding Ford Credit are summarized below (in billions):
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Company Excluding Ford Credit
 
 
 
 
 
 
 
Company Adjusted EBIT* excluding Ford Credit
$
0.8

 
$
(2.5
)
 
$
2.5

 
$
(3.2
)
 
 
 
 
 
 
 
 
Capital spending
$
(1.9
)
 
$
(1.2
)
 
$
(3.5
)
 
$
(2.9
)
Depreciation and tooling amortization
1.4

 
1.3

 
2.7

 
2.7

Net spending
$
(0.5
)
 
$
0.2

 
$
(0.8
)
 
$
(0.2
)
 
 
 
 
 
 
 
 
Receivables
$
0.2

 
$
0.1

 
$
0.1

 
$
0.6

Inventory
(0.1
)
 
1.2

 
(1.2
)
 
0.1

Trade Payables
(0.2
)
 
(2.2
)
 
1.5

 
(2.7
)
Changes in working capital
$
(0.1
)
 
$
(0.9
)
 
$
0.3

 
$
(2.1
)
 
 
 
 
 
 
 
 
Ford Credit distributions
$
0.7

 
$
0.3

 
$
1.3

 
$
0.6

All other and timing differences
(0.6
)
 
(2.4
)
 
(1.3
)
 
(2.6
)
Company adjusted free cash flow *
$
0.2

 
$
(5.3
)
 
$
2.1

 
$
(7.6
)
 
 
 
 
 
 
 
 
Global Redesign (including separations)
$
(0.2
)
 
$
(0.1
)
 
$
(0.4
)
 
$
(0.3
)
Changes in debt
0.3

 
9.6

 
0.3

 
24.7

Funded pension contributions
(0.1
)
 
(0.1
)
 
(0.4
)
 
(0.3
)
Shareholder distributions
(0.6
)
 

 
(1.2
)
 
(0.6
)
All other (including acquisitions and divestitures)
(0.5
)
 
0.9

 
(0.3
)
 
1.0

Change in cash
$
(1.0
)
 
$
5.0

 
$
0.2

 
$
17.0

__________
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
*
Note: Numbers may not sum due to rounding.

Our second quarter 2020 Net cash provided by/(used in) operating activities was up $2.7 billion year over year. This improvement is more than explained by Ford Credit operating cash flow, which is up $8.1 billion year over year. Excluding Ford Credit operating cash flow, the Net cash provided by/(used in) operating activities is $5.5 billion lower than a year ago. Our Company adjusted free cash flow was negative $5.3 billion, which was $5.5 billion lower than a year ago driven by lower adjusted EBIT and more unfavorable timing differences and working capital.

50

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

 

Capital spending was $1.2 billion in the second quarter of 2020, $0.7 billion lower than a year ago. We expect full year 2020 capital spending to be between $6.1 billion and $6.6 billion, down from our prior expectation of $6.3 billion to $6.8 billion, and down between $1 billion and $1.5 billion from the $7.6 billion of capital spending in 2019.

Second quarter 2020 working capital was $0.9 billion negative, more than explained by lower trade payables driven by suspended production at most of our assembly plants and lower industry volumes. Lower inventory also reflects the impact from lower production and finished vehicle inventory, and provided a partial offset.

Second quarter 2020 all other and timing differences were about $2.4 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 second quarter of 2020, we contributed $107 million to our worldwide funded pension plans. We continue to expect to contribute between $0.5 billion and $0.7 billion to our funded plans (most of which are mandatory contributions).

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

Available Credit Lines. At June 30, 2020, the full amount under each of our $13.4 billion corporate credit facility, $2 billion supplemental revolving credit facility, and $1.5 billion delayed draw term loan remained drawn, and $0.5 billion of committed Company credit lines excluding Ford Credit was available under local credit facilities for our affiliates.

Our corporate and supplemental revolving credit facilities were amended as of July 27, 2020 to extend the maturity dates 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. Additional information about the amendments is available in our Current Report on Form 8-K filed on July 30, 2020.

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. As part of the July 27, 2020 extension of the corporate and supplemental revolving credit facilities, we agreed not to engage in share repurchases (with limited exceptions) while any portion of either facility is outstanding and not to pay 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.

Also on July 27, 2020, we repaid $5.7 billion of our corporate credit facility and the full $2 billion outstanding under our supplemental revolving credit facility. As of July 30, 2020, the utilized portion of the corporate credit facility is $7.7 billion, all of which matures on April 30, 2024, and the entire $2 billion supplemental revolving credit facility is available.

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.

51

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

 

On June 29, 2020, Ford Motor Company Limited, our operating subsidiary in the United Kingdom (“Ford Britain”), entered into a £625 million term loan credit facility with a syndicate of banks to support Ford 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 Britain’s obligations under the credit facility to the lenders.  On June 30, 2020, Ford Britain drew the full £625 million available under the facility. 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 June 30, 2020, Company debt excluding Ford Credit was $40 billion, including Automotive debt of $39.5 billion. These June 30, 2020 balances were $24.7 billion and $24.8 billion higher, respectively, than at December 31, 2019, primarily reflecting the draws on our credit facilities and our $8 billion unsecured debt issuance in April 2020. As described above, $7.7 billion of the outstanding amount under our credit facilities was repaid on July 27, 2020.

In June 2020, our Loan Arrangement and Reimbursement Agreement with the DOE was modified to reduce quarterly principal payments from $148 million to $37 million. The deferred portion of the principal payments will be due upon the original maturity date in June 2022. In the event we pay a dividend, repurchase shares above a specified materiality threshold, or provide security to other lenders, any principal payments remaining at such time will revert to the original payment schedule.

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.

52

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

 

Ford Credit Segment

Ford Credit ended the second quarter with $32.4 billion in liquidity. During the second quarter of 2020, Ford Credit completed $5 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 increase ABS mix, prudently issue unsecured debt, and maintain strong liquidity throughout 2020.

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):
 
June 30,
2019
 
December 31,
2019
 
June 30,
2020
Term Debt (incl. Bank Borrowings)
$
74

 
$
73

 
$
73

Term Asset-Backed Securities
57

 
57

 
55

Commercial Paper
4

 
4

 
2

Ford Interest Advantage / Deposits
6

 
7

 
6

Other
10

 
9

 
6

Equity
15

 
14

 
14

Adjustments for Cash
(14
)
 
(12
)
 
(17
)
Total Managed Receivables *
$
152

 
$
152

 
$
139

 
 
 
 
 
 
Securitized Funding as Percent of Managed Receivables
38
%
 
38
%
 
39
%
__________
*
See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.

Managed receivables were $139 billion at June 30, 2020, and were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 39% at the end of the second quarter of 2020. Ford Credit expects this to increase modestly by the end of the year. The calendarization of the funding plan will result in quarterly fluctuations of the securitized funding percentage.

53

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 July 29, 2020, excluding short-term funding programs (in billions):
 
 
2018
Actual
 
2019
Actual
 
2020
Forecast
 
Through
July 29
Unsecured
 
$
13

 
$
17

 
$ 7 - 10
 
$
5

Securitizations *
 
14

 
14

 
11 - 14
 
7

Total public
 
$
27

 
$
31

 
$ 18 - 24
 
$
12

__________
*
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 $18 billion to $24 billion. Through July 29, 2020, Ford Credit has completed $12 billion of public term issuances.

Liquidity. The following table shows Ford Credit’s liquidity sources and utilization (in billions):
 
June 30,
2019
 
December 31,
2019
 
June 30,
2020
Liquidity Sources *
 
 
 
 
 
Cash
$
14.1

 
$
11.7

 
$
17.1

Committed asset-backed facilities
35.7

 
36.6

 
37.1

Other unsecured credit facilities
2.9

 
3.0

 
2.5

Ford corporate credit facility allocation
3.0

 
3.0

 

Total liquidity sources
$
55.7

 
$
54.3

 
$
56.7

 
 
 
 
 
 
Utilization of Liquidity *
 
 
 
 
 
Securitization cash
$
(4.0
)
 
$
(3.5
)
 
$
(3.6
)
Committed asset-backed facilities
(17.5
)
 
(17.3
)
 
(17.7
)
Other unsecured credit facilities
(0.9
)
 
(0.8
)
 
(0.6
)
Ford corporate credit facility allocation

 

 

Total utilization of liquidity
$
(22.4
)
 
$
(21.6
)
 
$
(21.9
)
 
 
 
 
 
 
Gross liquidity
$
33.3

 
$
32.7

 
$
34.8

Adjustments **
0.3

 
0.4

 
(2.4
)
Net liquidity available for use
$
33.6

 
$
33.1

 
$
32.4

__________
*
See Definitions and Information Regarding Ford Credit Causal Factors section.
**
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 June 30, 2020, Ford Credit’s net liquidity available for use was $32.4 billion, $0.7 billion lower than year-end 2019. Ford Credit’s sources of liquidity include cash, committed asset-backed facilities, and unsecured credit facilities. At June 30, 2020, Ford Credit’s liquidity sources including cash totaled $56.7 billion, up $2.4 billion from year-end 2019.

54

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):
 
 
July - December
2020
 
2021
 
2022
 
2023 and Beyond
Balance Sheet Liquidity Profile
 
 
 
 
 
 
 
 
Assets (a)
 
$
64

 
$
95

 
$
121

 
$
154

Total debt (b)
 
35

 
75

 
97

 
134

Memo: Unsecured Long-Term Debt Maturities
 
8

 
17

 
13

 
30

__________
(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 second 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 June 30, 2020, out of $154 billion of assets, $76 billion are unencumbered. See Notes 8 and 14 for additional information.

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.

55

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):
 
 
June 30,
2019
 
December 31,
2019
 
June 30,
2020
Leverage Calculation
 
 
 
 
 
 
Debt
 
$
141.5

 
$
140.0

 
$
135.3

Adjustments for cash
 
(14.1
)
 
(11.7
)
 
(17.1
)
Adjustments for derivative accounting *
 
(0.6
)
 
(0.5
)
 
(1.8
)
Total adjusted debt
 
$
126.8

 
$
127.8

 
$
116.4

 
 
 
 
 
 
 
Equity **
 
$
14.9

 
$
14.3

 
$
13.8

Adjustments for derivative accounting *
 
(0.1
)
 

 

Total adjusted equity
 
$
14.8

 
$
14.3

 
$
13.8

 
 
 
 
 
 
 
Financial statement leverage (to 1) (GAAP)
 
9.5

 
9.8

 
9.8

Managed leverage (to 1) (Non-GAAP)
 
8.6

 
8.9

 
8.5

__________
*
Related primarily to market valuation adjustments to derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings.
**
Total shareholder’s interest reported on Ford Credit’s balance sheets.

Ford Credit plans its managed leverage by considering market conditions and the risk characteristics of its business. At June 30, 2020, Ford Credit’s financial statement leverage was 9.8:1, and its managed leverage was 8.5:1. Ford Credit targets managed leverage in the range of 8:1 to 9:1.

56

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

 

Total Company

Pension Plans - Underfunded Balances. As of June 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. We analyze total Company performance using an adjusted Return on Invested Capital (“ROIC”) financial metric based on an after-tax, rolling four quarter average. The following table contains the calculation of our ROIC for the periods shown (in billions):
 
Four Quarters Ending
 
June 30,
2019
 
June 30,
2020
Adjusted Net Operating Profit After Cash Tax
 
 
 
Net income/(loss) attributable to Ford
$
2.2

 
$
(2.1
)
Add: Noncontrolling interest

 

Less: Income tax
(0.7
)
 
0.4

Add: Cash tax
(0.8
)
 
(0.4
)
Less: Interest on debt
(1.1
)
 
(1.2
)
Less: Total pension/OPEB income/(cost)
(0.8
)
 
(2.0
)
Add: Pension/OPEB service costs
(1.1
)
 
(1.1
)
Net operating profit/(loss) after cash tax
$
3.0

 
$
(0.7
)
Less: Special items (excl. pension/OPEB) pre-tax
(2.3
)
 
1.4

Adjusted net operating profit after cash tax
$
5.3

 
$
(2.1
)
 
 
 
 
Invested Capital
 
 
 
Equity
$
36.1

 
$
30.9

Redeemable noncontrolling interest

 

Debt (excl. Ford Credit)
14.6

 
40.0

Net pension and OPEB liability
11.2

 
11.8

Invested capital (end of period)
$
62.0

 
$
82.6

Average invested capital
$
62.7

 
$
67.9

 

 
 
ROIC *
4.8
%
 
(1.1
)%
Adjusted ROIC (Non-GAAP) **
8.5
%
 
(3.1
)%
__________
*
Calculated as the sum of net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters.
**
Calculated as the sum of adjusted net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters.
*
Note: Numbers may not sum due to rounding.

57

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 March 31, 2020:

On May 7, 2020, Fitch downgraded the credit ratings for Ford and Ford Credit (to BB+ from BBB-) and maintained a negative outlook.
On May 21, 2020, DBRS downgraded the credit ratings for Ford and Ford Credit (to BB (high) from BBB), and maintained a negative outlook.
On May 27, 2020, Moody’s concluded its review of Ford and Ford Credit for possible downgrade, confirmed their ratings at Ba2, and revised the outlook to negative from under review for downgrade.

The following table summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:
 
NRSRO RATINGS
 
Ford
 
Ford Credit
 
NRSROs
 
Issuer
Default /
Corporate /
Issuer Rating
 
Long-Term Senior Unsecured
 
Outlook / Trend
 
Long-Term Senior Unsecured
 
Short-Term
Unsecured
 
Outlook / Trend
 
Minimum Long-Term Investment Grade Rating
DBRS
BB (high)
 
BB (high)
 
Negative
 
BB (high)
 
R-4
 
Negative
 
BBB (low)
Fitch
BB+
 
BB+
 
Negative
 
BB+
 
B
 
Negative
 
BBB-
Moody’s
N/A
 
Ba2
 
Negative
 
Ba2
 
NP
 
Negative
 
Baa3
S&P
BB+
 
BB+
 
CreditWatch with negative implications
 
BB+
 
B
 
CreditWatch with negative implications
 
BBB-


58

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 July 30, 2020. The guidance is based on our expectations as of July 30, 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. 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 *
 
 
Q3
 
$0.5 - $1.5 billion
Q4
 
Loss
Full Year
 
Loss
Capital spending
 
$6.1 - $6.6 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 values
 
Down about 5%**
Securitized funding as percent of managed receivables
 
Increase modestly by year-end
Total public funding issuances
 
$18 - $24 billion
*
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.
**
On average compared with full year 2019 at constant mix.

For third quarter 2020, we expect Company adjusted EBIT of $0.5 billion to $1.5 billion, reflecting the economic impact of COVID-19, weaker global demand for new vehicles, parts, and services, and lower EBT from Ford Credit.

For fourth quarter 2020, we expect Company adjusted EBIT to be a loss, driven by the volume impact of the new F-150 launch and lower ongoing industry volumes. Our major launches in North America have shifted to the fourth quarter of 2020 following our COVID-19-related production disruption. We anticipate that downtime, changeover, and ramp-up will reduce F-150 wholesales significantly in the fourth quarter. This launch impact will more than offset the non-recurrence of UAW contract bonuses in the fourth quarter of 2019, which totaled approximately $600 million.

Although the all-new Bronco Sport and Mustang Mach-E are also launching in the fourth quarter, the limited number of wholesales will not have a material impact on our fourth quarter results. We also expect lower year-over-year Ford Credit EBT in the fourth quarter.

For full year 2020, we expect Company adjusted EBIT to be a loss. We also expect full year warranty costs to be higher than 2019.



59

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.


60

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.

61

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 (“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.

62

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)
 
 
Second Quarter

First Half
 
2019
 
2020
 
2019
 
2020
Net income/(loss) attributable to Ford (GAAP)
 
$
148

 
$
1,117

 
$
1,294

 
$
(876
)
Income/(Loss) attributable to noncontrolling interests
 
2

 
1

 
39

 
1

Net income/(loss)
 
$
150

 
$
1,118

 
$
1,333

 
$
(875
)
Less: (Provision for)/Benefit from income taxes
 
(55
)
 
34

 
(482
)
 
(813
)
Income/(Loss) before income taxes
 
$
205

 
$
1,084

 
$
1,815

 
$
(62
)
Less: Special items pre-tax
 
(1,205
)
 
3,480

 
(1,797
)
 
3,193

Income/(Loss) before special items pre-tax
 
$
1,410

 
$
(2,396
)
 
$
3,612

 
$
(3,255
)
Less: Interest on debt
 
(244
)
 
(450
)
 
(489
)
 
(677
)
Adjusted EBIT (Non-GAAP)
 
$
1,654

 
$
(1,946
)
 
$
4,101

 
$
(2,578
)
 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
Revenue ($B)
 
$
38.9

 
$
19.4

 
$
79.2

 
$
53.7

Net income/(loss) margin (%)
 
0.4
%
 
5.8
 %
 
1.6
%
 
(1.6
)%
Adjusted EBIT margin (%)
 
4.3
%
 
(10.0
)%
 
5.2
%
 
(4.8
)%

Earnings per Share Reconciliation to Adjusted Earnings per Share
 
 
Second Quarter

First Half
 
2019
 
2020
 
2019
 
2020
Diluted After-Tax Results ($M)
 
 
 
 
 
 
 
 
Diluted after-tax results (GAAP)
 
$
148

 
$
1,117

 
$
1,294

 
$
(876
)
Less: Impact of pre-tax and tax special items
 
(989
)
 
2,525

 
(1,574
)
 
1,451

Less: Noncontrolling interests impact of Russia restructuring
 

 

 
(35
)
 

Adjusted net income/(loss) – diluted (Non-GAAP)
 
$
1,137

 
$
(1,408
)
 
$
2,903

 
$
(2,327
)
 
 
 
 
 
 
 
 
 
Basic and Diluted Shares (M)
 
 
 
 
 
 
 
 
Basic shares (average shares outstanding)
 
3,984

 
3,975

 
3,979

 
3,969

Net dilutive options, unvested restricted stock units and restricted stock
 
29

 
17

 
26

 

Diluted shares
 
4,013

 
3,992

 
4,005

 
3,969

 
 
 
 
 
 
 
 
 
Earnings per share – diluted (GAAP)
 
$
0.04

 
$
0.28

 
$
0.32

 
$
(0.22
)
Less: Net impact of adjustments
 
(0.24
)
 
0.63

 
(0.40
)
 
0.37

Adjusted earnings per share – diluted (Non-GAAP)
 
$
0.28

 
$
(0.35
)
 
$
0.72

 
$
(0.59
)

63

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

 

Effective Tax Rate Reconciliation to Adjusted Effective Tax Rate
 
 
Second Quarter
 
First Half
 
 
 
 
2019
 
2020
 
2019
 
2020
 
Memo:
FY 2019
Pre-Tax Results ($M)
 
 
 
 
 
 
 
 
 
 
Income/(Loss) before income taxes (GAAP)
 
$
205

 
$
1,084

 
$
1,815

 
$
(62
)
 
$
(640
)
Less: Impact of special items
 
(1,205
)
 
3,480

 
(1,797
)
 
3,193

 
(5,999
)
Adjusted earnings before taxes (Non-GAAP)
 
$
1,410

 
$
(2,396
)
 
$
3,612

 
$
(3,255
)
 
$
5,359

 
 
 
 
 
 
 
 
 
 
 
Taxes ($M)
 
 
 
 
 
 
 
 
 
 
(Provision for)/Benefit from income taxes (GAAP)
 
$
(55
)
 
$
34

 
$
(482
)
 
$
(813
)
 
$
724

Less: Impact of special items
 
216

 
(955
)
 
223

 
(1,742
)
 
1,323

Adjusted (provision for) / benefit from income taxes (Non-GAAP)
 
$
(271
)
 
$
989

 
$
(705
)
 
$
929

 
$
(599
)
 
 
 
 
 
 
 
 
 
 
 
Tax Rate (%)
 
 
 
 
 
 
 
 
 
 
Effective tax rate (GAAP)
 
26.6
%
 
(3.1
)%
 
26.5
%
 
(1,311
)%
 
113.1
%
Adjusted effective tax rate (Non-GAAP)
 
19.2
%
 
41.3
 %
 
19.5
%
 
28.5
 %
 
11.2
%

Net Cash Provided by/(Used in) Operating Activities Reconciliation to Company Adjusted Free Cash Flow ($M)
 
 
Second Quarter
 
First Half
 
2019
 
2020
 
2019
 
2020
Net cash provided by / (used in) operating activities (GAAP)
 
$
6,463

 
$
9,115

 
$
10,007

 
$
8,642

 
 
 
 
 
 
 
 
 
Less: Items not included in Company Adjusted Free Cash Flows
 
 
 
 
 
 
 
 
Ford Credit operating cash flows
 
$
5,267

 
$
13,413

 
$
6,385

 
$
13,546

Funded pension contributions
 
(106
)
 
(107
)
 
(400
)
 
(282
)
Global Redesign (including separations)
 
(222
)
 
(99
)
 
(358
)
 
(271
)
Ford Credit tax payments / (refunds) under tax sharing agreement
 

 
569

 
98

 
1,044

Other, net
 
175

 
(178
)
 
55

 
(193
)
 
 
 
 
 
 
 
 
 
Add: Items included in Company Adjusted Free Cash Flows
 
 
 
 
 
 
 
 
Automotive and Mobility capital spending
 
$
(1,911
)
 
$
(1,165
)
 
$
(3,531
)
 
$
(2,935
)
Ford Credit distributions
 
650

 
275

 
1,325

 
550

Settlement of derivatives
 
86

 
64

 
60

 
36

Company adjusted free cash flow (Non-GAAP)
 
$
174

 
$
(5,309
)
 
$
2,081

 
$
(7,551
)

64

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

 

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

 
 
June 30,
2019
 
December 31,
2019
 
June 30,
2020
Ford Credit finance receivables, net (GAAP) *
 
$
107.6

 
$
107.4

 
$
96.7

Net investment in operating leases (GAAP) *
 
27.7

 
27.6

 
26.4

Consolidating adjustments **
 
8.1

 
7.0

 
7.2

Total net receivables
 
$
143.4

 
$
142.0

 
$
130.3

 
 
 
 
 
 
 
Held-for-sale receivables (GAAP)
 
$

 
$
1.5

 
$

Ford Credit unearned interest supplements and residual support
 
6.9

 
6.7

 
6.5

Allowance for credit losses
 
0.5

 
0.5

 
1.3

Other, primarily accumulated supplemental depreciation
 
1.1

 
1.0

 
1.3

Total managed receivables (Non-GAAP)
 
$
151.9

 
$
151.7

 
$
139.4

__________
*
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.
**
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.
*
Note: Numbers may not sum due to rounding.

65

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 June 30, 2020
 
 
First Half
Cash flows from operating activities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Net income/(loss)
 
$
(1,303
)
 
$
428

 
$

 
$
(875
)
Depreciation and tooling amortization
 
2,743

 
2,059

 

 
4,802

Other amortization
 
28

 
(618
)
 

 
(590
)
Held-for-sale impairment charges
 
18

 

 

 
18

Provision for credit and insurance losses
 
34

 
745

 

 
779

Pension and OPEB expense/(income)
 
(454
)
 

 

 
(454
)
Equity investment dividends received in excess of (earnings)/losses
177

 
(8
)
 

 
169

Foreign currency adjustments
 
160

 
(47
)
 

 
113

Net (gain)/loss on changes in investments in affiliates
 
(3,472
)
 
(8
)
 

 
(3,480
)
Stock compensation
 
105

 
2

 

 
107

Provision for deferred income taxes
 
1,347

 
(692
)
 

 
655

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

 
9,772

 

 
9,772

Decrease/(Increase) in intersegment receivables/payables
(35
)
 
35

 

 

Decrease/(Increase) in accounts receivable and other assets
242

 
(22
)
 

 
220

Decrease/(Increase) in inventory
 
66

 

 

 
66

Increase/(Decrease) in accounts payable and accrued and other liabilities
(2,365
)
 
(120
)
 

 
(2,485
)
Other
 
(130
)
 
(45
)
 

 
(175
)
Interest supplements and residual value support to Ford Credit
(2,065
)
 
2,065

 

 

Net cash provided by/(used in) operating activities
 
$
(4,904
)
 
$
13,546

 
$

 
$
8,642

Cash flows from investing activities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Capital spending
 
$
(2,935
)
 
$
(20
)
 
$

 
$
(2,955
)
Acquisitions of finance receivables and operating leases
 

 
(27,113
)
 

 
(27,113
)
Collections of finance receivables and operating leases
 

 
22,923

 

 
22,923

Proceeds from sale of business
 

 
1,340

 

 
1,340

Purchases of marketable and other investments
 
(15,485
)
 
(4,139
)
 

 
(19,624
)
Sales and maturities of marketable securities and other investments
8,379

 
2,425

 

 
10,804

Settlements of derivatives
 
36

 
37

 

 
73

Other
 
338

 
(1
)
 

 
337

Investing activity (to)/from other segments
 
550

 
(11
)
 
(539
)
 

Net cash provided by/(used in) investing activities
 
$
(9,117
)
 
$
(4,559
)
 
$
(539
)
 
$
(14,215
)
Cash flows from financing activities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Cash payments for dividends and dividend equivalents
 
$
(596
)
 
$

 
$

 
$
(596
)
Purchases of common stock
 

 

 

 

Net changes in short-term debt
 
879

 
(1,668
)
 

 
(789
)
Proceeds from issuance of long-term debt
 
24,157

 
20,146

 

 
44,303

Principal payments on long-term debt
 
(380
)
 
(22,965
)
 

 
(23,345
)
Other
 
(141
)
 
(41
)
 

 
(182
)
Financing activity to/(from) other segments
 
11

 
(550
)
 
539

 

Net cash provided by/(used in) financing activities
 
$
23,930

 
$
(5,078
)
 
$
539

 
$
19,391

 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
$
(204
)
 
$

 
$
(174
)
 
$
(378
)

66

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 June 30, 2020
 
 
Second Quarter
 
 
Company excluding Ford Credit
 
 
 
 
 
 
Automotive
 
Mobility
 
Other (a)
 
Subtotal
 
Ford Credit
 
Consolidated
Revenues
 
$
16,622

 
$
10

 
$

 
$
16,632

 
$
2,739

 
$
19,371

Total costs and expenses
19,303

 
361

 
233

 
19,897

 
2,233

 
22,130

Operating income/(loss)
(2,681
)
 
(351
)
 
(233
)
 
(3,265
)
 
506

 
(2,759
)
Interest expense on Automotive debt

 

 
439

 
439

 

 
439

Interest expense on Other debt

 

 
11

 
11

 

 
11

Other income/(loss), net
601

 
31

 
3,651

 
4,283

 
35

 
4,318

Equity in net income/(loss) of affiliated companies
(9
)
 
(12
)
 
(6
)
 
(27
)
 
2

 
(25
)
Income/(Loss) before income taxes
(2,089
)
 
(332
)
 
2,962

 
541

 
543

 
1,084

Provision for/(Benefit from) income taxes
(922
)
 
(79
)
 
831

 
(170
)
 
136

 
(34
)
Net income/(loss)
(1,167
)
 
(253
)
 
2,131

 
711

 
407

 
1,118

Less: Income/(Loss) attributable to noncontrolling interests
1

 

 

 
1

 

 
1

Net income/(loss) attributable to Ford Motor Company
$
(1,168
)
 
$
(253
)
 
$
2,131

 
$
710

 
$
407

 
$
1,117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the period ended June 30, 2020
 
 
First Half
 
 
Company excluding Ford Credit
 
 
 
 
 
 
Automotive
 
Mobility
 
Other (a)
 
Subtotal
 
Ford Credit
 
Consolidated
Revenues
 
$
47,962

 
$
23

 
$

 
$
47,985

 
$
5,706

 
$
53,691

Total costs and expenses
51,409

 
742

 
700

 
52,851

 
5,157

 
58,008

Operating income/(loss)
(3,447
)
 
(719
)
 
(700
)
 
(4,866
)
 
549

 
(4,317
)
Interest expense on Automotive debt

 

 
653

 
653

 

 
653

Interest expense on Other debt

 

 
24

 
24

 

 
24

Other income/(loss), net
1,237

 
65

 
3,680

 
4,982

 
16

 
4,998

Equity in net income/(loss) of affiliated companies
(56
)
 
(12
)
 
(6
)
 
(74
)
 
8

 
(66
)
Income/(Loss) before income taxes
(2,266
)
 
(666
)
 
2,297

 
(635
)
 
573

 
(62
)
Provision for/(Benefit from) income taxes
(701
)
 
(159
)
 
1,528

 
668

 
145

 
813

Net income/(loss)
(1,565
)
 
(507
)
 
769

 
(1,303
)
 
428

 
(875
)
Less: Income/(Loss) attributable to noncontrolling interests
1

 

 

 
1

 

 
1

Net income/(loss) attributable to Ford Motor Company
$
(1,566
)
 
$
(507
)
 
$
769

 
$
(1,304
)
 
$
428

 
$
(876
)
__________
(a) Other includes Corporate Other, Interest on Debt, and Special Items.


67

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):
 
 
June 30, 2020
Assets
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Cash and cash equivalents
 
$
18,151

 
$
12,838

 
$

 
$
30,989

Marketable securities
 
21,105

 
5,036

 

 
26,141

Ford Credit finance receivables, net
 

 
42,720

 

 
42,720

Trade and other receivables, net
 
3,065

 
6,042

 

 
9,107

Inventories
 
10,220

 

 

 
10,220

Assets held for sale
 
670

 
50

 

 
720

Other assets
 
2,171

 
2,043

 

 
4,214

Receivable from other segments
 
253

 
2,157

 
(2,410
)
 

   Total current assets
 
55,635

 
70,886

 
(2,410
)
 
124,111

 
 
 
 
 
 
 
 
 
Ford Credit finance receivables, net
 

 
53,987

 

 
53,987

Net investment in operating leases
 
1,349

 
26,367

 

 
27,716

Net property
 
35,064

 
212

 

 
35,276

Equity in net assets of affiliated companies
 
4,539

 
112

 

 
4,651

Deferred income taxes
 
12,319

 
153

 
(1,406
)
 
11,066

Other assets
 
9,613

 
2,946

 

 
12,559

Receivable from other segments
 
7

 
11

 
(18
)
 

   Total assets
 
$
118,526

 
$
154,674

 
$
(3,834
)
 
$
269,366

Liabilities
 
Company excluding Ford Credit
 
Ford Credit
 
Eliminations
 
Consolidated
Payables
 
$
15,312

 
$
1,048

 
$

 
$
16,360

Other liabilities and deferred revenue
 
19,233

 
1,559

 

 
20,792

Automotive debt payable within one year
 
2,084

 

 

 
2,084

Ford Credit debt payable within one year
 

 
53,260

 

 
53,260

Other debt payable within one year
 

 

 

 

Liabilities held for sale
 
284

 

 

 
284

Payable to other segments
 
2,410

 

 
(2,410
)
 

   Total current liabilities
 
39,323

 
55,867

 
(2,410
)
 
92,780

 
 
 
 
 
 
 
 
 
Other liabilities and deferred revenue
 
24,156

 
1,235

 

 
25,391

Automotive long-term debt
 
37,409

 

 

 
37,409

Ford Credit long-term debt
 

 
82,007

 

 
82,007

Other long-term debt
 
470

 

 

 
470

Deferred income taxes
 
56

 
1,804

 
(1,406
)
 
454

Payable to other segments
 
18

 

 
(18
)
 

   Total liabilities
 
$
101,432

 
$
140,913

 
$
(3,834
)
 
$
238,511



68

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

 

Selected Other Information.

Equity. At June 30, 2020, total equity attributable to Ford was $30.8 billion, a decrease of $2.4 billion compared with December 31, 2019. The detail for this change is shown below (in billions):
 
Increase/
(Decrease)
Net income
$
(0.9
)
Shareholder distributions
(0.6
)
Adoption of accounting standards
(0.2
)
Other comprehensive income
(0.7
)
Total
$
(2.4
)

U.S. Sales by Type. The following table shows second 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. Sales
 
U.S. Wholesales
Trucks
237,891

 
138,496

SUVs
151,328

 
74,633

Cars
44,650

 
26,001

Total Vehicles
433,869

 
239,130



69

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.
ASU
 
Effective Date (a)
2019-12
Simplifying the Accounting for Income Taxes
 
January 1, 2021
2018-12
Targeted Improvements to the Accounting for Long Duration Contracts
 
January 1, 2022
__________
(a)
Early adoption for each of the standards is permitted.


70


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 June 30, 2020, was an asset of $302 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 June 30, 2020 and December 31, 2019.

Commodity Price Risk. The net fair value of commodity forward contracts (including adjustments for credit risk) as of June 30, 2020, was a liability of $84 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 $98 million at June 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 June 30, 2020, all else constant, such an increase in interest rates would decrease its pre-tax cash flow by $11 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 P. Hackett, our Chief Executive Officer (“CEO”), and Tim Stone, our Chief Financial Officer (“CFO”), have performed an evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of June 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. There were no changes in internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

71


PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

OTHER MATTERS

Brazilian Tax Matters.  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.

Transit Connect Customs Ruling. On March 8, 2013, U.S. Customs and Border Protection (“CBP”) ruled that Transit Connects imported as passenger wagons and later converted into cargo vans are subject to the 25% duty applicable to cargo vehicles, rather than the 2.5% duty applicable to passenger vehicles. As a result of the ruling, beginning in March 2013 CBP required Ford to pay the 25% duty upon importation of Transit Connects that were to be converted to cargo vehicles, and sought the difference in duty rates for certain prior imports. Our protest of the ruling within CBP was denied, and we filed a challenge in the U.S. Court of International Trade (“CIT”). On August 9, 2017, the CIT ruled in our favor. On October 6, 2017, CBP filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”), and on June 7, 2019, a panel of three Federal Circuit judges ruled in favor of CBP. On July 22, 2019, we filed a petition for rehearing and rehearing en banc with the Federal Circuit. On October 16, 2019, the Federal Circuit denied our petition. On February 13, 2020, we filed a petition for a writ of certiorari with the U.S. Supreme Court, and on June 29, 2020, our petition was denied. Accordingly, Ford will have to pay the increased duties for certain prior imports, plus interest, and CBP might assert a claim for penalties.


72


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. Although restrictions have been partially eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities.

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. Beginning in May 2020, taking a phased approach and after introducing new safety protocols at our plants, we resumed manufacturing operations around the world, and by July 2020, we returned to pre-COVID-19 production levels in North America, Europe, and China.

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. Moreover, as a result of the restrictions described above and consumers’ reaction to COVID-19 in general, showroom traffic at our dealers dropped significantly and many dealers temporarily ceased normal operations, thereby reducing the demand for our products and leading dealers to purchase fewer vehicles from us, as well as a reduction in parts and accessories sales. To the extent dealer operations are impacted by restrictions on daily activities, it could have a substantial adverse effect on our financial condition, liquidity, and results of operations.

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 has adversely affected Ford Credit’s access to the debt and securitization markets and its cost of funding.


73


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. While the ultimate impact on our financial condition and results of operations cannot be determined at this time, 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.
Designation
 
Description
 
Method of Filing
 
Defined Contribution Supplemental Executive Retirement Plan, as amended and restated.
 
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.INS
 
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (“Inline XBRL”).
 
*
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
*
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
*
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
*
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
*
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
*
Exhibit 104
 
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
 
*
__________
* Submitted electronically with this Report.

74


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:
July 30, 2020


75