Item 1. Financial Statements
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16. EMPLOYEE SEPARATION ACTIONS AND EXIT AND DISPOSAL ACTIVITIES (Continued)
Ford Credit
Accumulated foreign currency translation losses included in Accumulated other comprehensive income/(loss) at June 30, 2023 of $ 223 million are associated with Ford Credit’s investments in Brazil and Argentina that have ceased operations. We expect to reclassify these losses to income upon substantially complete liquidation of Ford Credit’s investments, which may occur over multiple reporting periods. In the second quarter and first half of 2022, we reclassified losses of $ 36 million and $ 155 million, respectively, to Other income/(loss), net , upon the liquidation of three investments in Brazil. Although the timing for the completion of the remaining actions is uncertain, we expect the majority of losses to be recognized in 2024 or later.
NOTE 17. ACQUISITIONS AND DIVESTITURES
Company Excluding Ford Credit
Argo AI, LLC (“Argo AI”). In October 2022, Ford and Volkswagen AG (“VW”), who held equal interests that together comprised a majority ownership of Argo AI, initiated the process of exiting the joint development of highly automated driving technology (L4) through Argo AI. At December 31, 2022, the carrying value of our equity method investment in Argo AI was $ 0 , and we had $ 65 million in Other liabilities and deferred revenue related to our funding commitment for our share of Argo AI’s expenses previously incurred. Argo AI is in the process of winding down operations, and in the second quarter of 2023, we settled our expected funding commitment.
Sanand, India (“Sanand”) Plants. In the third quarter of 2022, we entered into an agreement to sell our Sanand vehicle assembly and powertrain plants to Tata Passenger Electric Mobility Limited (“Tata”), a subsidiary of Tata Motors Limited. The sale transaction included the land, buildings, and other fixed assets (excluding the powertrain machinery and equipment) for the plants. We recognized, in Cost of sales , pre-tax impairment charges of $ 32 million in the third quarter of 2022 to adjust the carrying value of the assets to fair value less costs to sell. We determined fair value using the market approach, based on the negotiated value of the assets. Accordingly, we reported $ 88 million of fixed assets for this operation as held for sale for the period ended December 31, 2022, which we report in Other assets in the current assets section of our consolidated balance sheets.
On January 10, 2023, we completed the sale of the plants to Tata. Ford will continue to operate the powertrain facility by leasing back the associated land and building. As a result of the sale transaction, we derecognized the fixed assets and recognized the powertrain facility operating lease right-of-use asset and related lease liability in the first quarter of 2023. The fair value of the cash consideration received approximated the carrying value of the fixed assets at the time of sale.
Ford Romania S.R.L. (“Ford Romania”). On July 1, 2022, we completed the sale of Ford Romania, our wholly-owned Romanian manufacturing subsidiary, to Ford Otosan, a joint venture in which Ford has a 41 % ownership share. The transaction resulted in deconsolidation of our Ford Romania subsidiary in the third quarter of 2022. The fair value of consideration received, consisting of cash and a note receivable, approximated the carrying value of Ford Romania at the time of sale. The Ford Romania plant in Craiova, Romania will continue to manufacture Ford-branded vehicles for Ford and Ford Otosan. Ford’s portion of the output is expected to be significant; as a result, at the time of the sale there were about $ 100 million of assets, such as embedded leases, and related liabilities that continue to be reported as part of our financial statements.
Skinny Labs Inc., dba Spin (“Spin”). On April 1, 2022, we completed the sale of Spin, our wholly-owned micro-mobility provider, to TIER Mobility SE, a German-based micro-mobility provider, which resulted in the deconsolidation of our Spin subsidiary in the second quarter of 2022. In exchange for our shares of Spin, we received preferred equity in TIER Mobility SE.
24
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The changes in the balances for each component of accumulated other comprehensive income/(loss) attributable to Ford Motor Company for the periods ended June 30 were as follows (in millions):
Second Quarter First Half
2022 2023 2022 2023
Foreign currency translation
Beginning balance $ ( 5,341 ) $ ( 5,923 ) $ ( 5,487 ) $ ( 6,416 )
Gains/(Losses) on foreign currency translation ( 996 ) 276 ( 1,067 ) 761
Less: Tax/(Tax benefit) (a) 65 — ( 31 ) ( 10 )
Net gains/(losses) on foreign currency translation ( 1,061 ) 276 ( 1,036 ) 771
(Gains)/Losses reclassified from AOCI to net income (b) 47 ( 2 ) 168 ( 4 )
Other comprehensive income/(loss), net of tax (c) ( 1,014 ) 274 ( 868 ) 767
Ending balance $ ( 6,355 ) $ ( 5,649 ) $ ( 6,355 ) $ ( 5,649 )
Marketable securities
Beginning balance $ ( 272 ) $ ( 332 ) $ ( 19 ) $ ( 442 )
Gains/(Losses) on available for sale securities ( 118 ) ( 67 ) ( 448 ) 68
Less: Tax/(Tax benefit) ( 29 ) ( 16 ) ( 106 ) 17
Net gains/(losses) on available for sale securities ( 89 ) ( 51 ) ( 342 ) 51
(Gains)/Losses reclassified from AOCI to net income 8 9 8 20
Less: Tax/(Tax benefit) 2 2 2 5
Net (gains)/losses reclassified from AOCI to net income
6 7 6 15
Other comprehensive income/(loss), net of tax ( 83 ) ( 44 ) ( 336 ) 66
Ending balance $ ( 355 ) $ ( 376 ) $ ( 355 ) $ ( 376 )
Derivative instruments
Beginning balance $ ( 49 ) $ 74 $ ( 193 ) $ 129
Gains/(Losses) on derivative instruments ( 126 ) ( 436 ) 30 ( 491 )
Less: Tax/(Tax benefit) ( 30 ) ( 113 ) 7 ( 127 )
Net gains/(losses) on derivative instruments ( 96 ) ( 323 ) 23 ( 364 )
(Gains)/Losses reclassified from AOCI to net income 6 ( 49 ) 38 ( 66 )
Less: Tax/(Tax benefit) 4 ( 3 ) 11 ( 6 )
Net (gains)/losses reclassified from AOCI to net income (d) 2 ( 46 ) 27 ( 60 )
Other comprehensive income/(loss), net of tax ( 94 ) ( 369 ) 50 ( 424 )
Ending balance $ ( 143 ) $ ( 295 ) $ ( 143 ) $ ( 295 )
Pension and other postretirement benefits
Beginning balance $ ( 2,632 ) $ ( 2,607 ) $ ( 2,640 ) $ ( 2,610 )
Amortization and recognition of prior service costs/(credits)
6 6 12 12
Less: Tax/(Tax benefit) 2 2 3 3
Net prior service costs/(credits) reclassified from AOCI to net income
4 4 9 9
Translation impact on non-U.S. plans
8 ( 1 ) 11 ( 3 )
Other comprehensive income/(loss), net of tax 12 3 20 6
Ending balance $ ( 2,620 ) $ ( 2,604 ) $ ( 2,620 ) $ ( 2,604 )
Total AOCI ending balance at June 30 $ ( 9,473 ) $ ( 8,924 ) $ ( 9,473 ) $ ( 8,924 )
__________
(a) We do not recognize deferred taxes for a majority of the foreign currency translation gains and losses because we do not anticipate reversal in the foreseeable future. However, we have made elections to tax certain non-U.S. operations simultaneously in U.S. tax returns, and have recorded deferred taxes for temporary differences that will reverse, independent of repatriation plans, in U.S. tax returns. Taxes or tax benefits resulting from foreign currency translation of the temporary differences are recorded in Other comprehensive income/(loss), net of tax .
(b) Reclassified to Other income/(loss), net.
(c) Excludes a $ 4 million loss and a $ 4 million gain in 2022 and 2023, respectively.
(d) Reclassified to Cost of sales . During the next twelve months, we expect to reclassify existing net losses on cash flow hedges of $ 139 million (see Note 15).
25
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. VARIABLE INTEREST ENTITIES
Certain of our affiliates are variable interest entities in which we are not the primary beneficiary. Our maximum exposure to any potential losses associated with these unconsolidated affiliates is limited to our equity investments, accounts receivable, loans, and guarantees and was $ 1.0 billion and $ 2.1 billion at December 31, 2022 and June 30, 2023, respectively. Of these amounts, guarantees of $ 113 million at both December 31, 2022 and June 30, 2023 related to certain obligations of our VIEs also are included in Note 20.
On July 13, 2022, Ford, SK On Co., Ltd., and SK Battery America, Inc. (a wholly owned subsidiary of SK On) completed the creation of BlueOval SK, LLC, a 50/ 50 joint venture that will build and operate electric vehicle battery plants in Tennessee and Kentucky to supply batteries to Ford and Ford affiliates. BlueOval SK is a variable interest entity of which we are not the primary beneficiary, and we use the equity method of accounting for our investment. As of June 30, 2023, Ford has contributed to BlueOval SK $ 1.6 billion of its agreed capital contribution of up to $ 6.6 billion through 2026, subject to any adjustments agreed to by the parties.
26
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies primarily consist of guarantees and indemnifications, litigation and claims, and warranty and field service actions.
Guarantees and Indemnifications
Financial Guarantees. Financial guarantees and indemnifications are recorded at fair value at their inception. Subsequent to initial recognition, the guarantee liability is adjusted at each reporting period to reflect the current estimate of expected payments resulting from possible default events over the remaining life of the guarantee. The maximum potential payments for financial guarantees were $ 518 million and $ 576 million at December 31, 2022 and June 30, 2023, respectively. The carrying value of recorded liabilities related to financial guarantees was $ 31 million and $ 47 million at December 31, 2022 and June 30, 2023, respectively.
Our financial guarantees consist of debt and lease obligations of certain joint ventures, as well as certain financial obligations of outside third parties, including suppliers, to support our business and economic growth. Expiration dates vary through 2037, and guarantees will terminate on payment and/or cancellation of the underlying obligation. A payment by us would be triggered by failure of the joint venture or other third party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from a third party amounts paid by us under the guarantee.
Non-Financial Guarantees. Non-financial guarantees and indemnifications are recorded at fair value at their inception. We regularly review our performance risk under these arrangements, and in the event it becomes probable we will be required to perform under a guarantee or indemnity, the amount of probable payment is recorded. The maximum potential payments for non-financial guarantees were $ 273 million and $ 77 million at December 31, 2022 and June 30, 2023, respectively. The carrying value of recorded liabilities related to non-financial guarantees was $ 0 at both December 31, 2022 and June 30, 2023.
Included in the $ 77 million of maximum potential payments at June 30, 2023 are guarantees for the resale value of vehicles sold in certain arrangements to daily rental companies. The maximum potential payment of $ 71 million as of June 30, 2023 represents the total proceeds we guarantee the rental company will receive on resale. Reflecting our present estimate of proceeds the rental companies will receive on resale from third parties, we do not expect we will have to pay under the guarantee.
In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction, such as the sale of a business. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax, and shareholder matters; intellectual property rights; power generation contracts; governmental regulations and employment-related matters; dealer, supplier, and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of contract claim brought by a counterparty, including a joint venture or alliance partner, or a third-party claim. While some of these indemnifications are limited in nature, many of them do not limit potential payment. Therefore, we are unable to estimate a maximum amount of future payments that could result from claims made under these unlimited indemnities.
27
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS AND CONTINGENCIES (Continued)
Litigation and Claims
Various legal actions, proceedings, and claims (generally, “matters”) are pending or may be instituted or asserted against us. These include, but are not limited to, matters arising out of alleged defects in our products; product warranties; governmental regulations relating to safety, emissions, and fuel economy or other matters; government incentives; tax matters, including trade and customs; alleged illegal acts resulting in fines or penalties; financial services; employment-related matters; dealer, supplier, and other contractual relationships; intellectual property rights; environmental matters; shareholder or investor matters; and financial reporting matters. Certain of the pending legal actions are, or purport to be, class actions. Some of the matters involve or may involve claims for compensatory, punitive, or antitrust or other treble damages in very large amounts, or demands for field service actions, environmental remediation programs, sanctions, loss of government incentives, assessments, or other relief, which, if granted, would require very large expenditures.
The extent of our financial exposure to these matters is difficult to estimate. Many matters do not specify a dollar amount for damages, and many others specify only a jurisdictional minimum. To the extent an amount is asserted, our historical experience suggests that in most instances the amount asserted is not a reliable indicator of the ultimate outcome.
We accrue for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood that we will prevail, and the severity of any potential loss. We reevaluate and update our accruals as matters progress over time.
For the majority of matters, which generally arise out of alleged defects in our products, we establish an accrual based on our extensive historical experience with similar matters. We do not believe there is a reasonably possible outcome materially in excess of our accrual for these matters.
For the remaining matters, where our historical experience with similar matters is of more limited value (i.e., “non-pattern matters”), we evaluate the matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of a material loss in excess of any accrual that can be estimated. Our estimate of reasonably possible loss in excess of our accruals for all material matters currently reflects indirect tax and customs matters, for which we estimate the aggregate risk to be a range of up to a bout $ 1.4 billion.
As noted, the litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. Our assessments are based on our knowledge and experience, but the ultimate outcome of any matter could require payment substantially in excess of the amount that we have accrued and/or disclosed.
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Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS AND CONTINGENCIES (Continued)
Warranty and Field Service Actions
We accrue the estimated cost of both base warranty coverages and field service actions at the time of sale. We establish our estimate of base warranty obligations using a patterned estimation model, using historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. We establish our estimates of field service action obligations using a patterned estimation model, using historical information regarding the nature, frequency, severity, and average cost of claims for each model year. In addition, from time to time, we issue extended warranties at our expense, the estimated cost of which is accrued at the time of issuance. Warranty and field service action obligations are reported in Other liabilities and deferred revenue . We reevaluate the adequacy of our accruals on a regular basis.
We recognize the benefit from a recovery of the costs associated with our warranty and field service actions when specifics of the recovery have been agreed with our supplier and the amount of recovery is virtually certain. Recoveries are reported in Trade and other receivables, net and Other assets.
The estimate of our future warranty and field service action costs, net of estimated supplier recoveries, for the periods ended June 30 was as follows (in millions):
First Half
2022 2023
Beginning balance $ 8,451 $ 9,193
Payments made during the period ( 2,006 ) ( 2,011 )
Changes in accrual related to warranties issued during the period 1,877 2,146
Changes in accrual related to pre-existing warranties 395 882
Foreign currency translation and other ( 120 ) ( 314 )
Ending balance $ 8,597 $ 9,896
Changes to our estimated costs are reported as changes in accrual related to pre-existing warranties in the table above. Our estimate of reasonably possible costs in excess of our accruals for material field service actions and customer satisfaction actions is a range of up to about $ 1 billion in the aggregate.
29
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 21. SEGMENT INFORMATION
We report segment information consistent with the way our chief operating decision maker (“CODM”) evaluates the operating results and performance of the Company.
On January 1, 2023, we implemented a new operating model and reporting structure. As a result of this change, we analyze the results of our business through the following segments: Ford Blue, Ford Model e, and Ford Pro (combined, replacing the previous Automotive segment), Ford Next (previously the Mobility segment), and Ford Credit. Company adjusted earnings before interest and taxes (“EBIT”) include the financial results of these five reportable segments and Corporate Other, and net income comprises the financial results of the five reportable segments and Corporate Other, as well as Interest on Debt, Special Items, and Taxes.
Additionally, past service pension and OPEB income and expense plus related assets, previously reported in the Automotive segment, have been realigned to Corporate Other.
Prior period amounts were adjusted retrospectively to reflect each of the above changes.
Below is a description of our reportable segments and other activities.
Ford Blue Segment
Ford Blue primarily includes the sale of Ford and Lincoln internal combustion engine (“ICE”) and hybrid vehicles, service parts, accessories, and digital services for retail customers, together with the associated costs of development, manufacture, and distribution of the vehicles, parts, accessories, and services. This segment focuses on developing Ford and Lincoln ICE and hybrid vehicles. Additionally, this segment provides hardware engineering and manufacturing capabilities to Ford Model e and manufactures vehicles on behalf of Ford Pro and, in certain cases, Ford Model e. Ford Blue also includes:
• All sales for markets not presently in scope for Ford Model e or Ford Pro (as further described below)
• In markets outside of the United States and Canada, sales to commercial, government, and rental customers of ICE and hybrid vehicles not considered core to Ford Pro
• Sales of electric vehicles (“EVs”) by our unconsolidated affiliates in China
• All sales of vehicles manufactured and sold to other OEMs
Ford Model e Segment
Ford Model e primarily includes the sale of our electric vehicles, service parts, accessories, and digital services for retail customers, together with the associated costs of development, manufacture, and distribution of the vehicles, parts, accessories, and services. This segment focuses on developing EV and digital vehicle technologies, as well as software development. Additionally, Ford Model e provides software and connected vehicle technologies on behalf of the enterprise, and manufactures certain EVs, including for Ford Pro. Ford Model e operates in North America, Europe, and China. Ford Model e also includes EV and related sales not considered core to Ford Pro to commercial, government, and rental customers in Europe, China, and Mexico.
30
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 21. SEGMENT INFORMATION (Continued)
Ford Pro Segment
Ford Pro primarily includes the sale of Ford and Lincoln vehicles, service parts, accessories, and services for commercial, government, and rental customers. Included in this segment are sales of all core Ford Pro vehicles, such as Super Duty and the Transit range of vans in North America and Europe and all sales of Ranger in Europe. In the United States and Canada, Ford Pro also includes all vehicle sales to commercial, government, and rental customers. This segment focuses on selling ICE, hybrid, and electric vehicles, and providing digital and physical services to optimize and maintain fleets, including telematics and EV charging solutions. This segment reflects external sales of vehicles produced by Ford Blue and Ford Model e, and the costs (including intersegment markup) associated with acquiring vehicles for sale and providing services are reflected in this segment. Ford Pro operates in North America and Europe.
Ford Next Segment
The Ford Next segment (formerly the Mobility segment) primarily includes expenses and investments for emerging business initiatives aimed at creating value for Ford in vehicle-adjacent market segments.
Ford Credit Segment
The Ford Credit segment is comprised of the Ford Credit business on a consolidated basis, which is primarily vehicle-related financing and leasing activities.
Corporate Other
Corporate Other primarily includes corporate governance expenses, past service pension and OPEB income and expense, interest income (excluding Ford Credit interest income and interest earned on our extended service contract portfolio) 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. Corporate Other assets include: cash, cash equivalents and marketable securities, tax related assets, defined benefit pension plan net assets, and other assets managed centrally.
Interest on Debt
Interest on Debt is presented as a separate reconciling item and consists of interest expense on Company debt excluding Ford Credit.
Special Items
Special Items are presented as a separate reconciling item. They consist of (i) pension and OPEB remeasurement gains and losses, (ii) gains and losses on investments in equity securities, (iii) significant personnel expenses, supplier- and dealer-related costs, and facility-related charges stemming from our efforts to match production capacity and cost structure to market demand and changing model mix, and (iv) other items that we do not necessarily consider to be indicative of earnings from ongoing operating activities. Our management ordinarily excludes these items from its review of the results of the operating segments for purposes of measuring segment profitability and allocating resources. We also report these special items separately to help investors track amounts related to these activities and to allow investors analyzing our results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results.
31
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 21. SEGMENT INFORMATION (Continued)
Segment Revenue, Cost, and Asset Principles for Ford Blue, Ford Model e, and Ford Pro
External vehicle and digital services revenue is generally vehicle-specific and included in the segment responsible for the external vehicle sale. A majority of parts and accessories revenue and cost is attributed to customer sales channels or vehicle lines based on recent end customer sales and is included in the respective segment.
In the normal course of business, Ford Blue, Ford Model e, and Ford Pro transact between segments and cooperate to leverage synergies, including developing and manufacturing vehicles on behalf of another segment. When one segment produces a vehicle that is sold externally by another segment, an intersegment transaction occurs. The producing segment will report intersegment revenue to recoup the costs associated with the unit produced. This includes material cost, labor and overhead (including depreciation and amortization), inbound freight, and an intersegment markup. The intersegment markup amount is set to deliver a competitive return to the producing segment for its manufacturing and distribution service. Costs are reflected in the associated segment externally reporting the vehicle sale, as detailed in the table below:
Income Statement Elements Examples Segment Reporting
Costs specific to a particular vehicle Bill of material cost and initial warranty accrual Reported in the segment externally selling the vehicle
Costs identifiable by product line Manufacturing and logistics costs, depreciation & amortization expense, direct research & development costs Typically identifiable to the product line or production location. Reported in the segment externally selling the vehicle, based on relative volume
Shared costs Selling, general & administrative expense, and indirect/cross product line research & development costs Typically shared across all segments, generally based on relative volume. Certain costs clearly linked to a segment are reported in the specific segment
Intersegment markup costs for intersegment vehicle transactions Contract manufacturing and distribution fees Reported in the segment externally selling the vehicle, for each applicable vehicle transaction
Assets are reported in each segment, aligned to the appropriate operational responsibility. Manufacturing assets, e.g., our plants and the machinery and equipment therein, are included in our Ford Blue and Ford Model e segments. Manufacturing assets producing only, or primarily, EVs and related components are reflected in Ford Model e. Manufacturing assets that support the production of ICE and hybrid vehicles, including those producing ICE and electric in the same facility, are included in Ford Blue. Vendor tooling dedicated to producing EV parts is reported in Ford Model e. There are no Ford manufacturing assets or vendor tooling reported in Ford Pro. Regardless of the segment reporting the asset, depreciation and amortization expense is reflected on the basis of production volume and reported in the segment that reports the external vehicle sale.
Equity in net income/(loss) of affiliated companies is included in Income/(Loss) before income taxes , based primarily on which segment the entity supports or has the majority of the entity’s purchases or sales. The table below shows the segment reporting for our most significant unconsolidated entities:
Ford Blue Ford Model e Ford Pro
∘ Changan Ford Automobile Corporation, Ltd. (“CAF”)
∘ BlueOval SK, LLC
∘ Ford Otomotiv Sanayi Anonim Sirketi (“Ford Otosan”)
∘ Jiangling Motors Corporation, Ltd. (“JMC”)
∘ AutoAlliance (Thailand) Co., Ltd. (“AAT”)
32
Item 1. Financial Statements (Continued)
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 21. SEGMENT INFORMATION (Continued)
Key financial information for the periods ended or at June 30 was as follows (in millions):
Ford Blue Ford Model e Ford Pro Ford Next Ford Credit Corporate
Other Interest
on Debt Special Items Eliminations/Adjustments Total
Second Quarter 2022
External revenues $ 23,834 $ 1,320 $ 12,748 $ 25 $ 2,256 $ 7 $ — $ — $ — $ 40,190
Intersegment revenues (a) 9,702 50 — — — — — — ( 9,752 ) —
Total revenues $ 33,536 $ 1,370 $ 12,748 $ 25 $ 2,256 $ 7 $ — $ — $ ( 9,752 ) $ 40,190
Income/(Loss) before income taxes $ 2,504 $ ( 510 ) $ 879 $ ( 221 ) $ 939 $ 131 $ ( 312 ) $ ( 2,619 ) (b) $ — $ 791
Equity in net income/(loss) of affiliated companies 76 ( 3 ) 84 ( 83 ) 4 — — ( 20 ) — 58
Total assets 56,047 3,670 2,016 3,284 127,493 54,566 — — ( 1,321 ) (c) 245,755
Second Quarter 2023
External revenues $ 25,002 $ 1,834 $ 15,589 $ — $ 2,527 $ 2 $ — $ — $ — $ 44,954
Intersegment revenues (a) 10,206 172 — — — — — — ( 10,378 ) —
Total revenues $ 35,208 $ 2,006 $ 15,589 $ — $ 2,527 $ 2 $ — $ — $ ( 10,378 ) $ 44,954
Income/(loss) before income taxes $ 2,308 $ ( 1,080 ) $ 2,391 $ ( 26 ) $ 390 $ ( 197 ) $ ( 304 ) $ ( 1,194 ) (d) $ — $ 2,288
Equity in net income/(loss) of affiliated companies 104 ( 3 ) 160 ( 6 ) 7 1 — ( 387 ) (e) — ( 124 )
Total assets 58,475 9,420 2,754 253 143,155 54,063 — — ( 2,129 ) (c) 265,991
Ford Blue Ford Model e Ford Pro Ford Next Ford Credit Corporate
Other Interest
on Debt Special Items Eliminations/Adjustments Total
First Half 2022
External revenues $ 44,644 $ 2,292 $ 23,072 $ 109 $ 4,537 $ 12 $ — $ — $ — $ 74,666
Intersegment revenues (a) 16,956 77 — — — — — — ( 17,033 ) —
Total revenues $ 61,600 $ 2,369 $ 23,072 $ 109 $ 4,537 $ 12 $ — $ — $ ( 17,033 ) $ 74,666
Income/(Loss) before income taxes $ 3,832 $ ( 890 ) $ 1,370 $ ( 463 ) $ 1,867 $ 332 $ ( 620 ) $ ( 8,485 ) (b) $ — $ ( 3,057 )
Equity in net income/(loss) of affiliated companies 132 ( 5 ) 169 ( 158 ) 10 1 — ( 124 ) (f) — 25
First Half 2023
External revenues $ 50,126 $ 2,541 $ 28,838 $ 1 $ 4,916 $ 6 $ — $ — $ — $ 86,428
Intersegment revenues (a) 19,383 181 — — — — — — ( 19,564 ) —
Total revenues $ 69,509 $ 2,722 $ 28,838 $ 1 $ 4,916 $ 6 $ — $ — $ ( 19,564 ) $ 86,428
Income/(loss) before income taxes $ 4,931 $ ( 1,802 ) $ 3,757 $ ( 70 ) $ 693 $ ( 344 ) $ ( 612 ) $ ( 2,106 ) (d) $ — $ 4,447
Equity in net income/(loss) of affiliated companies 159 ( 6 ) 277 ( 18 ) 14 1 — ( 421 ) (e) — 6
__________
(a) Intersegment revenues only reflect finished vehicle transactions between Ford Blue, Ford Model e, and Ford Pro where there is an intersegment markup and are recognized at the time of the intersegment transaction.
(b) Primarily reflects gains/(losses) on our Rivian investment.
(c) Primarily includes eliminations of intersegment transactions occurring in the ordinary course of business.
(d) Primarily reflects restructuring actions, mark-to-market adjustments for our global pension and OPEB plans, and an accrual for the Transit Connect customs matter (relating to certain Transit Connect vehicles produced between 2009 and 2013).
(e) Primarily reflects our share of charges from an equity method investment resulting from Ford’s ongoing restructuring actions in China.
(f) Primarily reflects the full impairment of our Ford Sollers Netherlands B.V. (the parent company of our joint venture in Russia) equity method investment, resulting from the ongoing regulatory and economic uncertainty in Russia.
33
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RECENT DEVELOPMENTS
On September 14, 2023, our collective bargaining agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) in the United States will expire, and on September 18, 2023, our collective bargaining agreement with Unifor in Canada will expire, which will require negotiation of new agreements. See Item 1A. Risk Factors in our 2022 Form 10-K Report and as updated by our subsequent filings with the SEC for a discussion of the risks related to production disruptions.
RESULTS OF OPERATIONS
In the second quarter of 2023, the net income attributable to Ford Motor Company was $1,917 million, and Company adjusted EBIT was $3,786 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 21 of the Notes to the Financial Statements. We report special items separately to allow investors analyzing our results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results. Our pre-tax and tax special items were as follows (in millions):
Second Quarter First Half
2022 2023 2022 2023
Restructuring (by Geography)
Europe $ (27) $ (51) $ (49) $ (421)
China (12) (446) (12) (755)
Ford Credit - Brazil (36) — (155) —
Other (68) (159) (104) (147)
Subtotal Restructuring $ (143) $ (656) $ (320) $ (1,323)
Pension and OPEB Gain/(Loss)
Pension and OPEB remeasurement $ (16) $ (89) $ (16) $ (202)
Pension settlements and curtailments — (59) — (105)
Subtotal Pension and OPEB Gain/(Loss) $ (16) $ (148) $ (16) $ (307)
Other Items
Gain/(loss) on Rivian investment
$ (2,447) $ (6) $ (7,896) $ (31)
Transit Connect customs matter — (300) — (300)
Russia suspension of operations/asset write-off 6 — (132) —
Patent matters related to prior calendar years
14 8 (121) 8
Other (including gains/(losses) on investments) (33) (92) — (153)
Subtotal Other Items $ (2,460) $ (390) $ (8,149) $ (476)
Total EBIT Special Items $ (2,619) $ (1,194) $ (8,485) $ (2,106)
Provision for/(Benefit from) tax special items (a) $ (537) $ (177) $ (1,729) $ (321)
__________
(a) Includes related tax effect on special items and tax special items.
We recorded $1.2 billion of pre-tax special item charges in the second quarter of 2023, driven primarily by restructuring actions in China and an accrual for the Transit Connect customs matter (relating to certain Transit Connect vehicles produced between 2009 and 2013).
In Note 21 of the Notes to the Financial Statements, special items are reflected as a separate reconciling item, as opposed to being allocated among our segments. This reflects the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
COMPANY KEY METRICS
The table below shows our second quarter 2023 key metrics for the Company, compared to a year ago.
Second Quarter First Half
2022 2023 H / (L) 2022 2023 H / (L)
GAAP Financial Measures
Cash Flows from Operating Activities ($B) $ 2.9 $ 5.0 $ 2.1 $ 1.9 $ 7.8 $ 6.0
Revenue ($M) 40,190 44,954 12 % 74,666 86,428 16 %
Net Income/(Loss) ($M) 667 1,917 $ 1,250 (2,443) 3,674 $ 6,117
Net Income/(Loss) Margin (%) 1.7 % 4.3 % 2.6 ppts (3.3) % 4.3 % 7.6 ppts
EPS (Diluted) $ 0.16 $ 0.47 $ 0.31 $ (0.61) $ 0.91 $ 1.52
Non-GAAP Financial Measures (a)
Company Adj. Free Cash Flow ($B) $ 3.6 $ 2.9 $ (0.7) $ 3.0 $ 3.6 $ 0.6
Company Adj. EBIT ($M) 3,722 3,786 64 6,048 7,165 1,117
Company Adj. EBIT Margin (%) 9.3 % 8.4 % (0.8) ppts 8.1 % 8.3 % 0.2 ppts
Adjusted EPS (Diluted) $ 0.68 $ 0.72 $ 0.04 $ 1.06 $ 1.34 $ 0.28
Adjusted ROIC (Trailing Four Quarters) 11.6 % 14.2 % 2.7 ppts
__________
(a) See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
In the second quarter of 2023, our diluted earnings per share of Common and Class B Stock was $0.47, and our diluted adjusted earnings per share was $0.72.
Net income/(loss) margin was 4.3% in the second quarter of 2023, up 2.6 percentage points from a year ago. Company adjusted EBIT margin was 8.4% in the second quarter of 2023, down 0.8 percentage points from a year ago.
The year-over-year increase of $1.3 billion in net income in the second quarter of 2023 was primarily driven by the non-recurrence of a mark-to-market loss on our Rivian investment (included in special items in the second quarter of 2022), offset partially by higher restructuring and pension expense in the second quarter of 2023 (also included in special items).
The year-over-year increase of $64 million in Company adjusted EBIT was driven by higher Ford Pro EBIT and a lower EBIT loss in Ford Next. Partial offsets include higher EBIT losses in Ford Model e, lower Ford Blue EBIT and Ford Credit EBT, and lower past service pension and OPEB income in Corporate Other.
The table below shows our second quarter and first half 2023 net income/(loss) attributable to Ford and Company adjusted EBIT by segment.
Second Quarter First Half
2022 2023 H / (L) 2022 2023 H / (L)
Ford Blue $ 2,504 $ 2,308 $ (196) $ 3,832 $ 4,931 $ 1,099
Ford Model e (510) (1,080) (570) (890) (1,802) (912)
Ford Pro 879 2,391 1,512 1,370 3,757 2,387
Ford Next (221) (26) 195 (463) (70) 393
Ford Credit 939 390 (549) 1,867 693 (1,174)
Corporate Other 131 (197) (328) 332 (344) (676)
Company Adjusted EBIT (a) 3,722 3,786 64 6,048 7,165 1,117
Interest on Debt (312) (304) (8) (620) (612) (8)
Special Items (2,619) (1,194) (1,425) (8,485) (2,106) (6,379)
Taxes / Noncontrolling Interests (124) (371) 247 614 (773) 1,387
Net Income/(Loss) $ 667 $ 1,917 $ 1,250 $ (2,443) $ 3,674 $ 6,117
__________
(a) See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The tables below and on the following pages provide second quarter and first half 2023 key metrics and the change in second quarter 2023 EBIT compared with second quarter 2022 by causal factor for each of our segments. For a description of these causal factors, see Definitions and Information Regarding Ford Blue, Ford Model e, Ford Pro Causal Factors.
Ford Blue Segment
Second Quarter First Half
Key Metrics 2022 2023 H / (L) 2022 2023 H / (L)
Wholesale Units (000) (a) 670 720 49 1,333 1,426 92
Revenue ($M) $ 23,834 $ 25,002 $ 1,168 $ 44,644 $ 50,126 $ 5,482
EBIT ($M) 2,504 2,308 (196) 3,832 4,931 1,099
EBIT Margin (%) 10.5 % 9.2 % (1.3) ppts 8.6 % 9.8 % 1.2 ppts
__________
(a) Includes Ford and Lincoln brand and JMC brand vehicles produced and sold in China by our unconsolidated affiliates (about 111,000 units in Q2 2022 and 107,000 units in Q2 2023).
Change in EBIT by Causal Factor (in millions)
Second Quarter 2022 EBIT $ 2,504
Volume / Mix 267
Net Pricing 133
Cost 28
Exchange (367)
Other (257)
Second Quarter 2023 EBIT $ 2,308
In the second quarter of 2023, Ford Blue’s wholesales increased 7% from a year ago driven by improvements in production-related supply constraints. Second quarter 2023 revenue increased 5%, driven by higher wholesales.
Ford Blue’s second quarter 2023 EBIT was $2.3 billion, a decrease of $196 million from a year ago, with an EBIT margin of 9.2%. The lower EBIT was driven by weaker currencies and the non-recurrence of an insurance claim recovery in the second quarter of 2022 (included in Other), offset partially by higher wholesales, higher net pricing, and improved cost, primarily driven by improved commodity costs.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Model e Segment
Second Quarter First Half
Key Metrics 2022 2023 H / (L) 2022 2023 H / (L)
Wholesale Units (000) 24 34 10 42 47 5
Revenue ($M) $ 1,320 $ 1,834 $ 514 $ 2,292 $ 2,541 $ 249
EBIT ($M) (510) (1,080) (570) (890) (1,802) (912)
EBIT Margin (%) (38.6) % (58.9) % (20.3) ppts (38.8) % (70.9) % (32.1) ppts
Change in EBIT by Causal Factor (in millions)
Second Quarter 2022 EBIT $ (510)
Volume / Mix 66
Net Pricing (177)
Cost (481)
Exchange 16
Other 6
Second Quarter 2023 EBIT $ (1,080)
In the second quarter of 2023, Ford Model e’s wholesales increased 44% from a year ago, reflecting increased production capacity for Mustang Mach-E and a full quarter of F-150 Lightning production, which launched in late April 2022. Second quarter 2023 revenue increased 39%, primarily driven by higher wholesales, offset partially by lower net pricing.
Ford Model e’s second quarter 2023 EBIT loss was $1.1 billion, a $570 million higher loss than a year ago, with an EBIT margin of negative 58.9%. The lower EBIT was primarily driven by lower net pricing, higher launch-related supplier costs, as well as higher warranty, engineering, spending-related, and selling, general & administrative costs.
Ford Pro Segment
Second Quarter First Half
Key Metrics 2022 2023 H / (L) 2022 2023 H / (L)
Wholesale Units (000) (a) 338 365 27 623 702 80
Revenue ($M) $ 12,748 $ 15,589 $ 2,841 $ 23,072 $ 28,838 $ 5,766
EBIT ($M) 879 2,391 1,512 1,370 3,757 2,387
EBIT Margin (%) 6.9 % 15.3 % 8.4 ppts 5.9 % 13.0 % 7.1 ppts
__________
(a) Includes Ford brand vehicles produced and sold by our unconsolidated affiliate Ford Otosan in Türkiye (about 17,000 units in Q2 2022 and 24,000 units in Q2 2023).
Change in EBIT by Causal Factor (in millions)
Second Quarter 2022 EBIT $ 879
Volume / Mix 110
Net Pricing 1,916
Cost (282)
Exchange (65)
Other (167)
Second Quarter 2023 EBIT $ 2,391
In the second quarter of 2023, Ford Pro’s wholesales increased 8% from a year ago driven by improvements in production-related supply constraints and new product launches. Second quarter 2023 revenue increased 22%, driven by higher net pricing and wholesales.
Ford Pro’s second quarter 2023 EBIT was $2.4 billion, an increase of $1.5 billion from a year ago, with an EBIT margin of 15.3%. The improvement in EBIT was driven by higher net pricing and wholesales, and lower commodity costs. Partial offsets included higher material cost for new products, higher warranty costs (primarily driven by inflationary cost pressures), and the non-recurrence of an insurance claim recovery in the second quarter of 2022 (included in Other).
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Definitions and Information Regarding Ford Blue, Ford Model e, Ford Pro Causal Factors
In general, we measure year-over-year change in Ford Blue, Ford Model e, and Ford Pro EBIT using the causal factors listed below, with net pricing and cost variances calculated at present-period volume and mix and exchange:
• Market Factors (exclude the impact of unconsolidated affiliate wholesale units):
◦ Volume and Mix – primarily measures EBIT variance from changes in wholesale unit volumes (at prior-year average contribution margin per unit) driven by changes in industry volume, market share, and dealer stocks, as well as the EBIT variance resulting from changes in product mix, including mix among vehicle lines and mix of trim levels and options within a vehicle line
◦ Net Pricing – primarily measures EBIT variance driven by changes in wholesale unit prices to dealers and marketing incentive programs such as rebate programs, low-rate financing offers, special lease offers, and stock adjustments on dealer inventory
• Cost:
◦ Contribution Costs – primarily measures EBIT variance driven by per-unit changes in cost categories that typically vary with volume, such as material costs (including commodity and component costs), warranty expense, and freight and duty costs
◦ Structural Costs – primarily measures EBIT variance driven by absolute change in cost categories that typically do not have a directly proportionate relationship to production volume. Structural costs include the following cost categories:
▪ Manufacturing, Including Volume-Related – consists primarily of costs for hourly and salaried manufacturing personnel, plant overhead (such as utilities and taxes), and new product launch expense. These costs could be affected by volume for operating pattern actions such as overtime, line-speed, and shift schedules
▪ Engineering 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 and capital project expense, 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
• 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. Excludes transactions between Ford Blue, Ford Model e, and Ford Pro segments
• Industry Volume and Market Share – based, in part, on estimated vehicle registrations; includes medium and heavy duty trucks
• SAAR – seasonally adjusted annual rate
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Next Segment
The Ford Next segment (formerly Mobility) primarily includes expenses and investments for emerging business initiatives aimed at creating value for Ford in vehicle-adjacent market segments.
In this segment, our second quarter 2023 EBIT loss was $26 million, a $195 million improvement from a year ago. Ford Next has evolved from primarily investing in the development of autonomous vehicle capabilities to focus exclusively on incubating and launching new businesses creating strategic value for Ford.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Credit Segment
Ford Credit files periodic reports with the SEC that contain additional information regarding Ford Credit. The reports are available through Ford Credit’s website located at www.fordcredit.com/investor-center and can also be found on the SEC’s website located at www.sec.gov . The foregoing information regarding Ford Credit’s website and its content is for convenience only and not deemed to be incorporated by reference into this Report nor filed with the SEC.
The tables below provide second quarter and first half 2023 key metrics and the change in second quarter 2023 EBT compared with second quarter 2022 by causal factor for the Ford Credit segment. For a description of these causal factors, see Definitions and Information Regarding Ford Credit Causal Factors.
Second Quarter First Half
Key Metrics 2022 2023 H / (L) 2022 2023 H / (L)
Total Net Receivables ($B) $ 116 $ 126 9 % $ 116 $ 126 9 %
Loss-to-Receivables (bps) (a) 5 21 16 7 28 21
Auction Values (b) $ 34,620 $ 31,830 (8) % $ 34,485 $ 31,445 (9) %
EBT ($M) 939 390 $ (549) 1,867 693 $ (1,174)
ROE (%) 26 % 9 % (17) ppts 24 % 9 % (15) ppts
Other Balance Sheet Metrics
Debt ($B) $ 110 $ 124 13 %
Net Liquidity ($B) 25 29 16 %
Financial Statement Leverage
(to 1) 9.1 9.9 0.8
__________
(a) U.S. retail financing only.
(b) U.S. 36-month off-lease second quarter auction values at Q2 2023 mix and YTD amounts at 2023 YTD mix.
Change in EBT by Causal Factor (in millions)
Second Quarter 2022 EBT $ 939
Volume / Mix 47
Financing Margin (196)
Credit Loss (96)
Lease Residual (112)
Exchange (1)
Other (191)
Second Quarter 2023 EBT $ 390
Ford Credit’s total net receivables of $126 billion were $10 billion higher than a year ago, reflecting the impact of increased non-consumer financing and consumer financing, partially offset by fewer operating leases. The U.S. loss-to-receivables (“LTR”) ratio remained at a low level in the second quarter of 2023, at 21 basis points, though higher than a year ago as losses begin to normalize from historic lows. U.S. auction values in the second quarter of 2023 were lower compared to a year ago.
Ford Credit’s second quarter 2023 EBT of $390 million was $549 million lower than a year ago, explained primarily by lower financing margin due to higher borrowing costs, the non-recurrence of prior year credit loss reserve releases and higher credit losses, unfavorable lease residual performance, and unfavorable market valuation adjustments to derivatives (included in Other).
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Definitions and Information Regarding Ford Credit Causal Factors
In general, we measure year-over-year changes in Ford Credit’s EBT using the causal factors listed below:
• Volume and Mix:
◦ Volume primarily measures changes in net financing margin driven by changes in average 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
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
In addition, the following definitions and calculations apply to Ford Credit when used in this Report:
• Cash (as shown in the Funding Structure 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
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Corporate Other
Corporate Other primarily includes corporate governance expenses, past service pension and OPEB income and expense, interest income (excluding Ford Credit interest income and interest earned on our extended service contract portfolio) 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. In the second quarter of 2023, Corporate Other had a $197 million loss, compared with a $131 million profit a year ago. The loss was driven by lower past service pension and OPEB income, which was partially offset by higher Company excluding Ford Credit interest income due to increases in interest rates (primarily Fed Funds).
Interest on Debt
Interest on Debt, which consists of interest expense on Company debt excluding Ford Credit, was $304 million in the second quarter of 2023, $8 million lower than a year ago.
Taxes
Our Provision for/(Benefit from) income taxes for the second quarter and first half of 2023 was a provision of $272 million and $768 million, respectively. This resulted in effective tax rates of 11.9% and 17.3%, respectively.
Our second quarter and first half of 2023 adjusted effective tax rates, which exclude special items, were 12.9% and 16.6%, respectively.
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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2023, total balance sheet cash, cash equivalents, marketable securities, and restricted cash, including Ford Credit and entities held for sale, was $43.0 billion.
We consider our key balance sheet metrics to be: (i) Company cash, which includes cash equivalents, marketable securities, and restricted cash, including cash held for sale, excluding Ford Credit’s cash, cash equivalents, marketable securities, and restricted cash; and (ii) Company liquidity, which includes Company cash, less restricted cash, and total available committed credit lines, excluding Ford Credit’s total available committed credit lines.
Company excluding Ford Credit
December 31,
2022 June 30,
2023
Balance Sheets ($B)
Company Cash $ 32.3 $ 29.8
Liquidity 48.0 47.3
Debt (19.9) (19.6)
Cash Net of Debt 12.3 10.3
Pension Funded Status ($B) (a)
Funded Plans $ 4.1 $ 4.0
Unfunded Plans (4.3) (4.2)
Total Global Pension $ (0.2) $ (0.2)
Total Funded Status OPEB $ (4.5) $ (4.4)
__________
(a) Balances at June 30, 2023 reflect net funded status at December 31, 2022, updated for service and interest cost; expected return on assets; curtailments, settlements, and associated interim remeasurement (where applicable); separation expense; actual benefit payments; and cash contributions. The discount rate and rate of expected return assumptions are unchanged from year-end 2022.
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 June 30, 2023, we had Company cash of $29.8 billion and liquidity of $47.3 billion. At June 30, 2023, about 90% 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 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.
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Item 2. 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” in the “Liquidity and Capital Resources - Company Excluding Ford Credit” section in Item 7 of our 2022 Form 10-K Report)
• Marketing incentive payments to dealers
• Payments for warranty and field service actions (for additional information, see Note 20 of the Notes to the Financial Statements herein)
• Debt repayments (for additional information, see the Aggregate Contractual Obligations table in the “Liquidity and Capital Resources - Company Excluding Ford Credit” section in Item 7 and Note 19 of the Notes the Financial Statements in our 2022 Form 10-K Report)
• Discretionary and mandatory payments to our global pension plans (for additional information, see the Aggregate Contractual Obligations table in the “Liquidity and Capital Resources - Company Excluding Ford Credit” section in Item 7 of our 2022 Form 10-K Report, the “Changes in Company Cash” section below, and Note 13 of the Notes to the Financial Statements herein)
• Employee wages, benefits, and incentives
• Operating lease payments (for additional information, see the Aggregate Contractual Obligations table in the “Liquidity and Capital Resources - Company Excluding Ford Credit” section in Item 7 and Note 18 of the Notes to the Financial Statements in our 2022 Form 10-K Report)
• Cash effects related to the restructuring of our business
• 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 plan to utilize our liquidity (as described above) and our cash flows from business operations to fund our material cash requirements.
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