FORD MOTOR CO 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (Continued) Issuer Purchases of Securities In the fourth quarter of 2022, we completed a modest anti-dilutive share repurchase program to offset the dilutive effect of share-based compensation granted during 2022. The plan authorized repurchases of up to 35 million shares of Ford Common Stock. Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly-Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs October 1, 2022 through October 31, 2022 — $ — — — November 1, 2022 through November 30, 2022 35,000,000 13.81 35,000,000 — December 1, 2022 through December 31, 2022 — — — — Total / Average 35,000,000 $ 13.81 — — Dividends The table below shows the dividends we paid per share of Common and Class B Stock for each quarterly period in 2021 and 2022: 2021 2022 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter Dividends per share of Ford Common and Class B Stock $ 0.00 $ 0.00 $ 0.00 $ 0.10 $ 0.10 $ 0.10 $ 0.15 $ 0.15 On February 2, 2023, we declared a regular dividend of $0.15 per share and a supplemental dividend of $0.65 per share. Subject to legally available funds, we intend to continue to pay a regular quarterly cash dividend on our outstanding Common Stock and Class B Stock. The declaration and payment of future dividends is at the sole discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, available cash, and current and anticipated cash needs. 34 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Key Trends and Economic Factors Affecting Ford and the Automotive Industry COVID-19 and Supplier Disruptions. 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. Outbreaks in certain regions continue to cause intermittent COVID-19-related disruptions in our supply chain and local manufacturing operations. We also continue to face supplier disruptions due to labor shortages and other production issues, in addition to the continuing semiconductor shortage. Our inconsistent production schedule has been disruptive to our suppliers’ operations, which, in turn, has led to higher costs and production shortfalls. Further, actions taken by Russia in Ukraine have impacted and could further impact our suppliers, particularly our lower tier suppliers, as well as our operations in Europe. For additional information on the impact of supplier disruptions, see the Outlook section on page 73 . Currency Exchange Rate Volatility. After aggressively easing monetary policy in response to the COVID-19 pandemic, the Federal Reserve, and other central banks around the world, in 2022 began to withdraw monetary stimulus by raising interest rates. Periods of monetary policy tightening are often associated with heightened financial market and currency volatility, especially for those markets that are outliers in terms of their economic or monetary policy backdrop. This is notable for many emerging markets, which may also face increased exposure to commodity prices and political instability, contributing to unpredictable movements in the value of their exchange rates. In addition to direct impacts on the financial flows of global automotive companies, currency movements can also impact pricing of vehicles exported to overseas markets. In most markets, exchange rates are market-determined, and all are impacted by many different macroeconomic and policy factors, and thus likely to remain volatile. However, in some markets, exchange rates are heavily influenced or controlled by governments. Pricing Pressure. Over the last year, prices of both new and used vehicles have increased substantially due to strong demand, supply shortages, and inflationary costs. We have already observed some moderation in the rate of price increases as auto production slowly recovers from the semiconductor shortage, but it is unclear whether prices will decline fully to pre-COVID-19 pandemic levels. Over the long term, intense competition and excess capacity are likely to put downward pressure on inflation-adjusted prices for similarly-contented vehicles and contribute to a challenging pricing environment for the automotive industry in most major markets. Commodity and Energy Prices. Prices for commodities remain volatile. In some cases, spot prices for various commodities have recently diverged somewhat, as anticipated weakening in global industrial activity mitigates price increases for base metals such as steel and aluminum, while precious metals (e.g., palladium), and raw materials that are used in batteries for electric vehicles (e.g., lithium, cobalt, nickel, graphite, and manganese, among other materials, for batteries) remain high. The net impact on us and our suppliers has been higher material costs overall. To help ensure supply of raw materials for critical components (e.g., batteries), we, like others in the industry, have entered into multi-year sourcing agreements and may enter into additional agreements. Similar dynamics are impacting energy markets, with Europe particularly exposed to the risk of both higher prices and constraints on supply of natural gas due to the ongoing conflict in Ukraine. Such shortages may impact facilities operated by us or our suppliers, which could have an impact on us in Europe and other regions. In the long term, the outcome of de-carbonization and electrification of the vehicle fleet may depress oil demand, but the global energy transition will also contribute to ongoing volatility of oil and other energy prices. For additional information on commodity costs, see the Outlook section on page 73 . Vehicle Profitability. Our financial results depend on the profitability of the vehicles we sell, which may vary significantly by vehicle line. In general, larger vehicles tend to command higher prices and be more profitable than smaller vehicles, both across and within vehicle segments. For example, in North America, our larger, more profitable vehicles had an average contribution margin that was 120% of our total average contribution margin across all vehicles, whereas our smaller vehicles had significantly lower contribution margins. In addition, government regulations aimed at reducing emissions and increasing fuel efficiency (e.g., ZEV mandates and low emission zones), and other factors that accelerate the transition to electrified vehicles, may increase the cost of vehicles by more than the perceived benefit to consumers and dampen margins. 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Trade Policy. To the extent governments in various regions implement or intensify barriers to imports, such as erecting tariff or non-tariff barriers or manipulating their currency, and provide advantages to local exporters selling into the global marketplace, there can be a significant negative impact on manufacturers based in other markets. While we believe the long-term trend will support the growth of free trade, we will continue to monitor and address developing issues. Inflation and Interest Rates. We continue to see near-term impacts on our business due to inflation, including ongoing global price pressures in the wake of Russia’s invasion of Ukraine, driving up energy prices, freight premiums, and other operating costs above normal rates. Although headline inflation in the United States and Europe appears to have peaked, as gasoline and natural gas prices recede from the latest spike, core inflation (excluding food and energy prices) remains elevated and is a source of continued cost pressure on businesses and households. Interest rates have increased significantly as central banks in developed countries attempt to subdue inflation while government deficits and debt remain at high levels in many global markets. Accordingly, the eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for the business. At Ford Credit, rising interest rates may impact its ability to source funding and offer financing at competitive rates, which could reduce its financing margin. Revenue Our Automotive segment revenue is generated primarily by sales of vehicles, parts, and accessories. Revenue is recorded when control is transferred to our customers (generally, our dealers and distributors). For the majority of sales, this occurs when products are shipped from our manufacturing facilities. However, we defer a portion of the consideration received when there is a separate future or stand-ready performance obligation, such as extended service contracts or ongoing vehicle connectivity. Revenue related to extended service contracts is recognized over the term of the agreement in proportion to the costs we expect to incur in satisfying the contract obligations; revenue related to other future or stand-ready performance obligations is generally recognized on a straight-line basis over the period in which services are expected to be performed. Vehicles sold to daily rental car companies with an obligation to repurchase for a guaranteed amount, exercisable at the option of the customer, are accounted for as operating leases, with lease revenue recognized over the term of the lease. Proceeds from the sale of vehicles at auction are recognized in revenue upon transfer of control of the vehicle to the buyer. Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit. Upon Ford Credit originating the wholesale receivable related to a dealer’s purchase of a vehicle, Ford Credit pays cash to the relevant Automotive legal entity in payment of the dealer’s obligation for the purchase price of the vehicle. The dealer then pays the wholesale finance receivable to Ford Credit when it sells the vehicle to a retail customer. Our Ford Credit segment revenue is generated primarily from interest on finance receivables and revenue from operating leases. Revenue from interest on finance receivables is recognized over the term of the receivable using the interest method and includes the amortization of certain deferred origination costs. Revenue from operating leases is recognized on a straight-line basis over the term of the lease. Transactions between our Automotive and Ford Credit segments occur in the ordinary course of business. For example, we offer special retail financing and lease incentives to dealers’ customers who choose to finance or lease our vehicles from Ford Credit. The cost for these incentives is included in our estimate of variable consideration at the date the related vehicle sales to our dealers are recorded. In order to compensate Ford Credit for the lower interest or lease payments offered to the retail customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or lease contract with the dealer’s customer. Ford Credit recognizes the incentive amount over the life of retail finance contracts as an element of financing revenue and over the life of lease contracts as a reduction to depreciation. See Note 1 of the Notes to the Financial Statements for a more detailed discussion of transactions between our Automotive and Ford Credit segments. 36 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Costs and Expenses Our income statement classifies our Company excluding Ford Credit total costs and expenses into two categories: (i) cost of sales, and (ii) selling, administrative, and other expenses. We include within cost of sales those costs related to the development, production, and distribution of our vehicles, parts, accessories, and services. Specifically, we include in cost of sales each of the following: material costs (including commodity costs); freight costs; warranty, including product recall costs; labor and other costs related to the development and production of our vehicles and connectivity, parts, accessories, and services; depreciation and amortization; and other associated costs. We include within selling, administrative, and other expenses labor and other costs not directly related to the development and production of our vehicles, parts, accessories, and services, including such expenses as advertising and sales promotion costs. Certain of our costs, such as material costs, generally vary directly with changes in volume and mix of production. In our industry, production volume often varies significantly from quarter to quarter and year to year. Quarterly production volumes experience seasonal shifts throughout the year (including peak retail sales seasons and the impact on production of model changeover and new product launches). Annual production volumes are heavily impacted by external economic factors, including the pace of economic growth and factors such as the availability of consumer credit and cost of fuel. As a result, we analyze the profit impact of certain cost changes holding constant present-year volume and mix and currency exchange, in order to evaluate our cost trends absent the impact of varying production and currency exchange levels. We analyze these cost changes in the following categories: • Contribution Costs – these costs typically vary with production volume. These costs include material (including commodity), warranty, and freight and duty costs. • Structural Costs – these costs typically do not have a directly proportionate relationship to production volume. These costs include manufacturing; vehicle and software engineering; spending-related; advertising and sales promotion; administrative, information technology, and selling; and pension and OPEB costs. While contribution costs generally vary directly in proportion to production volume, elements within our structural costs category are impacted to differing degrees by changes in production volume. We also have varying degrees of discretion when it comes to controlling the different elements within our structural costs. For example, depreciation and amortization expense largely is associated with prior capital spending decisions. On the other hand, while labor costs do not vary directly with production volume, manufacturing labor costs may be impacted by changes in volume, for example when we increase overtime, add a production shift, or add personnel to support volume increases. Other structural costs, such as advertising or engineering costs, do not necessarily have a directly proportionate relationship to production volume. Our structural costs generally are within our discretion, although to varying degrees, and can be adjusted over time in response to external factors. We consider certain structural costs to be a direct investment in future growth and revenue. For example, structural costs are necessary to grow our business and improve profitability, invest in new products and technologies, respond to increasing industry sales volume, and grow our market share. Cost of sales and Selling, administrative, and other expenses for full year 2022 were $145.3 billion. Our Automotive segment’s material and commodity costs make up the largest portion of these costs and expenses, followed by structural costs. Although material costs are our largest absolute cost, our margins can be affected significantly by changes in any category of costs. 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) RESULTS OF OPERATIONS - 2022 The net loss attributable to Ford Motor Company was $1,981 million in 2022. Company adjusted EBIT was $10,415 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 26 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): 2021 2022 Global Redesign Europe $ (530) $ (151) India (468) (298) South America (803) 53 China (including Taiwan) 150 (380) North America (72) (198) Other 3 7 Subtotal Global Redesign $ (1,720) $ (967) Other Items Gain/(loss) on Rivian investment $ 9,096 $ (7,377) Debt extinguishment premium (1,692) (135) AV strategy including Argo impairment (see Note 14) — (2,812) Ford Credit – Brazil restructuring (see Note 21) 14 (155) Russia suspension of operations/asset write-off — (158) Patent matters related to prior calendar years — (124) Other 82 (35) Subtotal Other Items $ 7,500 $ (10,796) Pension and OPEB Gain/(Loss) Pension and OPEB remeasurement $ 3,873 $ 29 Pension settlements and curtailments (70) (438) Subtotal Pension and OPEB Gain/(Loss) $ 3,803 $ (409) Total EBIT Special Items $ 9,583 $ (12,172) Cash effect of Global Redesign (incl. separations) $ (1,935) $ (377) Provision for/(Benefit from) tax special items (a) $ (1,924) $ (2,573) __________ (a) Includes related tax effect on special items and tax special items. We recorded $12.2 billion of pre-tax special item charges in 2022, driven by a $7.4 billion mark-to-market net loss on our Rivian investment and a $2.7 billion impairment on our Argo investment. In Note 26 of the Notes to the Financial Statements, special items are reflected as a separate reconciling item, as opposed to being allocated among the Automotive, Mobility, and Ford Credit segments. This reflects the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources. 38 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) COMPANY KEY METRICS The table below shows our full year 2022 key metrics for the Company compared to a year ago. 2021 2022 H / (L) GAAP Financial Measures Cash Flows from Operating Activities ($B) $ 15.8 $ 6.9 $ (8.9) Revenue ($M) 136,341 158,057 16 % Net Income/(Loss) ($M) 17,937 (1,981) $ (19,918) Net Income/(Loss) Margin (%) 13.2 % (1.3) % (14.5) ppts EPS (Diluted) $ 4.45 $ (0.49) $ (4.94) Non-GAAP Financial Measures (a) Company Adj. Free Cash Flow ($B) $ 4.6 $ 9.1 $ 4.5 Company Adj. EBIT ($M) 10,000 10,415 415 Company Adj. EBIT Margin (%) 7.3 % 6.6 % (0.7) ppts Adjusted EPS (Diluted) $ 1.59 $ 1.88 $ 0.29 Adjusted ROIC (Trailing Four Qtrs) 9.8 % 11.2 % 1.4 ppts __________ (a) See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. In 2022, our diluted earnings per share of Common and Class B Stock was a loss of $0.49 and our diluted adjusted earnings per share was $1.88. Net income/(loss) margin was negative 1.3% in 2022, down from 13.2% a year ago. Company adjusted EBIT margin was 6.6% in 2022, down from 7.3% a year ago. The table below shows our full year 2022 net income/(loss) attributable to Ford and Company adjusted EBIT by segment (in millions). 2021 2022 H / (L) Automotive $ 7,397 $ 9,692 $ 2,295 Mobility (1,030) (926) 104 Ford Credit 4,717 2,657 (2,060) Corporate Other (1,084) (1,008) 76 Company Adjusted EBIT (a) 10,000 10,415 415 Interest on Debt (1,803) (1,259) (544) Special Items 9,583 (12,172) 21,755 Taxes / Noncontrolling Interests 157 1,035 (878) Net Income/(Loss) $ 17,937 $ (1,981) $ (19,918) __________ (a) See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. The year-over-year decrease of $19.9 billion in net income/(loss) in 2022 includes the effect of special items, including the mark-to-market net loss on our Rivian investment and the impairment on our Argo investment, and lower Ford Credit EBT, partially offset by higher Automotive EBIT. The year-over-year increase of $400 million in Company adjusted EBIT primarily reflects higher Automotive EBIT, offset partially by lower Ford Credit EBT. 39 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Automotive Segment The table below shows our full year 2022 Automotive segment EBIT by business unit (in millions). 2021 2022 H / (L) North America $ 7,377 $ 9,176 $ 1,799 South America (121) 413 534 Europe (154) 47 201 China (including Taiwan) (327) (572) (245) International Markets Group 622 628 6 Automotive Segment $ 7,397 $ 9,692 $ 2,295 The tables below and on the following pages provide full year 2022 key metrics and the change in full year 2022 EBIT compared with full year 2021 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. 2021 2022 H / (L) Key Metrics Market Share (%) 5.1 % 5.0 % (0.1) ppts Wholesale Units (000) 3,942 4,231 289 Revenue ($M) $ 126,150 $ 148,980 $ 22,830 EBIT ($M) 7,397 9,692 2,295 EBIT Margin (%) 5.9 % 6.5 % 0.6 ppts Change in EBIT by Causal Factor (in millions) 2021 Full Year EBIT $ 7,397 Volume / Mix 4,337 Net Pricing 10,867 Cost (11,954) Exchange (525) Other (430) 2022 Full Year EBIT $ 9,692 In 2022, wholesales in our Automotive segment increased 7% from a year ago, primarily reflecting stronger wholesales in North America. Full year 2022 Automotive revenue increased 18%, driven by higher wholesales and net pricing, offset partially by weaker currencies. Our full year 2022 Automotive segment EBIT was $9.7 billion, an increase of $2.3 billion from a year ago, with an EBIT margin of 6.5%. The EBIT improvement was driven by higher net pricing and higher wholesales, offset partially by inflationary increases on commodity, material, and freight costs, higher structural costs (including growth-related investments), unfavorable mix, weaker currencies, and higher warranty costs. 40 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) North America 2021 2022 H / (L) Key Metrics Market Share (%) 12.0 % 12.5 % 0.5 ppts Wholesale Units (000) 2,006 2,335 328 Revenue ($M) $ 87,783 $ 108,727 $ 20,944 EBIT ($M) 7,377 9,176 1,799 EBIT Margin (%) 8.4 % 8.4 % — ppts Change in EBIT by Causal Factor (in millions) 2021 Full Year EBIT $ 7,377 Volume / Mix 3,968 Net Pricing 6,580 Cost (8,322) Exchange 245 Other (672) 2022 Full Year EBIT $ 9,176 In North America, 2022 wholesales increased 16% from a year ago, primarily reflecting an improvement in production-related supply constraints and a full year of Bronco and Maverick production. Full year 2022 revenue increased 24%, driven by higher wholesales and net pricing. North America’s 2022 EBIT was $9.2 billion, an increase of $1.8 billion from a year ago, with an EBIT margin of 8.4%. The EBIT improvement was driven by higher net pricing and higher wholesales, offset partially by inflationary increases on commodity, material, and freight costs, higher structural costs, unfavorable mix, and higher warranty costs. South America 2021 2022 H / (L) Key Metrics Market Share (%) 2.6 % 2.1 % (0.5) ppts Wholesale Units (000) 81 83 2 Revenue ($M) $ 2,399 $ 3,096 $ 697 EBIT ($M) (121) 413 534 EBIT Margin (%) (5.1) % 13.4 % 18.5 ppts Change in EBIT by Causal Factor (in millions) 2021 Full Year EBIT $ (121) Volume / Mix (69) Net Pricing 927 Cost (413) Exchange (22) Other 111 2022 Full Year EBIT $ 413 In South America, 2022 wholesales increased 3% from a year ago. Full year 2022 revenue increased 29%, driven by higher net pricing, offset partially by weaker currencies. South America’s 2022 EBIT was $413 million, an increase of $534 million from a year ago, with an EBIT margin of 13.4%. The EBIT improvement was driven by higher net pricing, offset partially by inflationary increases on material, commodity, and freight costs. The strong results in South America reflect our restructuring efforts and pricing and were further aided by a balance sheet revaluation in Argentina, the effect of which is not expected to be sustained. 41 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Europe 2021 2022 H / (L) Key Metrics Market Share (%) 6.4 % 6.5 % 0.1 ppts Wholesale Units (000) (a) 891 1,014 123 Revenue ($M) $ 24,466 $ 25,578 $ 1,112 EBIT ($M) (154) 47 201 EBIT Margin (%) (0.6) % 0.2 % 0.8 ppts __________ (a) Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Türkiye (about 61,000 units in 2021 and 76,000 units in 2022). Revenue does not include these sales. Change in EBIT by Causal Factor (in millions) 2021 Full Year EBIT $ (154) Volume / Mix 497 Net Pricing 2,770 Cost (2,751) Exchange (559) Other 244 2022 Full Year EBIT $ 47 In Europe, 2022 wholesales increased 14% from a year ago, primarily reflecting an improvement in production-related supply constraints. Full year 2022 revenue improved 5%, driven by higher wholesales and net pricing, offset partially by weaker currencies. Europe’s 2022 EBIT was $47 million, an improvement of $201 million from a year ago, with an EBIT margin of 0.2%. The EBIT improvement was driven by higher net pricing and higher wholesales, offset partially by inflationary increases on commodity, material, and freight costs, higher structural costs, and weaker currencies. 42 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) China (Including Taiwan) 2021 2022 H / (L) Key Metrics Market Share (%) 2.4 % 2.1 % (0.3) ppts Wholesale Units (000) (a) 649 495 (154) Revenue ($M) $ 2,547 $ 1,769 $ (778) EBIT ($M) (327) (572) (245) EBIT Margin (%) (12.8) % (32.3) % (19.5) ppts China Unconsolidated Affiliates Wholesale Units (000) (b) 633 484 (149) Ford Equity Income/(Loss) ($M) $ 165 $ 203 $ 38 __________ (a) Includes vehicles produced and sold by our unconsolidated affiliates. Revenue does not include these sales. (b) Includes Ford and Lincoln brand and JMC brand vehicles produced and sold in China and Ford brand vehicles produced in Taiwan by Lio Ho Group. Change in EBIT by Causal Factor (in millions) 2021 Full Year EBIT $ (327) Volume / Mix (281) Net Pricing (5) Cost 35 Exchange (34) Other 40 2022 Full Year EBIT $ (572) In China, 2022 wholesales decreased 24% from a year ago, driven by COVID-related restrictions and a weaker commercial vehicle industry. Full year 2022 revenue at our consolidated operations decreased 31%, primarily driven by lower component sales to our joint ventures in China and lower wholesales. China’s 2022 EBIT loss was $572 million, a $245 million higher loss than a year ago, with an EBIT margin of negative 32.3%. The EBIT decrease was driven by lower volume and weaker currency, offset partially by lower costs and higher profits at our joint ventures. 43 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) International Markets Group 2021 2022 H / (L) Key Metrics Market Share (%) 1.8 % 1.4 % (0.4) ppts Wholesale Units (000) (a) 315 304 (11) Revenue ($M) $ 8,955 $ 9,810 $ 855 EBIT ($M) 622 628 6 EBIT Margin (%) 6.9 % 6.4 % (0.5) ppts _________ (a) Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Russia (about 22,000 units in 2021 and 3,000 units in 2022). Revenue does not include these sales. Change in EBIT by Causal Factor (in millions) 2021 Full Year EBIT $ 622 Volume / Mix 222 Net Pricing 594 Cost (504) Exchange (154) Other (152) 2022 Full Year EBIT $ 628 In our International Markets Group, 2022 wholesales decreased 3% from a year ago, primarily reflecting our India restructuring and suspension of our joint venture in Russia, offset partially by the positive impact of the next-generation Ranger and Everest launches. Full year 2022 revenue increased 10%, driven by market mix and higher net pricing, offset partially by weaker currencies. Our International Market Group’s 2022 EBIT was $628 million, an increase of $6 million from a year ago, with an EBIT margin of 6.4%. The EBIT increase was driven by higher net pricing and higher wholesales, offset partially by inflationary increases on commodity, material, and freight costs, weaker currencies, and lower joint venture profits and royalties. 44 Item 7. 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-year 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 and Connectivity – consists primarily of costs for vehicle and software engineering personnel, prototype materials, testing, and outside engineering and software 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, Information Technology, and Selling – includes primarily costs for salaried personnel and purchased services related to our staff activities, information technology, and selling functions ▪ 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 or others, 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 or others. 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 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Mobility Segment The Mobility segment primarily includes development costs for Ford’s autonomous vehicles and related businesses, Ford’s equity ownership in Argo AI (a developer of autonomous driving systems), and other mobility businesses and investments. In our Mobility segment, our 2022 EBIT loss improved $104 million from a year ago. The $926 million EBIT loss reflects our strategic investments in our autonomous vehicle capabilities and support of our mobility initiatives. In the third quarter of 2022, we made the strategic decision to shift our capital spending from L4 technology being developed by Argo AI to advanced L2/L3 systems, which we believe will ultimately be essential to achieve profitable commercialization of L4 autonomy at scale in the future. Additionally, because of the significant additional capital and time required to achieve commercialization of L4, as well as other macroeconomic factors, Argo AI has been unable to attract new investors. After performing external outreach in the third quarter to assess market interest in acquiring either Argo AI or its technology components and conducting internal reviews to evaluate opportunities to leverage Argo AI’s technology, Ford determined that Argo AI no longer has value as a going concern. As a result, we reassessed the carrying value of our investment in Argo AI starting from September 30, 2022, and in October, Ford and VW initiated the process of exiting the joint development of L4 technology through Argo AI. Accordingly, in the second half of 2022, we recorded as a special item a $2.7 billion pre-tax impairment on our Argo AI investment, and on October 26, 2022, we announced that Argo AI plans to wind down operations, which is in progress. 46 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Ford Credit Segment The tables below provide full year 2022 key metrics and the change in full year 2022 EBT compared with full year 2021 by causal factor for the Ford Credit segment. For a description of these causal factors, see Definitions and Information Regarding Ford Credit Causal Factors . 2021 2022 H / (L) GAAP Financial Measures Total Net Receivables ($B) $ 118 $ 122 3 % Loss-to-Receivables (bps) (a) 6 14 8 Auction Values (b) $ 28,120 $ 30,440 8 % EBT ($M) 4,717 2,657 $ (2,060) ROE (%) 32 % 16 % (16) ppts Other Balance Sheet Metrics Debt ($B) $ 118 $ 119 1 % Net Liquidity ($B) 32 21 (34) % Financial Statement Leverage (to 1) 9.5 10 0.5 __________ (a) U.S. retail financing only. (b) U.S. 36-month off-lease auction values at full year 2022 mix. Change in EBT by Causal Factor (in millions) 2021 Full Year EBT $ 4,717 Volume / Mix (218) Financing Margin (600) Credit Loss (348) Lease Residual (907) Exchange (25) Other 38 2022 Full Year EBT $ 2,657 Total net receivables at December 31, 2022 were $5 billion higher than a year ago, primarily reflecting higher non-consumer financing, offset partially by fewer operating leases, lower consumer financing, and currency exchange rates. Ford Credit’s loss metrics reflected healthy and stable consumer credit conditions and strong auction values. Ford Credit’s U.S. 36-month auction values for off-lease vehicles were up 8% from a year ago, reflecting strong demand for used vehicles, including the impact of lower new vehicle production due to the semiconductor shortage. We are planning for full year 2023 auction values to decrease as supply constraints improve. Ford Credit’s 2022 EBT of $2,657 million was $2,060 million lower than a year ago, reflecting lower credit loss and lease residual reserve releases, lower financing margin, and lower lease return rates. 47 Item 7. 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 net receivables excluding the allowance for credit losses 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 net receivables excluding the allowance for credit losses 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 net receivables excluding the allowance for credit losses 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 net receivables excluding the allowance for credit losses 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 - Allowance for Credit Losses” section of Item 7 of Part II of our 2022 Form 10-K Report • Lease Residual: ◦ Lease residual measures changes to residual performance at prior period exchange rates. For analysis purposes, management splits residual performance primarily into residual gains and losses, and the change in accumulated supplemental depreciation ◦ Residual gain and loss changes are primarily driven by the number of vehicles returned to Ford Credit and sold, and the difference between the auction value and the depreciated value (which includes both base and accumulated supplemental depreciation) of the vehicles sold. Changes in accumulated supplemental depreciation are primarily driven by changes in Ford Credit’s estimate of the expected auction value at the end of the lease term, and changes in Ford Credit’s estimate of the number of vehicles that will be returned to it and sold. Depreciation on vehicles subject to operating leases includes early termination losses on operating leases due to customer default events. 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 2022 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/(loss) 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/(loss) 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 48 Item 7. 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 and Liquidity 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 • Loss-to-Receivables (“LTR”) Ratio – LTR ratio is calculated using net charge-offs divided by average finance receivables, excluding unearned interest supplements and the allowance for credit losses • 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 and Restricted Cash (as shown in the Liquidity table) – Securitization cash is held for the benefit of the securitization investors (for example, a reserve fund). Restricted cash primarily includes cash held to meet certain local governmental and regulatory reserve requirements and cash held under the terms of certain contractual agreements • 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 table) – 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 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, and marketable securities (excluding gains and losses on investments in equity securities), 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, that are not allocated to operating segments. These include expenses related to setting and directing global policy, providing oversight and stewardship, and promoting the Company’s interests. For full year 2022, Corporate Other had a $1,008 million loss, compared with a $1,084 million loss in 2021. The improvement was driven by higher Automotive interest income due to higher interest rates (primarily Fed Funds). Interest on Debt Interest on Debt consists of interest expense on Company debt excluding Ford Credit. Our full year 2022 interest expense on Company debt excluding Ford Credit was $1,259 million, $544 million lower than in 2021, primarily explained by U.S. debt restructuring actions taken in the fourth quarter of 2021 and during 2022. 49 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Taxes Our Provision for/(Benefit from) income taxes for full year 2022 was a $864 million benefit, resulting in an effective tax rate of 28.6%. This includes benefits arising from the reversal of U.S. valuation allowances, primarily as a result of planning actions. Our full year 2022 adjusted effective tax rate, which excludes special items, was 18.7%. We regularly review our organizational structure and income tax elections for affiliates in non-U.S. and U.S. tax jurisdictions, which may result in changes in affiliates that are included in or excluded from our U.S. tax return. Any future changes to our structure, as well as any changes in income tax laws in the countries that we operate, could cause increases or decreases to our deferred tax balances and related valuation allowances. 50 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) RESULTS OF OPERATIONS - 2021 The net income attributable to Ford Motor Company was $17,937 million in 2021. Company adjusted EBIT was $10,000 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 26 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): 2020 2021 Global Redesign Europe $ (727) $ (530) India (23) (468) South America (2,486) (803) Russia 18 5 China (including Taiwan) (56) 150 Separations and Other (not included above) (94) (74) Subtotal Global Redesign $ (3,368) $ (1,720) Other Items Gain on transaction with Argo AI $ 3,454 $ — Gain on Rivian IPO and mark-to-market 143 9,096 Gains and losses on investments in equity securities (excl. Rivian) 100 92 Debt extinguishment premium — (1,692) Takata field service action (610) — Ford Credit - Brazil and Argentina — 14 Other (226) (10) Subtotal Other Items $ 2,861 $ 7,500 Pension and OPEB Gain/(Loss) Pension and OPEB remeasurement $ (1,435) $ 3,873 Pension settlements and curtailments (61) (70) Subtotal Pension and OPEB Gain/(Loss) $ (1,496) $ 3,803 Total EBIT Special Items $ (2,003) $ 9,583 Cash effect of Global Redesign (incl. separations) $ (503) $ (1,935) Provision for/(Benefit from) tax special items (a) $ 721 $ (1,924) __________ (a) Includes related tax effect on special items and tax special items. For full year 2021, we recorded $9.6 billion of pre-tax special items, primarily reflecting gains on our equity investment in Rivian in connection with Rivian’s initial public offering and mark-to-market valuation adjustments during the year, as well as a remeasurement gain associated with our global pension and OPEB plans. The gains were partially offset by costs associated with our Global Redesign actions and a debt extinguishment premium associated with the repurchase and redemption of $7.6 billion of our higher-coupon debt. In Note 26 of the Notes to the Financial Statements, special items are reflected as a separate reconciling item, as opposed to being allocated among the Automotive, Mobility, and Ford Credit segments. This reflects the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources. 51 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) COMPANY KEY METRICS The table below shows our full year 2021 key metrics for the Company compared with full year 2020. 2020 2021 H / (L) GAAP Financial Measures Cash Flows from Operating Activities ($B) $ 24.3 $ 15.8 $ (8.5) Revenue ($M) 127,144 136,341 7 % Net Income/(Loss) ($M) (1,279) 17,937 $ 19,216 Net Income/(Loss) Margin (%) (1.0) % 13.2 % 14.2 ppts EPS (Diluted) $ (0.32) $ 4.45 $ 4.77 Non-GAAP Financial Measures (a) Company Adj. Free Cash Flow ($B) $ 1.3 $ 4.6 $ 3.3 Company Adj. EBIT ($M) 2,536 10,000 7,464 Company Adj. EBIT Margin (%) 2.0 % 7.3 % 5.3 ppts Adjusted EPS (Diluted) $ 0.36 $ 1.59 $ 1.23 Adjusted ROIC (Trailing Four Qtrs) 0.7 % 9.8 % 9.1 ppts __________ (a) See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. In 2021, our diluted earnings per share of Common and Class B Stock was $4.45 and our diluted adjusted earnings per share was $1.59. Net income/(loss) margin was 13.2% in 2021, up from negative 1.0% in 2020. Company adjusted EBIT margin was 7.3% in 2021, up from 2.0% in 2020. The table below shows our full year 2021 net income/(loss) attributable to Ford and Company adjusted EBIT by segment (in millions). 2020 2021 H / (L) Automotive $ 1,706 $ 7,397 $ 5,691 Mobility (1,052) (1,030) 22 Ford Credit 2,608 4,717 2,109 Corporate Other (726) (1,084) (358) Company Adjusted EBIT (a) 2,536 10,000 7,464 Interest on Debt (1,649) (1,803) 154 Special Items (2,003) 9,583 (11,586) Taxes / Noncontrolling Interests (163) 157 (320) Net Income/(Loss) $ (1,279) $ 17,937 $ 19,216 __________ (a) See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. The year-over-year increase of $19.2 billion in net income/(loss) in 2021 includes the effect of special items, including the Rivian IPO and mark-to-market gain, as well as higher Automotive EBIT and Ford Credit EBT. The year-over-year increase of $7.5 billion in Company adjusted EBIT was driven by higher Automotive EBIT and Ford Credit EBT. 52 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Automotive Segment The table below shows our full year 2021 Automotive segment EBIT by business unit (in millions). 2020 2021 H / (L) North America $ 3,710 $ 7,377 $ 3,667 South America (490) (121) 369 Europe (851) (154) 697 China (including Taiwan) (499) (327) 172 International Markets Group (164) 622 786 Automotive Segment $ 1,706 $ 7,397 $ 5,691 The tables below and on the following pages provide full year 2021 key metrics and the change in full year 2021 EBIT compared with full year 2020 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. 2020 2021 H / (L) Key Metrics Market Share (%) 5.8 % 5.1 % (0.6) ppts Wholesale Units (000) 4,187 3,942 (245) Revenue ($M) $ 115,894 $ 126,150 $ 10,256 EBIT ($M) 1,706 7,397 5,691 EBIT Margin (%) 1.5 % 5.9 % 4.4 ppts Change in EBIT by Causal Factor (in millions) 2020 Full Year EBIT $ 1,706 Volume / Mix (2,853) Net Pricing 9,700 Cost (2,173) Exchange 524 Other 493 2021 Full Year EBIT $ 7,397 In 2021, wholesales in our Automotive segment declined 6% from 2020, reflecting semiconductor-related production constraints and the shift to a new business model in South America. Full year 2021 Automotive revenue increased 9% from 2020, driven by higher net pricing, favorable mix, and stronger currencies, partially offset by lower wholesales. Our full year 2021 Automotive segment EBIT increased $5.7 billion from 2020 with an EBIT margin of 5.9 percent. The EBIT improvement was driven by higher net pricing (reflecting the strength of our product portfolio and lower incentives in response to reduced dealer stock levels), lower warranty expense, favorable mix, higher profits from our Ford Customer Service Division business, and stronger currencies, partially offset by lower wholesales and increased commodity costs. 53 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) North America 2020 2021 H / (L) Key Metrics Market Share (%) 13.2 % 12.0 % (1.2) ppts Wholesale Units (000) 2,081 2,006 (75) Revenue ($M) $ 80,044 $ 87,783 $ 7,739 EBIT ($M) 3,710 7,377 3,667 EBIT Margin (%) 4.6 % 8.4 % 3.8 ppts Change in EBIT by Causal Factor (in millions) 2020 Full Year EBIT $ 3,710 Volume / Mix (1,661) Net Pricing 7,858 Cost (2,672) Exchange 220 Other (78) 2021 Full Year EBIT $ 7,377 In North America, 2021 wholesales declined 4% from 2020, primarily reflecting the impact of semiconductor-related production constraints. Full year 2021 revenue increased 10% from 2020, driven by higher net pricing, favorable mix, and stronger currencies, partially offset by lower wholesales. North America’s 2021 EBIT increased $3.7 billion from 2020 with an EBIT margin of 8.4%. The EBIT improvement was driven by higher net pricing, lower warranty expense, and favorable mix, partially offset by increased commodity prices, lower volume, and higher structural costs. South America 2020 2021 H / (L) Key Metrics Market Share (%) 6.2 % 2.6 % (3.7) ppts Wholesale Units (000) 185 81 (104) Revenue ($M) $ 2,463 $ 2,399 $ (64) EBIT ($M) (490) (121) 369 EBIT Margin (%) (19.9) % (5.1) % 14.8 ppts Change in EBIT by Causal Factor (in millions) 2020 Full Year EBIT $ (490) Volume / Mix (210) Net Pricing 602 Cost (12) Exchange 2 Other (13) 2021 Full Year EBIT $ (121) In South America, 2021 wholesales declined 56% from 2020, primarily reflecting the shift to the region’s new business model and the impact of semiconductor-related production constraints. Full year 2021 revenue declined 3% from 2020, driven by lower volume and weaker currencies, partially offset by higher net pricing and favorable mix. South America’s 2021 EBIT loss improved $369 million from 2020 with an EBIT margin of negative 5.1%. The EBIT improvement was driven by higher net pricing, partially offset by lower volume. 54 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Europe 2020 2021 H / (L) Key Metrics Market Share (%) 7.2 % 6.4 % (0.8) ppts Wholesale Units (000) (a) 1,020 891 (128) Revenue ($M) $ 22,644 $ 24,466 $ 1,822 EBIT ($M) (851) (154) 697 EBIT Margin (%) (3.8) % (0.6) % 3.2 ppts __________ (a) Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Türkiye (about 72,000 units in 2020 and 61,000 units in 2021); revenue does not include these sales. Change in EBIT by Causal Factor (in millions) 2020 Full Year EBIT $ (851) Volume / Mix (941) Net Pricing 949 Cost 472 Exchange (112) Other 329 2021 Full Year EBIT $ (154) In Europe, 2021 wholesales declined 13% from 2020, primarily reflecting the impact of semiconductor-related production constraints. Full year 2021 revenue improved 8% from 2020, driven by favorable mix, stronger currencies, and higher net pricing, partially offset by lower volume. Europe’s 2021 EBIT loss improved $697 million from 2020 with an EBIT margin of negative 0.6%. The EBIT improvement was driven by higher net pricing, lower material and warranty expenses, and lower structural costs, partially offset by lower volume and increased commodity prices. 55 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) China (Including Taiwan) 2020 2021 H / (L) Key Metrics Market Share (%) 2.4 % 2.4 % — ppts Wholesale Units (000) (a) 617 649 31 Revenue ($M) $ 3,202 $ 2,547 $ (655) EBIT ($M) (499) (327) 172 EBIT Margin (%) (15.6) % (12.8) % 2.8 ppts China Unconsolidated Affiliates Wholesale Units (000) (b) 564 633 69 Ford Equity Income/(Loss) ($M) $ 49 $ 165 $ 116 __________ (a) Includes vehicles produced and sold by our unconsolidated affiliates. Revenue does not include these sales. (b) Includes Ford and Lincoln brand and JMC brand vehicles produced and sold in China and, from second quarter 2021, Ford brand vehicles produced in Taiwan by Lio Ho Group. Change in EBIT by Causal Factor (in millions) 2020 Full Year EBIT $ (499) Volume / Mix (190) Net Pricing 73 Cost 16 Exchange 69 Other 204 2021 Full Year EBIT $ (327) In China, 2021 wholesales increased 5% from 2020, driven by higher joint venture volumes. Full year 2021 consolidated revenue declined 20% from 2020, driven by product localization and the de-consolidation of our operations in Taiwan, partially offset by favorable import mix, higher component sales to our joint ventures in China, and stronger currencies. China’s 2021 EBIT loss improved $172 million from 2020 with an EBIT margin of negative 12.8%. The EBIT improvement was driven by favorable mix of imported vehicles, higher joint venture profits and royalties, and higher net pricing, partially offset by lower volume at our consolidated operations. 56 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) International Markets Group 2020 2021 H / (L) Key Metrics Market Share (%) 1.7 % 1.8 % — ppts Wholesale Units (000) (a) 284 315 31 Revenue ($M) $ 7,541 $ 8,955 $ 1,414 EBIT ($M) (164) 622 786 EBIT Margin (%) (2.2) % 6.9 % 9.1 ppts _________ (a) Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Russia (about 14,000 units in 2020 and 22,000 units in 2021). Revenue does not include these sales. Change in EBIT by Causal Factor (in millions) 2020 Full Year EBIT $ (164) Volume / Mix 150 Net Pricing 218 Cost 24 Exchange 344 Other 50 2021 Full Year EBIT $ 622 In our International Markets Group, 2021 wholesales increased 11% from 2020, reflecting the non-recurrence of the COVID-related production suspension and higher industry volumes, partially offset by the impact of semiconductor-related supply constraints. Full year 2021 revenue increased 19% from 2020, driven by higher volume and mix, higher net pricing, and stronger currencies. Our International Markets Group’s 2021 EBIT improved $786 million from 2020 with an EBIT margin of 6.9%. The EBIT improvement was driven by stronger currencies, higher net pricing and volume, and lower warranty expense. 57 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Mobility Segment In our Mobility segment, our 2021 EBIT loss improved $22 million from 2020. The $1 billion EBIT loss reflected our strategic investments in 2021 as we continued to expand our capabilities in autonomous vehicles and mobility businesses. Ford Credit Segment The tables below provide full year 2021 key metrics and the change in full year 2021 EBT compared with full year 2020 by causal factor for the Ford Credit segment. 2020 2021 H / (L) GAAP Financial Measures Total Net Receivables ($B) $ 132 $ 118 (11) % Loss-to-Receivables (bps) (a) 36 6 (30) Auction Values (b) $ 22,380 $ 28,120 26 % EBT ($M) 2,608 4,717 $ 2,109 ROE (%) (c) 15 % 32 % 17 ppts Other Balance Sheet Metrics Debt ($B) $ 138 $ 118 (15) % Net Liquidity ($B) 35 32 (10) % Financial Statement Leverage (to 1) (c) 8.8 9.5 0.7 __________ (a) U.S. retail financing only. (b) U.S. 36-month off-lease auction values at full year 2022 mix. (c) 2020 amounts have been updated as a result of the adoption of ASU 2019-12, Simplifying the Accounting for Income Taxes . Change in EBT by Causal Factor (in millions) 2020 Full Year EBT $ 2,608 Volume / Mix (243) Financing Margin (206) Credit Loss 1,136 Lease Residual 1,494 Exchange 27 Other (99) 2021 Full Year EBT $ 4,717 Total net receivables at December 31, 2021 were $14 billion lower than at December 31, 2020, primarily reflecting lower wholesale receivables as a result of lower dealer inventories due to the semiconductor shortage. Ford Credit’s loss metrics reflected healthy and stable consumer credit conditions and strong auction values. Ford Credit’s U.S. 36-month auction values for off-lease vehicles were up 26% from 2020, reflecting strong demand for used vehicles, including the impact of lower new vehicle production due to the semiconductor shortage. Ford Credit’s 2021 EBT increased $2,109 million from 2020, explained primarily by favorable operating lease residual performance, the non-recurrence of the 2020 increase to the credit loss reserve due to deterioration in macroeconomic conditions related to COVID-19, and reductions in the credit loss reserve in 2021, partially offset by lower volume driven by the impact of the global semiconductor shortage and lower financing margin. 58 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Corporate Other For full year 2021, Corporate Other had a $1,084 million loss, compared with a $726 million loss in 2020. The higher loss was driven by lower interest income and higher administrative and IT-related expenses. Interest on Debt Our full year 2021 interest expense on Company debt excluding Ford Credit was $1,803 million, $154 million higher than in 2020, primarily explained by higher U.S. unsecured debt interest expense. Taxes Our Provision for/(Benefit from) income taxes for full year 2021 was a $130 million benefit, resulting in an effective tax rate of negative 0.7%. This includes a benefit of $2.9 billion to recognize deferred tax assets resulting from changes in our global tax structure and a $918 million benefit from the reversal of U.S. valuation allowances. Our full year 2021 adjusted effective tax rate, which excludes special items, was 21.9%. 59 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) LIQUIDITY AND CAPITAL RESOURCES At December 31, 2022, total balance sheet cash, cash equivalents, marketable securities, and restricted cash, including Ford Credit and entities held for sale, was $44.3 billion. We consider our key balance sheet metrics to be: (i) Company cash, which includes cash equivalents, marketable securities, and restricted cash, including cash held for sale, excluding Ford Credit’s cash, cash equivalents, marketable securities, and restricted cash; and (ii) Company liquidity, which includes Company cash, less restricted cash, and total available committed credit lines, excluding Ford Credit’s total available committed credit lines. Company excluding Ford Credit December 31, 2021 December 31, 2022 Balance Sheets ($B) Company Cash $ 36.5 $ 32.3 Liquidity 52.4 48.0 Debt (20.4) (19.9) Cash Net of Debt 16.1 12.3 Pension Funded Status ($B) Funded Plans $ 5.8 $ 4.1 Unfunded Plans (6.1) (4.3) Total Global Pension $ (0.3) $ (0.2) Total Funded Status OPEB $ (6.0) $ (4.5) Liquidity . One of our key priorities is to maintain a strong balance sheet, while at the same time having resources available to invest in and grow our business. At December 31, 2022, we had Company cash of $32.3 billion and liquidity of $48.0 billion, including approximately $194 million of Rivian marketable securities. In 2022, we sold approximately 91 million of our Rivian shares resulting in proceeds of about $3 billion. As marketable securities increase or decrease in value, Company cash and liquidity will likewise increase or decrease. At December 31, 2022, about 89% of Company cash was held by consolidated entities domiciled in the United States. To be prepared for an economic downturn, we target an ongoing Company cash balance at or above $20 billion plus significant additional liquidity above our Company cash target. We expect to have periods when we will be above or below this amount due to: (i) future cash flow expectations, such as for investments in future opportunities, capital investments, debt maturities, pension contributions, or restructuring requirements, (ii) short-term timing differences, and (iii) changes in the global economic environment. Our Company cash investments (excluding the Rivian marketable securities) 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. 60 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Material Cash Requirements. Our material cash requirements include: • Capital expenditures (for additional information, see the “Changes in Company Cash” section below) and other payments for engineering, software, product development, and implementation of our plans for electric vehicles • Purchase of raw materials and components to support the manufacturing and sale of vehicles (including electric vehicles), parts, and accessories (for additional information, see the Aggregate Contractual Obligations table and the accompanying description of our “Purchase obligations” below) • Marketing incentive payments to dealers • Payments for warranty and field service actions (for additional information, see Note 25 of the Notes to the Financial Statements) • Debt repayments (for additional information, see the Aggregate Contractual Obligations table below and Note 19 of the Notes the Financial Statements) • Discretionary and mandatory payments to our global pension plans (for additional information, see the Aggregate Contractual Obligations table below, the “Changes in Company Cash” section below, and Note 17 of the Notes to the Financial Statements) • Employee wages, benefits, and incentives • Operating lease payments (for additional information, see the Aggregate Contractual Obligations table below and Note 18 of the Notes to the Financial Statements) • Cash effects related to the global redesign of our business (for additional information, see the “Changes in Company Cash” section below) • Strategic acquisitions and investments to grow our business, including electrification Subject to approval by our Board of Directors, shareholder distributions in the form of dividend payments and/or a share repurchase program (including share repurchases to offset the anti-dilutive effect of increased shared-based compensation) may require the expenditure of a material amount of cash. Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions, and other matters. We are party to many contractual obligations involving commitments to make payments to third parties, and, as noted above, such commitments require a material amount of cash. Most of these are debt obligations incurred by our Ford Credit segment. In addition, as part of our normal business practices, we enter into contracts with suppliers for purchases of certain raw materials, components, and services to facilitate adequate supply of these materials and services. These arrangements, including multi-year offtake commitments, may contain fixed or minimum quantity purchase requirements. “Purchase obligations” in the Aggregate Contractual Obligations table below are defined as off-balance sheet agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms; however, as we purchase raw materials and components beyond the minimum amounts required by the “Purchase obligations,” our material cash requirements for these items are higher than what is reflected in the Aggregate Contractual Obligations table. For additional information on the timing of these payments and the impact on our working capital, see the “Changes in Company Cash” section below. 61 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) The table below summarizes our aggregate contractual obligations as of December 31, 2022 (in millions): Payments Due by Period 2023 2024 - 2025 2026 - 2027 Thereafter Total Company excluding Ford Credit On-balance sheet Long-term debt (a) $ 286 $ 964 $ 4,899 $ 13,220 $ 19,369 Interest payments relating to long-term debt (b) 951 1,873 1,655 10,255 14,734 Finance leases (c) 107 159 99 348 713 Operating leases (d) 439 580 294 307 1,620 Pension funding (e) 162 345 357 — 864 Off-balance sheet Purchase obligations (f) 2,089 1,746 727 119 4,681 Total Company excluding Ford Credit 4,034 5,667 8,031 24,249 41,981 Ford Credit On-balance sheet Long-term debt (a) 29,819 48,942 15,990 6,528 101,279 Interest payments relating to long-term debt (b) 3,394 3,660 1,325 530 8,909 Operating leases 13 23 16 2 54 Off-balance sheet Purchase obligations 37 22 2 — 61 Total Ford Credit 33,263 52,647 17,333 7,060 110,303 Total Company $ 37,297 $ 58,314 $ 25,364 $ 31,309 $ 152,284 __________ (a) Excludes unamortized debt discounts/premiums, unamortized debt issuance costs, and fair value adjustments. (b) Long-term debt may have fixed or variable interest rates. For long-term debt with variable-rate interest, we estimate the future interest payments based on projected market interest rates for various floating-rate benchmarks received from third parties. (c) Includes interest payments of $139 million. (d) Excludes approximately $300 million in future lease payments for various operating leases commencing in a future period. (e) Amounts represent our estimate of contractually obligated contributions to the Ford-Werke plan. See Note 17 of the Notes to the Financial Statements for further information regarding our expected 2022 pension contributions and funded status. (f) Purchase obligations under existing offtake agreements for scarce raw materials are not included in the table above. As of December 31, 2022, our forecasted expenditures for the maximum quantity that may be purchased under these offtake agreements, which are subject to satisfaction of the conditions in the agreements, total about $2.4 billion through 2029 based on our present pricing forecast; however, our forecasted prices could fluctuate significantly from period to period, which would result in volatility in the estimate of our overall obligation. In addition, we plan to continue to enter into offtake agreements with raw material suppliers, the costs under which we expect to be significant. We plan to utilize our liquidity (as described above) and our cash flows from business operations to fund our material cash requirements. 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, interest on debt, cash taxes, and all other and timing differences (including timing differences between accrual-based EBIT and associated cash flows). Non-operating items include: global redesign (including separation payments), changes in Company debt excluding Ford Credit, contributions to funded pension plans, shareholder distributions, and other items (including gains and losses on investments in equity securities, acquisitions and divestitures, equity investments, and other transactions with Ford Credit). 62 Item 7. 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 the sale of vehicles to dealers, which generally occurs shortly after being produced. In contrast, our Automotive trade payables are based primarily on industry-standard production supplier payment terms of about 45 days. As a result, our cash flow deteriorates if wholesale volumes (and the corresponding revenue) decrease while trade payables continue to become due. Conversely, our cash flow improves if wholesale volumes (and the corresponding revenue) increase while new trade payables are generally not due for about 45 days. For example, the suspension of production at most of our assembly plants and lower industry volumes due to COVID-19 in early 2020 resulted in an initial deterioration of our cash flow, while the subsequent resumption of manufacturing operations and return to pre-COVID-19 production levels at most of our assembly plants resulted in a subsequent improvement of our cash flow. Even in normal economic conditions, however, 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. Our finished product inventory at December 31, 2022 was higher year over year due to production and release scheduling, which resulted in higher sales inventory, in-transit inventory, and units awaiting upfit. In response to, or in anticipation of, supplier disruptions, we may stockpile certain components or raw materials to help prevent disruption in our production of vehicles. Such actions could have a short-term adverse impact on our cash and increase our inventory. Moreover, in order to secure critical materials for production of electric vehicles, we have entered into and plan to continue to enter into offtake agreements with raw material suppliers and make investments in certain raw material and battery suppliers, including contributing up to $6.6 billion in capital to BlueOval SK, LLC over a five-year period ending in 2026. Such investments, which are part of our plan to invest over $50 billion in electric vehicles through 2026, could have an additional adverse impact on our cash in the near-term. The terms of the offtake agreements we have entered into, and those we may enter into in the future, vary by transaction, though they generally obligate us to purchase a certain percentage or minimum amount of output produced by the counterparty over an agreed upon period of time. The purchase price mechanism included in the offtake agreement is typically based on the market price of the material at the time of delivery. The terms also may include conditions to our obligation to purchase the materials, such as quality or minimum output. Subject to satisfaction of those conditions, we will be obligated to purchase the materials at the cost determined by the purchase price mechanism. Based on the offtake agreements we have entered into thus far, the earliest date by which we could be obligated to purchase any output, subject to satisfaction of the applicable conditions, will be in 2024. Financial institutions participate in a supply chain finance (“SCF”) program that enables our suppliers, at their sole discretion, to sell their Ford receivables (i.e., our payment obligations to the suppliers) to the financial institutions on a non-recourse basis in order to be paid earlier than our payment terms provide. Our suppliers’ voluntary inclusion of invoices in the SCF program has no bearing on our payment terms, the amounts we pay, or our liquidity. We have no economic interest in a supplier’s decision to participate in the SCF program, and we have no direct financial relationship with the SCF financial institutions. Moreover, we do not provide any guarantees in connection with the SCF program. As of December 31, 2022, the outstanding amount of Ford receivables that suppliers elected to sell to the SCF financial institutions was $253 million. The amount settled through the SCF program during 2022 was $1.4 billion. 63 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Changes in Company cash excluding Ford Credit are summarized below (in billions): December 31, 2020 December 31, 2021 December 31, 2022 Company Excluding Ford Credit Company Adjusted EBIT excluding Ford Credit (a) $ (0.1) $ 5.3 $ 7.8 Capital spending $ (5.7) $ (6.2) $ (6.5) Depreciation and tooling amortization 5.3 5.1 5.2 Net spending $ (0.4) $ (1.1) $ (1.3) Receivables $ 0.4 $ (0.2) $ (1.0) Inventory 0.3 (1.8) (2.5) Trade Payables 1.3 0.3 3.7 Changes in working capital $ 2.0 $ (1.7) $ 0.2 Ford Credit distributions $ 3.3 $ 7.5 $ 2.1 Interest on debt and cash taxes (1.8) (2.3) (1.7) All other and timing differences (1.7) (3.1) 1.9 Company adjusted free cash flow (a) $ 1.3 $ 4.6 $ 9.1 Global Redesign (including separations) $ (0.5) $ (1.9) $ (0.4) Changes in debt 8.4 (3.7) (0.4) Funded pension contributions (0.6) (0.8) (0.6) Shareholder distributions (0.6) (0.4) (2.5) All other (b) 0.5 7.9 (9.5) Change in cash $ 8.5 $ 5.7 $ (4.3) __________ (a) See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. (b) 2021 includes our investment in Rivian of $10.6 billion and cash premium paid of $(1.6) billion associated with repurchasing and redeeming $7.6 billion of higher-coupon debt. 2022 includes a $7.4 billion loss on our Rivian investment. Note: Numbers may not sum due to rounding. Our full year 2022 Net cash provided by/(used in) operating activities was positive $6.9 billion, a decrease of $8.9 billion from a year ago (see page 79 for additional information). The year-over-year decrease was driven by a decrease in Ford Credit operating cash flow partially offset by favorable timing differences. Company adjusted free cash flow was $9.1 billion, $4.5 billion higher than a year ago, driven by higher Company adjusted EBIT excluding Ford Credit, timing benefits, improvement in working capital, and lower interest expense, offset partially by lower Ford Credit distributions. Capital spending was $6.5 billion in 2022, $0.3 billion higher than a year ago, and is expected to be in the range of $8 billion to $9 billion in 2023. The full year 2022 working capital impact was $0.2 billion positive, driven by higher payables. All other and timing differences were positive $1.9 billion. Timing differences include differences between accrual-based EBIT and the associated cash flows (e.g., pension and OPEB income or expense; compensation payments; marketing incentive and warranty payments to dealers). Shareholder distributions (including dividends and anti-dilutive share repurchases) were $2.5 billion in 2022. On February 2, 2023, we declared a regular dividend of $0.15 per share and a supplemental dividend of $0.65 per share. We previously announced our plan for the global redesign of our business, pursuant to which we are working to turn around automotive operations, compete like a challenger, and capitalize on our strengths by allocating more capital, more resources, and more talent to our strongest businesses and vehicle franchises. The cash effect related to our global redesign activities was $3.9 billion through December 31, 2022. 64 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Available Credit Lines . Total Company committed credit lines, excluding Ford Credit, at December 31, 2022 were $19.3 billion, consisting of $13.5 billion of our corporate credit facility, $2.0 billion of our supplemental revolving credit facility, $1.75 billion of our 364-day revolving credit facility, and $2.1 billion of local credit facilities. At December 31, 2022, the utilized portion of the corporate credit facility was $19 million, representing amounts utilized for letters of credit, and the full $1.75 billion of our 364-day revolving credit facility was utilized by Ford Credit, in its capacity as a subsidiary borrower under that facility. In addition, $1.7 billion of committed Company credit lines, excluding Ford Credit, was utilized under local credit facilities for our affiliates as of December 31, 2022. As of January 25, 2023, Ford Credit had repaid the full $1.75 billion outstanding under the 364-day revolving credit facility. Lenders under our corporate credit facility have $3.4 billion of commitments maturing on June 23, 2025 and $10.1 billion of commitments maturing on June 23, 2027. Lenders under our supplemental revolving credit facility have $0.1 billion of commitments maturing on September 29, 2024 and $1.9 billion of commitments maturing on June 23, 2025. Lenders under our 364-day revolving credit facility have $1.75 billion of commitments maturing on June 22, 2023. The corporate, supplemental, and 364-day credit agreements include certain sustainability-linked targets, pursuant to which the applicable margin and facility fees may be adjusted if Ford achieves, or fails to achieve, the specified targets related to global manufacturing facility greenhouse gas emissions, renewable electricity consumption, and Ford Europe CO 2 tailpipe emissions. Ford outperformed the 2021 targets for all three of the sustainability-linked metrics, which impacted pricing beginning in the fourth quarter of 2022. 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 corporate credit facility, supplemental revolving credit facility, and 364-day revolving credit facility. The terms and conditions of the supplemental and 364-day revolving credit facilities are consistent with our corporate credit facility. Ford Credit has been designated as a subsidiary borrower under the corporate credit facility and the 364-day revolving credit facility. Each of the corporate credit facility, supplemental revolving credit facility, and 364-day revolving credit facility 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: Ford Component Sales, LLC; Ford European Holdings Inc.; 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 Next LLC; and Ford Trading Company, LLC. Debt. As shown in Note 19 of the Notes to the Financial Statements, at December 31, 2022, Company debt excluding Ford Credit was $19.9 billion. This balance is $400 million lower than at December 31, 2021, primarily reflecting the repayment in full of our $1.5 billion delayed draw term loan facility, repayment of the remaining $953 million under our Loan Arrangement and Reimbursement Agreement with the U.S. Department of Energy, a $1.1 billion redemption of higher coupon debt, and scheduled maturities, partially offset by the £750 million ($903 million as of December 31, 2022) draw on our U.K. Export Finance term loan credit facility and the issuance of our $1.8 billion green bond and $600 million retail bond. Leverage. We manage Company debt (excluding Ford Credit) levels with a leverage framework that targets investment grade credit ratings through a normal business cycle. 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 7. Ford Credit is self-funding and its debt, which is used to fund its operations, is separate from our Company debt excluding Ford Credit. 65 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Ford Credit Segment Ford Credit ended 2022 with $21 billion of liquidity. During the year, Ford Credit completed $16 billion of public term funding. Key elements of Ford Credit’s funding strategy include: • Maintain strong liquidity and funding diversity • Prudently access public markets • Continue growth of retail deposits in Europe • Flexibility to increase ABS mix as needed; preserving assets and committed capacity • Target financial statement leverage of 9:1 to 10:1 • 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 can continue to meet its financial obligations through economic cycles. Funding Sources. Ford Credit’s funding sources include primarily unsecured debt and securitization transactions (including other structured financings). Ford Credit issues both short-term and long-term debt that is held by both institutional and retail investors, with long-term debt having an original maturity of more than 12 months. Ford Credit sponsors a number of securitization programs that can be structured to provide both short-term and long-term funding through institutional investors and other financial institutions in the United States and international capital markets. Ford Credit obtains unsecured funding from the sale of demand notes under its Ford Interest Advantage program and through the retail deposit programs at FCE Bank plc (“FCE”) and Ford Bank GmbH (“Ford Bank”). At December 31, 2022, the principal amount outstanding of Ford Interest Advantage notes, which may be redeemed at any time at the option of the holders thereof without restriction, and FCE and Ford Bank deposits was $14.3 billion. Ford Credit maintains multiple sources of readily available liquidity to fund the payment of its unsecured short-term debt obligations. The following table shows funding for Ford Credit’s net receivables (in billions): December 31, 2020 December 31, 2021 December 31, 2022 Funding Structure Term unsecured debt $ 73.3 $ 59.4 $ 48.3 Term asset-backed securities 54.6 45.4 56.4 Ford Interest Advantage / Retail Deposits 9.8 12.9 14.3 Other (3.1) (0.2) 2.6 Equity 15.6 12.4 11.9 Adjustments for cash (18.5) (12.4) (11.2) Total Net Receivables $ 131.7 $ 117.5 $ 122.3 Securitized Funding as Percent of Total Debt 39.6 % 38.5 % 47.4 % Net receivables of $122.3 billion at December 31, 2022 were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of total debt was 47.4%. 66 Item 7. 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 2020, 2021, and 2022, and planned issuances for full year 2023, excluding short-term funding programs (in billions): 2020 Actual 2021 Actual 2022 Actual 2023 Forecast Unsecured $ 14 $ 5 $ 6 $ 10 - 13 Securitizations 13 9 10 10 - 13 Total public $ 27 $ 14 $ 16 $ 20 - 26 In 2022, Ford Credit completed $16 billion of public term funding. For 2023, Ford Credit projects full year public term funding in the range of $20 billion to $26 billion. Through February 1, 2023, Ford Credit has completed $5 billion of public term issuances. Liquidity. The following table shows Ford Credit’s liquidity sources and utilization (in billions): December 31, 2020 December 31, 2021 December 31, 2022 Liquidity Sources (a) Cash $ 18.5 $ 12.4 $ 11.2 Committed asset-backed facilities 38.1 37.1 37.4 Other unsecured credit facilities 2.5 2.7 2.3 Total liquidity sources $ 59.1 $ 52.2 $ 50.9 Utilization of Liquidity (a) Securitization cash and restricted cash $ (3.9) $ (3.9) $ (2.9) Committed asset-backed facilities (16.7) (12.5) (26.6) Other unsecured credit facilities (0.5) (1.0) (0.8) Total utilization of liquidity $ (21.1) $ (17.4) $ (30.3) Gross liquidity $ 38.0 $ 34.8 $ 20.6 Asset-backed capacity in excess of eligible receivables and other adjustments (2.6) (2.8) 0.4 Net liquidity available for use $ 35.4 $ 32.0 $ 21.0 __________ (a) See Definitions and Information Regarding Ford Credit Causal Factors section. Ford Credit’s net liquidity available for use will fluctuate quarterly based on factors including near-term debt maturities, receivable growth and decline, and timing of funding transactions. At December 31, 2022, Ford Credit’s net liquidity available for use was $21 billion, $11 billion lower than year-end 2021. Ford Credit’s net liquidity remains robust and aligns with lower near-term refinancing obligations. Ford Credit’s sources of liquidity include cash, committed asset-backed facilities, and unsecured credit facilities. At December 31, 2022, Ford Credit’s liquidity sources totaled $50.9 billion, down $1.3 billion from year-end 2021. Ford Credit continues to be well capitalized with a strong balance sheet. Material Cash Requirements. Ford Credit’s material cash requirements include: (1) the purchase of retail financing and operating lease contracts from dealers and providing wholesale financing for dealers to finance new and used vehicles; and (2) debt repayments (for additional information on debt, see the “Balance Sheet Liquidity Profile” section below, the “Material Cash Requirements” section in “Liquidity and Capital Resources - Company excluding Ford Credit” above, and Note 19 of the Notes to the Financial Statements). In addition, subject to approval by Ford Credit’s Board of Directors, shareholder distributions may require the expenditure of a material amount of cash. Moreover, Ford Credit may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions, and other matters. Ford Credit plans to utilize its liquidity (as described above) and its cash flows from business operations to fund its material cash requirements. 67 Item 7. 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 Ford Credit with additional liquidity after all of its assets have been funded and is in addition to liquidity available to protect for stress scenarios. 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): 2023 2024 2025 2026 and Beyond Balance Sheet Liquidity Profile Assets (a) $ 71 $ 97 $ 117 $ 137 Total debt (b) 58 83 100 121 Memo: Unsecured long-term debt maturities 8 12 11 17 __________ (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 2023. 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 December 31, 2022, Ford Credit had $137 billion of assets, $60 billion of which were unencumbered. Funding and Liquidity Risks. Ford Credit’s funding plan is subject to risks and uncertainties, many of which are beyond its control, including disruption in the capital markets that could impact both unsecured debt and asset-backed securities 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; • Credit ratings assigned to Ford and Ford Credit; • 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; and • Ford Credit’s ability to maintain credit facilities and committed asset-backed facilities. Stress Tests. Ford Credit regularly conducts stress testing on its funding and liquidity sources to ensure it can continue to meet financial obligations and support the sale of Ford and Lincoln vehicles during firm-specific and market-wide stress events. Stress tests are intended to quantify the potential impact of various adverse scenarios on the balance sheet and liquidity. These scenarios include assumptions on access to unsecured and secured debt markets, runoff of short-term funding, and ability to renew expiring liquidity commitments and are measured over various time periods, including 30 days, 90 days, and longer term. Ford Credit’s stress test does not assume any additional funding, liquidity, or capital support from Ford. Ford Credit routinely develops contingency funding plans as part of its liquidity stress testing. 68 Item 7. 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 (in billions): December 31, 2020 December 31, 2021 December 31, 2022 Leverage Calculation Debt $ 137.7 $ 117.7 $ 119.0 Equity (a) 15.6 12.4 11.9 Financial statement leverage (to 1) 8.8 9.5 10.0 __________ (a) Total shareholder’s interest reported on Ford Credit’s balance sheets. Ford Credit plans its leverage by considering market conditions and the risk characteristics of its business. At December 31, 2022, Ford Credit’s financial statement leverage was 10:1. Ford Credit targets financial statement leverage in the range of 9:1 to 10:1. 69 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Total Company Pension Plan Contributions and Strategy. Our strategy is to reduce the risk of our funded defined benefit pension plans, including minimizing the volatility of the value of our pension assets relative to pension liabilities and the need for unplanned use of capital resources to fund the plans. The strategy reduces balance sheet, cash flow, and income exposures and, in turn, reduces our risk profile. Going forward, we expect to: • Limit our pension contributions to offset ongoing service cost or meet regulatory requirements, if any; • Minimize the volatility of the value of our pension assets relative to pension obligations and ensure assets are sufficient to pay plan benefits; and • Evaluate strategic actions to reduce pension liabilities, such as plan design changes, curtailments, or settlements 2021 2022 2022 H / (L) 2021 Pension Funded Status ($B) U.S. Plans $ 1.0 $ 0.1 $ (0.9) Non-U.S. Plans (1.3) (0.3) 1.0 Total Global Pension $ (0.3) $ (0.2) $ 0.1 Year-End Discount Rate (Weighted Average) U.S. Plans 2.91 % 5.51 % 2.60 ppts Non-U.S. Plans 1.75 % 4.42 % 2.67 ppts Actual Asset Returns U.S. Plans 2.82 % (21.20) % (24.02) ppts Non-U.S. Plans 2.69 % (25.40) % (28.09) ppts Pension - Funded Plans Only ($B) Funded Status $ 5.8 $ 4.1 $ (1.7) Contributions for Funded Plans 0.8 0.6 (0.2) Worldwide, our defined benefit pension plans were underfunded by $0.2 billion at December 31, 2022, an improvement of $0.1 billion from December 31, 2021, primarily reflecting the impact of higher discount rates mostly offset by negative asset performance. Of the $0.2 billion underfunded status at year-end 2022, our funded plans were $4.1 billion overfunded and our unfunded plans were $4.3 billion underfunded. These unfunded plans are “pay as you go” with benefits paid from Company cash and primarily include certain plans in Germany and U.S. defined benefit plans for senior management. The fixed income mix was 79% in both our U.S. plans and non-U.S. plans at year-end 2022. In 2022, we contributed $567 million to our global funded pension plans, a decrease of $206 million compared with 2021. During 2023, we expect to contribute between $500 million and $600 million of cash to our global funded pension plans. We also expect to make about $400 million of benefit payments to participants in unfunded plans. Based on current assumptions and regulations, we do not expect to have a legal requirement to fund our major U.S. plans in 2023. Our global funded plans remain fully funded in aggregate, demonstrating the effectiveness of our de-risking strategy and our commitment to a strong balance sheet. For a detailed discussion of our pension plans, refer to the “Critical Accounting Estimates - Pensions and Other Postretirement Employee Benefits” section of Item 7 of Part II of our 2022 Form 10-K Report and Note 17 of the Notes to the Financial Statements. 70 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Return on Invested Capital (“ROIC”). We analyze total Company performance using an adjusted ROIC financial metric based on an after-tax rolling four quarter average. The following table contains the calculation of our ROIC for the years shown (in billions): December 31, 2020 December 31, 2021 December 31, 2022 Adjusted Net Operating Profit/(Loss) After Cash Tax Net income/(loss) attributable to Ford $ (1.3) $ 17.9 $ (2.0) Add: Noncontrolling interest — — (0.2) Less: Income tax (0.2) 0.1 0.9 Add: Cash tax (0.4) (0.6) (0.8) Less: Interest on debt (1.6) (1.8) (1.3) Less: Total pension / OPEB income / (cost) (1.0) 4.9 0.4 Add: Pension / OPEB service costs (1.1) (1.1) (1.0) Net operating profit/(loss) after cash tax $ 0.1 $ 13.0 $ (3.9) Less: Special items (excl. pension / OPEB) pre-tax (0.4) 5.9 (11.7) Adjusted net operating profit/(loss) after cash tax $ 0.5 $ 7.1 $ 7.8 Invested Capital Equity $ 30.8 $ 48.6 $ 43.2 Debt (excl. Ford Credit) 24.0 20.4 19.9 Net pension and OPEB liability 13.3 6.4 4.7 Invested capital (end of period) $ 68.1 $ 75.4 $ 67.8 Average invested capital $ 70.7 $ 72.1 $ 70.0 ROIC (a) 0.1 % 18.0 % (5.6) % Adjusted ROIC (Non-GAAP) (b) 0.7 % 9.8 % 11.2 % __________ (a) Calculated as the sum of net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters. (b) Calculated as the sum of adjusted net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters. Note: Numbers may not sum due to rounding. 71 Item 7. 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. There have been no rating actions taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022. 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) Positive BB (high) R-4 Positive BBB (low) Fitch BB+ BB+ Positive BB+ B Positive BBB- Moody’s N/A Ba2 Stable Ba2 NP Stable Baa3 S&P BB+ BB+ Positive BB+ B Positive BBB- 72 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) OUTLOOK We provided 2023 Company guidance in our earnings release furnished on Form 8-K dated February 2, 2023. The guidance is based on our expectations as of February 2, 2023. Our actual results could differ materially from our guidance due to risks, uncertainties, and other factors, including those set forth in “Risk Factors” in Item 1A of Part I. 2023 Guidance Total Company Adjusted EBIT (a) $9 - $11 billion Adjusted Free Cash Flow (a) About $6 billion Capital spending $8 - $9 billion Ford Credit EBT About $1.3 billion __________ (a) When we provide guidance for Adjusted EBIT and Adjusted Free Cash Flow, we do not provide guidance for the most comparable GAAP measures because, as described in more detail below in “Non-GAAP Measures That Supplement GAAP Measures,” they include items that are difficult to predict with reasonable certainty. For full-year 2023, we expect adjusted EBIT of $9 billion to $11 billion, which assumes a seasonally adjusted annual rate (“SAAR”) of about 15 million in the United States and about 13 million in Europe. We also expect adjusted free cash flow of about $6 billion, which assumes no distributions from Ford Credit. Our outlook for 2023 assumes the headwinds and tailwinds below. Headwinds: • An expected mild U.S. recession and a moderate recession in Europe • Higher incentives across the industry as supply and demand come back into balance • Ford Credit EBT of about $1.3 billion, down about $1.4 billion, reflecting unfavorable lease residuals and credit losses and the non-recurrence of derivative gains • Continuation of the strong dollar • About $2 billion lower past service pension income • Continued investments in growth, including in customer experience, connected services, and capital expenditures Tailwinds: • Improvement in the supply chain and industry volume • Launch of our all-new Super Duty • Lower cost of goods sold, including efficiencies in materials, commodities, logistics, and other parts of our industrial platform Additionally, we will be negotiating a new contract with the UAW in the United States. 73 Item 7. 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 is highly dependent on its suppliers to deliver components in accordance with Ford’s production schedule and specifications, and a shortage of or inability to acquire key components, such as semiconductors, or raw materials, such as lithium, cobalt, nickel, graphite, and manganese, can disrupt Ford’s production of vehicles; • To facilitate access to the raw materials necessary for the production of electric vehicles, Ford has entered into, and expects to continue to enter into, multi-year commitments to raw material suppliers that subject Ford to risks associated with lower future demand for such materials as well as costs that fluctuate and are difficult to accurately forecast; • Ford’s long-term competitiveness depends on the successful execution of Ford+; • 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, restructurings, or new business strategies; • Operational systems, security systems, vehicles, and services could be affected by cyber incidents, ransomware attacks, and other disruptions and impact Ford and Ford Credit as well as their suppliers and dealers; • Ford’s production, as well as Ford’s suppliers’ production, and/or the ability to deliver products to consumers could be disrupted by labor issues, natural or man-made disasters, adverse effects of climate change, financial distress, production difficulties, capacity limitations, 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 digital, software, and physical services are subject to market acceptance and face significant competition from existing and new entrants in the automotive and digital and software services industries and its reputation may be harmed if it is unable to achieve the initiatives it has announced; • 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 or geopolitical developments, including protectionist trade policies such as tariffs, or other events; • Industry sales volume 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; • Inflationary pressure and fluctuations in commodity and energy prices, foreign currency exchange rates, interest rates, and market value of Ford or Ford Credit’s investments, including marketable securities, 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; • The impact of government incentives on Ford’s business could be significant, and 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 OPEB 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 and Ford Credit could experience unusual or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, services, perceived environmental impacts, or otherwise; • Ford may need to substantially modify its product plans and facilities to comply with safety, emissions, fuel economy, autonomous driving technology, environmental, and other regulations; • 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 consumers’ heightened expectations to safeguard their personal information; and • Ford Credit could be subject to new or increased credit regulations, consumer protection regulations, or other regulations. 74 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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” above. 75 Item 7. 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 operating results and trends, and a means to compare 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/(Loss) 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 focuses on underlying operating results and trends, and improves comparability of our period-over-period results. Our management ordinarily excludes special items from its review of the results of the operating segments for purposes of measuring segment profitability and allocating resources. Our categories of pre-tax special items and the applicable significance guideline for each item (which may consist of a group of items related to a single event or action) are as follows: Pre-Tax Special Item Significance Guideline ∘ Pension and OPEB remeasurement gains and losses ∘ No minimum ∘ Gains and losses on investments in equity securities ∘ No minimum ∘ 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 ∘ Generally $100 million or more ∘ Other items that we do not necessarily consider to be indicative of earnings from ongoing operating activities ∘ $500 million or more for individual field service actions; generally $100 million or more for other items 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, including gains and losses on pension and OPEB remeasurements and on investments in equity securities. • Company Adjusted EBIT Margin (Most Comparable GAAP Measure: Company Net Income/(Loss) 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/(Loss) Per Share (Most Comparable GAAP Measure: Earnings/(Loss) Per Share) – Measure of Company’s diluted net earnings/(loss) 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 earnings from ongoing operating activities. When we provide guidance for adjusted earnings/(loss) per share, we do not provide guidance on an earnings/(loss) 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. 76 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) • 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 Company excluding Ford Credit 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. • Adjusted ROIC – Calculated as the sum of adjusted net operating profit/(loss) after cash tax from the last four quarters, divided by the average invested capital over the last four quarters. Adjusted Return on Invested Capital (“Adjusted ROIC”) provides management and investors with useful information to evaluate the Company’s after-cash tax operating return on its invested capital for the period presented. Adjusted net operating profit/(loss) 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. 77 Item 7. 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. Net Income/(Loss) Reconciliation to Adjusted EBIT ($M) 2020 2021 2022 Net income/(loss) attributable to Ford (GAAP) $ (1,279) $ 17,937 $ (1,981) Income/(Loss) attributable to noncontrolling interests 3 (27) (171) Net income/(loss) $ (1,276) $ 17,910 $ (2,152) Less: (Provision for)/Benefit from income taxes (a) (160) 130 864 Income/(Loss) before income taxes $ (1,116) $ 17,780 $ (3,016) Less: Special items pre-tax (2,003) 9,583 (12,172) Income/(Loss) before special items pre-tax $ 887 $ 8,197 $ 9,156 Less: Interest on debt (1,649) (1,803) (1,259) Adjusted EBIT (Non-GAAP) $ 2,536 $ 10,000 $ 10,415 Memo: Revenue ($B) $ 127.1 $ 136.3 $ 158.1 Net income/(loss) margin (%) (1.0) % 13.2 % (1.3) % Adjusted EBIT margin (%) 2.0 % 7.3 % 6.6 % _________ (a) 2020 includes an expense to establish valuation allowances primarily against U.S. tax credits; 2021 reflects a benefit from recognizing deferred tax assets and favorable changes in our valuation allowances offset by the tax consequences of unrealized gains on marketable securities; 2022 reflects the tax consequences of unrealized losses on marketable securities and favorable changes in our valuation allowances. Earnings/(Loss) per Share Reconciliation to Adjusted Earnings/(Loss) per Share 2020 2021 2022 Diluted After-Tax Results ($M) Diluted after-tax results (GAAP) $ (1,279) $ 17,937 $ (1,981) Less: Impact of pre-tax and tax special items (2,724) 11,507 (9,599) Adjusted net income/(loss) - Diluted (Non-GAAP) $ 1,445 $ 6,430 $ 7,618 Basic and Diluted Shares (M) Basic shares (average shares outstanding) 3,973 3,991 4,014 Net dilutive options, unvested restricted stock units, unvested restricted stock shares, and convertible debt 29 43 42 Diluted shares 4,002 4,034 4,056 Earnings/(Loss) per share - diluted (GAAP) (a) $ (0.32) $ 4.45 $ (0.49) Less: Net impact of adjustments (0.68) 2.86 (2.37) Adjusted earnings per share - diluted (Non-GAAP) $ 0.36 $ 1.59 $ 1.88 _________ (a) In 2020 and 2022, there were 29 million and 42 million shares, respectively, excluded from the calculation of diluted earnings/(loss) per share, due to their anti-dilutive effect. 78 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Effective Tax Rate Reconciliation to Adjusted Effective Tax Rate 2020 2021 2022 Pre-Tax Results ($M) Income/(Loss) before income taxes (GAAP) $ (1,116) $ 17,780 $ (3,016) Less: Impact of special items (2,003) 9,583 (12,172) Adjusted earnings before taxes (Non-GAAP) $ 887 $ 8,197 $ 9,156 Taxes ($M) (Provision for)/Benefit from income taxes (GAAP) $ (160) $ 130 $ 864 Less: Impact of special items (a) (721) 1,924 2,573 Adjusted (provision for)/benefit from income taxes (Non-GAAP) $ 561 $ (1,794) $ (1,709) Tax Rate (%) Effective tax rate (GAAP) (14.3) % (0.7) % 28.6 % Adjusted effective tax rate (Non-GAAP) (63.2) % 21.9 % 18.7 % _________ (a) 2020 includes an expense to establish valuation allowances primarily against U.S. tax credits; 2021 reflects a benefit from recognizing deferred tax assets and favorable changes in our valuation allowances offset by the tax consequences of unrealized gains on marketable securities; 2022 reflects the tax consequences of unrealized losses on marketable securities and favorable changes in our valuation allowances. Net Cash Provided by/(Used in) Operating Activities Reconciliation to Company Adjusted Free Cash Flow ($M) 2020 2021 2022 Net cash provided by/(used in) operating activities (GAAP) $ 24,269 $ 15,787 $ 6,853 Less: Items not included in Company Adjusted Free Cash Flows Ford Credit operating cash flows (a) $ 21,592 $ 15,293 $ (5,416) Funded pension contributions (570) (773) (567) Global Redesign (including separations) (b) (503) (1,855) (835) Ford Credit tax payments/(refunds) under tax sharing agreement (a) 477 15 147 Other, net (583) (421) (58) Add: Items included in Company Adjusted Free Cash Flows Company excluding Ford Credit capital spending $ (5,702) $ (6,183) $ (6,511) Ford Credit distributions (a) 3,290 7,500 2,100 Settlement of derivatives (171) (255) (90) Company adjusted free cash flow (Non-GAAP) (a) $ 1,273 $ 4,590 $ 9,081 __________ (a) 2020 amounts have been updated as a result of the adoption of ASU 2019-12, Simplifying the Accounting for Income Taxes . (b) 2021 and 2022 Global Redesign excludes cash flows reported in investing activities. 79 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) 2022 SUPPLEMENTAL INFORMATION The tables below provide supplemental consolidating financial information and other financial information. 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 Year Ended December 31, 2022 Cash flows from operating activities Company excluding Ford Credit Ford Credit Eliminations Consolidated Net income/(loss) $ (4,361) $ 2,209 $ — $ (2,152) Depreciation and tooling amortization 5,361 2,281 — 7,642 Other amortization 62 (1,211) — (1,149) Held for sale impairment charges 32 — — 32 Brazil manufacturing exit non-cash charges (excluding accelerated depreciation of $17) (82) — — (82) (Gains)/Losses on extinguishment of debt 135 (14) — 121 Provision for/(Benefit from) credit and insurance losses 11 35 — 46 Pension and OPEB expense/(income) (378) — — (378) Equity method investment dividends received in excess of (earnings)/losses and impairments 3,321 3 — 3,324 Foreign currency adjustments (273) 246 — (27) Net realized and unrealized (gains)/losses on cash equivalents, marketable securities, and other investments 7,440 78 — 7,518 Net (gain)/loss on changes in investments in affiliates 146 1 — 147 Stock compensation 325 11 — 336 Provision for deferred income taxes (2,234) 324 — (1,910) Decrease/(Increase) in finance receivables (wholesale and other) — (10,560) — (10,560) Decrease/(Increase) in intersegment receivables/payables 274 (274) — — Decrease/(Increase) in accounts receivable and other assets (984) (199) — (1,183) Decrease/(Increase) in inventory (2,576) — — (2,576) Increase/(Decrease) in accounts payable and accrued and other liabilities 7,098 170 — 7,268 Other 788 (352) — 436 Interest supplements and residual value support to Ford Credit (1,836) 1,836 — — Net cash provided by/(used in) operating activities $ 12,269 $ (5,416) $ — $ 6,853 Cash flows from investing activities Capital spending $ (6,808) $ (58) $ — $ (6,866) Acquisitions of finance receivables and operating leases — (45,533) — (45,533) Collections of finance receivables and operating leases — 46,276 — 46,276 Proceeds from sale of business 449 — — 449 Purchases of marketable securities and other investments (13,880) (3,578) — (17,458) Sales and maturities of marketable securities and other investments 14,956 4,161 — 19,117 Settlements of derivatives (90) 184 — 94 Capital contributions to equity method investments (733) (5) — (738) Other 310 2 — 312 Investing activity (to)/from other segments 2,130 (30) (2,100) — Net cash provided by/(used in) investing activities $ (3,666) $ 1,419 $ (2,100) $ (4,347) Cash flows from financing activities Cash payments for dividends and dividend equivalents $ (2,009) $ — $ — $ (2,009) Purchases of common stock (484) — — (484) Net changes in short-term debt 85 5,375 — 5,460 Proceeds from issuance of long-term debt 3,295 42,175 — 45,470 Payments on long-term debt (3,897) (41,758) — (45,655) Other (192) (79) — (271) Financing activity to/(from) other segments — (2,100) 2,100 — Net cash provided by/(used in) financing activities $ (3,202) $ 3,613 $ 2,100 $ 2,511 Effect of exchange rate changes on cash, cash equivalents, and restricted cash $ (227) $ (187) $ — $ (414) 80 Item 7. 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 Year Ended December 31, 2022 Company excluding Ford Credit Ford Credit Consolidated Revenues $ 149,079 $ 8,978 $ 158,057 Total costs and expenses (a) 145,295 6,486 151,781 Operating income/(loss) 3,784 2,492 6,276 Interest expense on Company debt excluding Ford Credit 1,259 — 1,259 Other income/(loss), net (5,288) 138 (5,150) Equity in net income/(loss) of affiliated companies (2,910) 27 (2,883) Income/(Loss) before income taxes (5,673) 2,657 (3,016) Provision for/(Benefit from) income taxes (1,312) 448 (864) Net income/(loss) (4,361) 2,209 (2,152) Less: Income/(loss) attributable to noncontrolling interests (171) — (171) Net income/(loss) attributable to Ford Motor Company $ (4,190) $ 2,209 $ (1,981) __________ (a) Ford Credit excludes a specials charge of $10 million. 81 Item 7. 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): December 31, 2022 Assets Company excluding Ford Credit Ford Credit Eliminations Consolidated Cash and cash equivalents $ 14,741 $ 10,393 $ — $ 25,134 Marketable securities 17,443 1,493 — 18,936 Ford Credit finance receivables, net — 38,720 — 38,720 Trade and other receivables, net 4,575 11,154 — 15,729 Inventories 14,080 — — 14,080 Assets held for sale 97 — — 97 Other assets 2,527 1,253 — 3,780 Receivable from other segments 49 1,462 (1,511) — Total current assets 53,512 64,475 (1,511) 116,476 Ford Credit finance receivables, net — 49,903 — 49,903 Net investment in operating leases 951 21,821 — 22,772 Net property 37,032 233 — 37,265 Equity in net assets of affiliated companies 2,678 120 — 2,798 Deferred income taxes 15,394 158 — 15,552 Other assets 9,890 1,228 — 11,118 Receivable from other segments — 16 (16) — Total assets $ 119,457 $ 137,954 $ (1,527) $ 255,884 Liabilities Payables $ 24,507 $ 1,098 $ — $ 25,605 Other liabilities and deferred revenue 18,611 2,486 — 21,097 Company excluding Ford Credit debt payable within one year 730 — — 730 Ford Credit debt payable within one year — 49,434 — 49,434 Payable to other segments 1,511 — (1,511) — Total current liabilities 45,359 53,018 (1,511) 96,866 Other liabilities and deferred revenue 22,964 2,533 — 25,497 Company excluding Ford Credit long-term debt 19,200 — — 19,200 Ford Credit long-term debt — 69,605 — 69,605 Deferred income taxes 628 921 — 1,549 Payable to other segments 16 — (16) — Total liabilities $ 88,167 $ 126,077 $ (1,527) $ 212,717 82 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Selected Other Information. Equity. At December 31, 2021, total equity attributable to Ford was $48.5 billion, an increase of $17.8 billion compared with December 31, 2020. At December 31, 2022, total equity attributable to Ford was $43.2 billion, a decrease of $5.3 billion compared with December 31, 2021. The detail for the changes is shown below (in billions): 2021 vs 2020 Increase/ (Decrease) 2022 vs 2021 Increase/ (Decrease) Net income/(loss) $ 17.9 $ (2.0) Shareholder distributions (0.4) (2.5) Other comprehensive income/(loss) — (1.0) Adoption of accounting standards — — Common stock issued (including share-based compensation impacts) 0.3 0.2 Total $ 17.8 $ (5.3) 83 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) CRITICAL ACCOUNTING ESTIMATES We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. Warranties and Field Service Actions Nature of Estimates Required. We provide base warranties on the products we sell for specific periods of time and/or mileage, which vary depending upon the type of product and the geographic location of its sale. Separately, we also periodically perform field service actions related to safety recalls, emission recalls, and other product campaigns. Pursuant to these warranties and field service actions, we will repair, replace, or adjust parts on a vehicle that are defective in factory-supplied materials or workmanship. We accrue the estimated cost of both base warranty coverages and field service actions at the time of sale. 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. Assumptions and Approach Used. We establish our estimate of base warranty obligations using a patterned estimation model. We use historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. We reevaluate our estimate of base warranty obligations on a regular basis. Experience has shown that initial data for any given model year may be volatile; therefore, our process relies on long-term historical averages until sufficient data are available. With actual experience, we use the data to update the historical averages. We then compare the resulting accruals with present spending rates to assess whether the balances are adequate to meet expected future obligations. Based on this data, we update our estimates as necessary. Field service actions may occur in periods beyond the base warranty coverage period. We establish our estimates of field service action obligations using a patterned estimation model. We use historical information regarding the nature, frequency, severity, and average cost of claims for each model year. We assess our obligation for field service actions on a regular basis using actual claims experience and update our estimates as necessary. Due to the uncertainty and potential volatility of the factors used in establishing our estimates, changes in our assumptions could materially affect our financial condition and results of operations. See Note 25 of the Notes to the Financial Statements for information regarding warranty and field service action costs. Pensions and Other Postretirement Employee Benefits Nature of Estimates Required. The estimation of our defined benefit pension and OPEB plan obligations and expenses requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events, such as demographic experience and health care cost increases. Plan obligations and expenses are based on existing retirement plan provisions. No assumption is made regarding any potential future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor contracts). 84 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Assumptions and Approach Used. The assumptions used in developing the required estimates include the following key factors: • Discount rates. Our discount rate assumptions are based primarily on the results of cash flow matching analyses, which match the future cash outflows for each major plan to a yield curve based on high-quality bonds specific to the country of the plan. Benefit payments are discounted at the rates on the curve to determine the year-end obligations. • Expected long-term rate of return on plan assets. Our expected long-term rate of return considers inputs from a range of advisors for capital market returns, inflation, bond yields, and other variables, adjusted for specific aspects of our investment strategy by plan. Historical returns also are considered when appropriate. The assumption is based on consideration of all inputs, with a focus on long-term trends to avoid short-term market influences. • Salary growth. Our salary growth assumption reflects our actual experience, long-term outlook, and assumed inflation. • Inflation. Our inflation assumption is based on an evaluation of external market indicators, including real gross domestic product growth and central bank inflation targets. • Expected contributions. Our expected amount and timing of contributions are based on an assessment of minimum requirements, cash availability, and other considerations (e.g., funded status, avoidance of regulatory premiums and levies, and tax efficiency). • Retirement rates. Retirement rates are developed to reflect actual and projected plan experience. • Mortality rates. Mortality rates are developed to reflect actual and projected plan experience. • Health care cost trends . Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Assumptions are set at each year-end and are generally not changed during the year unless there is a major plan event, such as a curtailment or settlement that would trigger a plan remeasurement. See Note 17 of the Notes to the Financial Statements for more information regarding pension and OPEB costs and assumptions. Pension Plans Effect of Actual Results . The year-end 2022 weighted average discount rate was 5.51% for U.S. plans and 4.42% for non-U.S. plans, reflecting increases of 260 and 267 basis points, respectively, compared with year-end 2021. In 2022, the U.S. actual return on assets was negative 21.20%, which was lower than the expected long-term rate of return of 5.75%. Non-U.S. actual return on assets was negative 25.40%, which was lower than the expected long-term rate of return of 3.29%. The lower returns are explained by losses on fixed income and growth assets, both of which were consistent with broader market performance. In total, higher rates and pension asset losses, in addition to demographic and other updates, resulted in a net remeasurement loss of $1.3 billion, which has been recognized within net periodic benefit cost and reported as a special item. For 2023, the expected long-term rate of return on assets is 6.25% for U.S. plans, up 50 basis points from 2022, and 4.13% for non-U.S. plans, up 84 basis points compared with a year ago, reflecting higher nominal risk-free rates and a higher consensus on capital market return expectations from advisors. De-risking Strategy . We employ a broad de-risking strategy for our global funded plans that increases the matching characteristics of our assets relative to our obligation as funded status improves. Changes in interest rates, which directly influence changes in discount rates, in addition to other factors have a significant impact on the value of our pension obligation and fixed income asset portfolio. Our de-risking strategy has increased the allocation to fixed income investments and reduced our funded status sensitivity to changes in interest rates. Changes in interest rates should result in offsetting effects in the value of our pension obligation and the value of the fixed income asset portfolio. 85 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Sensitivity Analysis. The December 31, 2022 pension funded status and 2023 expense are affected by year-end 2022 assumptions. Sensitivities to these assumptions may be asymmetric and are specific to the time periods noted. The effects of changes in the factors that generally have the largest impact on year-end funded status and pension expense are discussed below. Discount rates and interest rates have the largest impact on our obligations and fixed income assets. The table below estimates the effect on our funded status of an increase/decrease in discount rates and interest rates (in millions): Basis Point Change Increase/(Decrease) in December 31, 2022 Funded Status Factor U.S. Plans Non-U.S. Plans Discount rate - obligation +/- 100 bps $2,700/$(3,200) $2,500/$(3,100) Interest rate - fixed income assets +/- 100 (2,600)/3,100 (1,700)/2,000 Net impact on funded status $100/$(100) $800/$(1,100) The fixed income asset sensitivity shown excludes other fixed income return components (e.g., changes in credit spreads, bond coupon and active management excess returns), and growth asset returns. Other factors that affect net funded status (e.g., contributions) are not reflected. Interest rates and the expected long-term rate of return on assets have the largest effect on pension expense. These assumptions are generally set at each year-end for expense recorded throughout the following year. The table below estimates the effect on pension expense of a higher/lower assumption for these factors (in millions): Basis Point Change Increase/(Decrease) in 2023 Pension Expense Factor U.S. Plans Non-U.S. Plans Interest rate - service cost and interest cost +/- 25 bps $25/$(25) $10/$(10) Expected long-term rate of return on assets +/- 25 (80)/80 (50)/50 The effect of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities. The sensitivity of pension expense to a change in discount rate assumptions may not be linear. Other Postretirement Employee Benefits Effect of Actual Results . The weighted average discount rate used to determine the benefit obligation for worldwide OPEB plans at December 31, 2022 was 5.48%, compared with 2.97% at December 31, 2021, resulting in a worldwide net remeasurement gain of $1.3 billion, which has been recognized within net periodic benefit cost and reported as a special item. Sensitivity Analysis. Discount rates and interest rates have the largest effect on our OPEB obligation and expense. The table below estimates the effect on 2023 OPEB expense of higher/lower assumptions for these factors (in millions): Worldwide OPEB Basis Point Change (Increase)/Decrease 2022 YE Obligation Increase/(Decrease) 2023 Expense Factor Discount rate - obligation +/- 100 bps $415/$(495) N/A Interest rate - service cost and interest cost +/- 25 N/A $5/$(5) Income Taxes Nature of Estimates Required. We must make estimates and apply judgment in determining the provision for income taxes for financial reporting purposes. We make these estimates and judgments primarily in the following areas: (i) the calculation of tax credits, (ii) the calculation of differences in the timing of recognition of revenue and expense for tax reporting and financial statement purposes, as well as (iii) the calculation of interest and penalties related to uncertain tax positions. Changes in these estimates and judgments may result in a material increase or decrease to our tax provision, which would be recorded in the period in which the change occurs. 86 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) Assumptions and Approach Used. We are subject to the income tax laws and regulations of the many jurisdictions in which we operate. These tax laws and regulations are complex and involve uncertainties in the application to our facts and circumstances that may be open to interpretation. We recognize benefits for these uncertain tax positions based upon a process that requires judgment regarding the technical application of the laws, regulations, and various related judicial opinions. If, in our judgment, it is more likely than not (defined as a likelihood of more than 50%) that the uncertain tax position will be settled favorably for us, we estimate an amount that ultimately will be realized. This process is inherently subjective since it requires our assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis, including consideration of changes in facts and circumstances, such as new regulations or recent judicial opinions, as well as the status of audit activities by taxing authorities. Changes to our estimate of the amount to be realized are recorded in our provision for income taxes during the period in which the change occurred. We must also assess the likelihood that we will be able to recover our deferred tax assets against future sources of taxable income and reduce the carrying amount of deferred tax assets by recording a valuation allowance if, based on all available evidence, it is more likely than not that all or a portion of such assets will not be realized. This assessment, which is completed on a taxing jurisdiction basis, takes into account various types of evidence, including the following: • Nature, frequency, and severity of current and cumulative financial reporting losses. A pattern of objectively measured recent financial reporting losses is heavily weighted as a source of negative evidence. We generally consider cumulative pre-tax losses in the three-year period ending with the current quarter to be significant negative evidence regarding future profitability. We also consider the strength and trend of earnings, as well as other relevant factors. In certain circumstances, historical information may not be as relevant due to changes in our business operations; • Sources of future taxable income. Future reversals of existing temporary differences are heavily weighted sources of objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years, particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has not yet been achieved. In such cases, we generally give these projections of future taxable income no weight for the purposes of our valuation allowance assessment; and • Tax planning strategies. If necessary and available, tax planning strategies could be implemented to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavily weighted. In assessing the realizability of deferred tax assets, we consider the trade-offs between cash preservation and cash outlays to preserve tax credits. During 2022, we reversed $405 million of U.S. valuation allowances primarily as a result of planning actions. We presently believe that global valuation allowances of $822 million are required and that we ultimately will recover the remaining $14 billion of deferred tax assets. However, the ultimate realization of our deferred tax assets is subject to a number of variables, including our future profitability within relevant tax jurisdictions, and future tax planning and the related effects on our cash and liquidity position. Accordingly, our valuation allowances may increase or decrease in future periods. For additional information regarding income taxes, see Note 7 of the Notes to the Financial Statements. 87