Item 7. Management’s Discussion and Analysis
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’s long-term success depends on delivering the Ford+ plan, including improving cost competitiveness;
• Ford’s products have been and could continue to be affected by defects that result in recall campaigns, increased warranty costs, or delays in new model launches, and the time it takes to improve the quality of our products and services and reduce the costs associated therewith could continue to have an adverse effect on our business;
• 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 timely acquire key components or raw materials has previously disrupted and may, in the future, disrupt Ford’s operations;
• 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, public health issues, natural or man-made disasters, adverse effects of climate change, financial distress, production difficulties, capacity limitations, or other factors;
• Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, commercial relationships, or business strategies or the benefits may take longer than expected to materialize;
• Ford may not realize the anticipated benefits of restructuring actions and such actions may cause Ford to incur significant charges, disrupt our operations, or harm our reputation;
• Failure to develop and deploy secure digital services that appeal to customers, retain existing subscribers, and grow our subscription rates could have a negative impact on Ford’s business;
• Ford’s ability to maintain a competitive cost structure could be affected by labor or other constraints;
• Ford’s ability to attract, develop, grow, support, and reward talent is critical to its success and competitiveness;
• Operational information systems, security systems, products, and services could be affected by cybersecurity incidents, ransomware attacks, and other disruptions and impact Ford, Ford Credit, their suppliers, and dealers;
• To facilitate access to the raw materials and other components necessary for the manufacture of electrified products, Ford has entered into and may, in the future, enter into multi-year commitments to raw material and other suppliers that subject Ford to risks associated with lower future demand for such items as well as costs that fluctuate and are difficult to accurately forecast;
• With a global footprint and supply chain, Ford’s results and operations have been and could continue to be adversely affected by economic or geopolitical developments, including protectionist trade policies such as tariffs, or other events;
• 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 Ford’s reputation may be harmed based on positions it takes or if it is unable to achieve the initiatives it has announced;
• Ford may face increased price competition for its products and services, including pricing pressure resulting from industry excess capacity, currency fluctuations, competitive actions, legal and policy changes, or economic or other factors, particularly for electrified vehicles;
• 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’s results are dependent on sales of larger, more profitable vehicles, particularly in the United States;
• Industry sales volume can be volatile and could decline if there is a financial crisis, recession, public health emergency, or significant geopolitical event;
• The impact of government incentives on Ford’s business has been and could continue to be significant, and Ford’s receipt of government incentives could be subject to reduction, termination, or clawback;
• 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, asset portfolios, or other factors;
• Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles;
• 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 have experienced and could continue to 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 respond to shifting consumer sentiment and competitive dynamics as a result of policy changes affecting, or otherwise to comply with, safety, emissions, fuel economy, autonomous driving technology, environmental, and other regulations;
75
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
• Ford and Ford Credit could be affected by the continued development of more stringent privacy, data use, data protection, data access, and artificial intelligence 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.
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, and expressly disclaim to the extent permitted by law, 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.
76
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 (excluding 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 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
∘ 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 ∘ Generally $100 million or more
∘ Other items that we do not generally 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
• 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.
• 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.
• 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, restructuring actions, 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.
77
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
• 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 (excluding Ford Credit Debt), and certain pension/OPEB costs. Average invested capital is the sum of average balance sheet equity, debt (excluding Ford Credit Debt), and net pension/OPEB liability.
When we provide guidance for adjusted EBIT, adjusted earnings/(loss) per share, and adjusted effective tax rate, we do not provide guidance for their respective most comparable GAAP measures as those GAAP measures will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end, including gains and losses on pension and OPEB remeasurement, and other items that are difficult to quantify. When we provide guidance for Company adjusted free cash flow, we do not provide guidance for its most comparable GAAP measure (net cash provided by/(used in) operating activities) as 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.
78
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)
2023 2024 2025
Net income/(loss) attributable to Ford (GAAP) $ 4,347 $ 5,879 $ (8,182)
Income/(Loss) attributable to noncontrolling interests (18) 15 20
Net income/(loss) $ 4,329 $ 5,894 $ (8,162)
Less: (Provision for)/Benefit from income taxes 362 (1,339) 3,668
Income/(Loss) before income taxes $ 3,967 $ 7,233 $ (11,830)
Less: Special items pre-tax (5,147) (1,860) (17,356)
Income/(Loss) before special items pre-tax $ 9,114 $ 9,093 $ 5,526
Less: Interest on debt (1,302) (1,115) (1,254)
Adjusted EBIT (Non-GAAP) $ 10,416 $ 10,208 $ 6,780
Memo:
Revenue ($B) $ 176.2 $ 185.0 $ 187.3
Net income/(loss) margin (%) 2.5 % 3.2 % (4.4) %
Adjusted EBIT margin (%) 5.9 % 5.5 % 3.6 %
Earnings/(Loss) per Share Reconciliation to Adjusted Earnings/(Loss) per Share
2023 2024 2025
Diluted After-Tax Results ($M)
Diluted after-tax results (GAAP) $ 4,347 $ 5,879 $ (8,182)
Less: Impact of pre-tax and tax special items (a) (3,786) (1,537) (12,581)
Adjusted net income/(loss) - diluted (Non-GAAP) $ 8,133 $ 7,416 $ 4,399
Basic and Diluted Shares (M)
Basic shares (average shares outstanding) 3,998 3,978 3,979
Net dilutive options, unvested restricted stock units, unvested restricted stock shares, and convertible debt 43 43 56
Diluted shares 4,041 4,021 4,035
Earnings/(Loss) per share - diluted (GAAP) (b) $ 1.08 $ 1.46 $ (2.06)
Less: Net impact of adjustments (0.93) (0.38) (3.15)
Adjusted earnings per share - diluted (Non-GAAP) $ 2.01 $ 1.84 $ 1.09
_________
(a) Includes adjustment for noncontrolling interest in 2023.
(b) In 2025, there were 56 million shares excluded from the GAAP calculation of diluted earnings/(loss) per share due to their anti-dilutive effect.
79
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Effective Tax Rate Reconciliation to Adjusted Effective Tax Rate
2023 2024 2025
Pre-Tax Results ($M)
Income/(Loss) before income taxes (GAAP) $ 3,967 $ 7,233 $ (11,830)
Less: Impact of special items (5,147) (1,860) (17,356)
Adjusted earnings before taxes (Non-GAAP) $ 9,114 $ 9,093 $ 5,526
Taxes ($M)
(Provision for)/Benefit from income taxes (GAAP) (a) $ 362 $ (1,339) $ 3,668
Less: Impact of special items 1,273 323 4,775
Adjusted (provision for)/benefit from income taxes (Non-GAAP) $ (911) $ (1,662) $ (1,107)
Tax Rate (%)
Effective tax rate (GAAP) (a) (9.1) % 18.5 % 31.0 %
Adjusted effective tax rate (Non-GAAP) 10.0 % 18.3 % 20.0 %
_________
(a) 2023 reflects benefits from U.S. research tax credits and legal entity restructuring within our leasing operations and China.
Net Cash Provided by/(Used in) Operating Activities Reconciliation to Company Adjusted Free Cash Flow ($M)
2023 2024 2025
Net cash provided by/(used in) operating activities (GAAP) $ 14,918 $ 15,423 $ 21,282
Less: Items not included in company adjusted free cash flows
Ford Credit operating cash flows $ 1,180 $ 3,600 $ 12,931
Funded pension contributions (592) (1,073) (720)
Restructuring (including separations) (a) (1,025) (799) (436)
Ford Credit tax payments/(refunds) under tax sharing agreement 169 (15) —
Other, net 240 (877) (996)
Add: Items included in company adjusted free cash flows
Company excluding Ford Credit capital spending $ (8,152) $ (8,590) $ (8,694)
Ford Credit distributions — 500 1,650
Settlement of derivatives 7 175 54
Company adjusted free cash flow (Non-GAAP) $ 6,801 $ 6,672 $ 3,513
__________
(a) Restructuring excludes cash flows reported in investing activities.
80
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
2025 SUPPLEMENTAL INFORMATION
The tables below provide supplemental consolidating financial information and other financial information. Company excluding Ford Credit includes our Ford Blue, Ford Model e, and Ford Pro reportable segments, Corporate Other, Interest on Debt, and Special Items. Eliminations, where presented, primarily represent eliminations of intersegment transactions and deferred tax netting.
Selected Income Statement Information. The following table provides supplemental income statement information (in millions):
For the Year Ended December 31, 2025
Company excluding Ford Credit Ford Credit Consolidated
Revenues $ 173,996 $ 13,271 $ 187,267
Total costs and expenses 185,315 11,121 196,436
Operating income/(loss) (11,319) 2,150 (9,169)
Interest expense on Company debt excluding Ford Credit 1,254 — 1,254
Other income/(loss), net 1,389 357 1,746
Equity in net income/(loss) of affiliated companies (3,203) 50 (3,153)
Income/(Loss) before income taxes (14,387) 2,557 (11,830)
Provision for/(Benefit from) income taxes (4,050) 382 (3,668)
Net income/(loss) (10,337) 2,175 (8,162)
Less: Income/(Loss) attributable to noncontrolling interests 20 — 20
Net income/(loss) attributable to Ford Motor Company $ (10,357) $ 2,175 $ (8,182)
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, 2025
Assets Company excluding
Ford Credit Ford Credit Eliminations Consolidated
Cash and cash equivalents $ 14,086 $ 9,270 $ — $ 23,356
Marketable securities 14,347 784 — 15,131
Ford Credit finance receivables, net — 49,130 — 49,130
Trade and other receivables, net 7,679 7,719 — 15,398
Inventories 15,285 — — 15,285
Other assets 3,888 1,299 — 5,187
Receivable from other segments 1,059 2,581 (3,640) —
Total current assets 56,344 70,783 (3,640) 123,487
Ford Credit finance receivables, net — 61,449 — 61,449
Net investment in operating leases 2,038 26,502 — 28,540
Net property 36,950 338 — 37,288
Equity in net assets of affiliated companies 2,628 125 — 2,753
Deferred income taxes 21,438 512 3 21,953
Other assets 11,536 2,154 — 13,690
Total assets $ 130,934 $ 161,863 $ (3,637) $ 289,160
Liabilities
Payables $ 24,845 $ 964 $ — $ 25,809
Other liabilities and deferred revenue 29,118 2,661 — 31,779
Company excluding Ford Credit debt payable within one year 5,550 — — 5,550
Ford Credit debt payable within one year — 51,752 — 51,752
Payable to other segments 3,640 — (3,640) —
Total current liabilities 63,153 55,377 (3,640) 114,890
Other liabilities and deferred revenue 29,545 1,357 — 30,902
Company excluding Ford Credit long-term debt 16,369 — — 16,369
Ford Credit long-term debt — 89,665 — 89,665
Deferred income taxes 691 660 3 1,354
Total liabilities $ 109,758 $ 147,059 $ (3,637) $ 253,180
82
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Selected Cash Flow Information. The following tables provide supplemental cash flow information (in millions):
For the Year Ended December 31, 2025
Cash flows from operating activities Company excluding Ford Credit Ford Credit Eliminations Consolidated
Net income/(loss) $ (10,337) $ 2,175 $ — $ (8,162)
Depreciation and tooling amortization 5,245 2,589 — 7,834
Other amortization 52 (1,891) — (1,839)
EV asset impairment/program cancellation asset write-downs (including depreciation of $8,140)
9,435 — — 9,435
Provision for credit and insurance losses 2 614 — 616
Pension and OPEB expense/(income) 1,062 — — 1,062
Equity method investment (earnings)/losses and impairments in excess of dividends received 3,563 9 — 3,572
Foreign currency adjustments 9 (96) — (87)
Net realized and unrealized (gains)/losses on cash equivalents, marketable securities, and other investments (317) (29) — (346)
Stock compensation 492 18 — 510
Provision for/(Benefit from) deferred income taxes (4,785) 249 — (4,536)
Decrease/(Increase) in finance receivables (wholesale and other) — 4,992 — 4,992
Decrease/(Increase) in intersegment receivables/payables 239 (239) — —
Decrease/(Increase) in accounts receivable and other assets (2,838) 47 — (2,791)
Decrease/(Increase) in inventory 539 — — 539
Increase/(Decrease) in accounts payable and accrued and other liabilities
9,707 396 — 10,103
Other 294 86 — 380
Interest supplements and residual value support to Ford Credit
(4,011) 4,011 — —
Net cash provided by/(used in) operating activities $ 8,351 $ 12,931 $ — $ 21,282
Cash flows from investing activities
Capital spending $ (8,694) $ (121) $ — $ (8,815)
Acquisitions of finance receivables and operating leases — (55,747) — (55,747)
Collections of finance receivables and operating leases — 45,710 — 45,710
Purchases of marketable securities and other investments (9,050) (407) — (9,457)
Sales and maturities of marketable securities and other investments 9,703 360 — 10,063
Settlements of derivatives 54 (497) — (443)
Capital contributions to equity method investments (1,172) — — (1,172)
Returns of capital from equity method investments 1,702 — — 1,702
Other 108 2 — 110
Investing activity (to)/from other segments 1,650 — (1,650) —
Net cash provided by/(used in) investing activities $ (5,699) $ (10,700) $ (1,650) $ (18,049)
Cash flows from financing activities
Cash payments for dividends and dividend equivalents $ (2,989) $ — $ — $ (2,989)
Purchases of common stock — — — —
Net changes in short-term debt 610 44 — 654
Proceeds from issuance of long-term debt 1,372 48,316 — 49,688
Payments on long-term debt (1,195) (49,108) — (50,303)
Other (158) (97) — (255)
Financing activity to/(from) other segments — (1,650) 1,650 —
Net cash provided by/(used in) financing activities $ (2,360) $ (2,495) $ 1,650 $ (3,205)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash $ 251 $ 281 $ — $ 532
83
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Selected Other Information.
Equity. At December 31, 2024, total equity attributable to Ford was $44.8 billion, an increase of $2.1 billion compared with December 31, 2023. At December 31, 2025, total equity attributable to Ford was $36.0 billion, a decrease of $8.9 billion compared with December 31, 2024. The detail for the changes is shown below (in billions):
2024 vs 2023
Increase/(Decrease)
2025 vs 2024
Increase/(Decrease)
Net income/(loss) $ 5.9 $ (8.2)
Shareholder distributions (a) (3.6) (3.0)
Other comprehensive income/(loss) (0.6) 1.9
Common stock issued (including share-based compensation impacts) 0.4 0.4
Total $ 2.1 $ (8.9)
________
(a) Includes cash dividends, dividend equivalents, and anti-dilutive share repurchases.
84
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. Software updates are increasingly a component of vehicle service and may be performed during warranty coverage repairs, through field service actions, or through over-the-air updates. 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 quarterly 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.
We disclose our estimate of reasonably possible costs in excess of our accruals for material field service actions and customer satisfaction actions. The estimate we provide is presented on a gross cost basis, and we do not reduce or net our estimate to eliminate any unrealized profit Ford may earn associated with part sales to dealers.
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 24 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 utilize the calculated present value of the projected future payments to all participants, taking into consideration valuation assumptions specific to each plan. 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).
85
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, 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.
• 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.
• 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).
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 16 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 2025 weighted average discount rate was 5.34% for U.S. plans and 4.80% for non-U.S. plans, reflecting a decrease of 31 basis points and an increase of 29 basis points, respectively, compared with year-end 2024. Lower discount rates increased the valuations of U.S. plans, while higher discount rates decreased the valuations of non-U.S. plans. In 2025, the U.S. actual return on assets was 9.37%, which was higher than the expected long-term rate of return of 6.37%. Non-U.S. actual return on assets was 0.30%, which was lower than the expected long-term rate of return of 5.23%. The combination of lower discount rates and higher asset returns for our U.S. plans and higher discount rates and lower asset returns for our non-U.S. plans had offsetting effects and minimal impact to our net remeasurement. In 2025, we recorded a remeasurement loss of $616 million. For U.S. plans, the remeasurement loss was primarily from actuarial losses compared to plan assumptions. For non-U.S. plans, the remeasurement loss was from changes in key measurement assumptions, primarily improved life expectancy. This loss has been recognized within net periodic benefit cost and reported as a special item.
For 2026, the expected long-term rate of return on assets is 6.20% for U.S. plans, down 17 basis points from 2025, and 5.15% for non-U.S. plans, down 8 basis points compared with a year ago, reflecting lower expected capital market return assumptions.
86
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
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. Additionally, we aim to:
• Limit our pension contributions to offset ongoing service cost, ensure our funded plans remain fully funded in aggregate, and to meet regulatory requirements, if any;
• Ensure sufficient liquid assets to pay plan benefits; and
• Evaluate strategic actions to reduce pension liabilities, such as plan design changes or pension risk transfers to insurers
The fixed income mix was 79% in our U.S. plans and 86% in our non-U.S. plans at year-end 2025.
Sensitivity Analysis. The December 31, 2025 pension funded status and 2026 expense are affected by year-end 2025 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, 2025 Funded Status
Factor U.S. Plans Non-U.S. Plans
Discount rate - obligation +/- 100 bps $2,500/$(2,900) $1,700/$(2,100)
Interest rate - fixed income assets +/- 100 (2,400)/2,800 (1,400)/1,700
Net impact on funded status $100/$(100) $300/$(400)
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
2026 Pension Expense
Factor U.S. Plans Non-U.S. Plans
Interest rate - service cost and interest cost +/- 25 bps $30/$(30) $10/$(10)
Expected long-term rate of return on assets +/- 25 (70)/70 (60)/60
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, 2025 was 5.27%, compared with 5.46% at December 31, 2024, resulting in a minimal impact to our worldwide remeasurement. The $19 million gain has been recognized within net periodic benefit cost and reported as a special item.
87
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Sensitivity Analysis. Discount rates and interest rates have the largest effect on our OPEB obligation and expense. The table below estimates the effect on 2026 OPEB expense of higher/lower assumptions for these factors (in millions):
Worldwide OPEB
Basis
Point Change (Increase)/Decrease
2025 YE Obligation Increase/(Decrease)
2026 Expense
Factor
Discount rate - obligation +/- 100 bps $385/$(460) 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, and (iii) the calculation of interest and penalties related to uncertain tax positions.
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 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.
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.
88
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
In assessing the realizability of deferred tax assets, we consider the trade-offs between cash preservation and cash outlays to preserve tax credits. We presently believe that global valuation allowances of $628 million are required and that we ultimately will recover the remaining $20.6 billion of deferred tax assets. However, realization of our deferred tax assets is impacted by a number of variables, including future profitability within relevant tax jurisdictions, tax law changes, and 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.
Impairment of Long-Lived Assets and Goodwill
Asset groups are tested at the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets or groups of assets. Asset groups are reevaluated when events occur, such as changes in organizational structure and management reporting. Our asset groups for 2025 were: Ford Blue North America, Ford Blue Europe, Ford Blue Rest of World, Ford Model e, Ford Pro, and Ford Credit.
Nature of Estimates Required - Held-and-Used Long-Lived Assets. We test our long-lived asset groups when changes in circumstances indicate their carrying value may not be recoverable. Events that trigger a test for recoverability include:
• Material adverse changes in projected revenues or expenses, present negative cash flows combined with a history of negative cash flows and a forecast that demonstrates significant continuing losses
• Adverse change in legal factors or significant negative industry or regulatory trends (such as overcrowding of market offerings or changes in regulations, resulting in excess capacity relative to market demand)
• Current expectation that a long-lived asset group will be disposed of significantly before the end of its useful life
• Significant adverse change in the manner in which an asset group is used or in its physical condition
• Significant change in the asset group
In addition, investing in new or emerging products or services often requires substantial upfront capital, which may result in initial forecasted negative cash flows in the near term. In these instances, near-term negative cash flows on their own may not be indicative of a triggering event for evaluation of impairment. In such circumstances, when appropriate, we may also conduct a qualitative evaluation of the business growth trajectory, which can include updating our assessment of when positive cash flows are expected to be generated, confirming whether critical milestones have been achieved, and assessing our ability and intent to continue to access required funding to execute the plan. If this evaluation indicates a triggering event has occurred, a test for recoverability is performed.
When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of the asset group. If the undiscounted future cash flows are less than the carrying value of the assets, the asset group’s estimated fair value is measured by calculating the present value of the discounted cash flows or by valuing our long-lived assets using the market approach or cost approach. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amounts of those assets are depreciated over their remaining useful lives.
Nature of Estimates Required - Goodwill . Goodwill is subject to periodic assessments for impairment. We test goodwill for impairment annually during the fourth quarter, or when an event occurs or circumstances change that indicate goodwill may be impaired. We assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If a qualitative assessment identifies a possible impairment or we impair the assets of a reporting unit, then a quantitative goodwill impairment test is performed. If the carrying value of the reporting unit is above fair value, an impairment charge is recognized in an amount equal to the excess.
Assumptions and Approach Used - Held-and-Used Long-Lived Assets and Goodwill. The fair value of an asset group is determined from the perspective of a market participant. Considerations include valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group, and appropriate discount rates.
89
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Fair value reflects the price that would be received to sell an asset in an orderly transaction between market participants. The most appropriate method to determine the estimated fair value of an asset group depends on the facts and circumstances pertaining to the asset group being measured, and in certain instances, we may engage third parties to assist with the determination of fair value. We measure the fair value of an asset group based on market prices (i.e., the amount for which the asset could be sold to a third party) when available. When market prices are not available, we estimate the fair value of an asset group using the income approach, a market approach and/or a cost approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, business plan forecasts, expected growth rates, and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods.
Changes in assumptions or estimates can materially affect the fair value of an asset group, and, therefore, can affect test results. The following are key assumptions we use in making cash flow projections:
• Business projections. We make assumptions about the demand for our products in the marketplace. These
assumptions drive our planning assumptions for volume, mix, and pricing. We also make assumptions about our cost levels (e.g., capacity utilization, cost performance). These projections are derived using our internal business plan forecasts that are updated at least annually and reviewed by our Board of Directors.
• Long-term growth rate. A growth rate is used to calculate the terminal value of the business and is added to the present value of the debt-free cash flows. The growth rate is the expected rate at which an asset group’s earnings stream is projected to grow beyond the planning period.
• Discount rate. When measuring possible impairment, future cash flows are discounted at a rate that is consistent with a weighted-average cost of capital that we anticipate a potential market participant would use. Weighted-average cost of capital is an estimate of the overall risk-adjusted pre-tax rate of return expected by equity and debt holders of a business enterprise.
• Economic projections. Assumptions regarding general economic conditions are included in and affect our assumptions regarding industry sales and pricing estimates for our vehicles. These macroeconomic assumptions include, but are not limited to, industry sales volumes, inflation, interest rates, prices of raw materials (e.g., commodities), and foreign currency exchange rates.
The market approach is another method for measuring the fair value of an asset group. This approach relies on the market value (i.e., market capitalization) of companies that are engaged in the same or a similar line of business as the asset group being evaluated. It may also use prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities, such as a business. The cost approach may also be used to measure the fair value of an asset group. The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). The cost approach must also consider assumptions related to functional and economic obsolescence and marketability of the assets, and also considers factors such as replacement cost, reproduction cost, physical deterioration, age, and remaining useful life. In addition, to the extent available, we may also consider third-party valuations that have been prepared for other business purposes.
Model e Impairment. Despite challenges in the EV market, through the third quarter of 2025, Model e continued to make progress in the following areas, leading the company to conclude that an impairment trigger had not occurred:
• U.S. and EU EV sales were projected to continue to grow over the long term
• The Company continued to invest in next generation products
• Prior business plans indicated significant cash flow improvement by 2028
90
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
However, during the fourth quarter of 2025, we determined that a triggering event requiring us to test Model e long-lived assets and goodwill for impairment occurred based on the convergence of several events, including:
• Lower-than-anticipated industrywide EV adoption rates due to changes in consumer sentiment, competitive dynamics, legal and policy changes, and, in the last several months, significant developments in vehicle pricing dynamics
• The negative effect on EV adoption rates due to the termination of U.S. tax credits intended to incentivize the purchase of EVs
• Potentially significant relaxations in the stringency of federal emissions and fuel economy standards and federal legislation that eliminates the authority of California and other states to implement and enforce their more stringent emissions standards and zero-emission vehicle sales requirements that may further disrupt the market for EVs in the United States
• Our decision in December to rationalize our EV manufacturing capacity and product roadmap, including cancelling three previously planned EV product programs (a full-size pickup, a commercial van for the United States, and a commercial van for Europe) and ending production of the current generation F-150 Lightning EV
The challenges facing the EV market led us to conclude that a path to long-term profitability for our EV business was not possible without taking the strategic actions described above. As a result, we performed a recoverability test of the Model e asset group and concluded that its carrying value exceeded its fair value. We primarily used the market and cost approaches to estimate fair value for our long-lived assets, and we used the income approach to test goodwill. We subsequently recorded an impairment charge, including goodwill, of $8.4 billion during the fourth quarter.
91
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Allowance for Credit Losses
The allowance for credit losses represents Ford Credit’s estimate of the expected lifetime credit losses inherent in finance receivables as of the balance sheet date. The adequacy of Ford Credit’s allowance for credit losses is assessed quarterly, and the assumptions and models used in establishing the allowance are evaluated regularly. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain. Changes in assumptions affect Ford Credit interest, operating, and other expenses on our consolidated income statements and the allowance for credit losses contained within Ford Credit finance receivables, net on our consolidated balance sheets. See Note 10 of the Notes to the Financial Statements for more information regarding allowance for credit losses.
Nature of Estimates Required. Ford Credit estimates the allowance for credit losses for receivables that share similar risk characteristics based on a collective assessment using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses, recent portfolio performance, and forward-looking macroeconomic conditions. The models vary by portfolio and receivable type including consumer finance receivables, wholesale loans, and dealer loans. If Ford Credit does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding qualitative factors, including economic uncertainty, observable changes in portfolio performance, and other relevant factors.
Assumptions Used. Ford Credit’s allowance for credit losses is based on its assumptions regarding:
• Probability of default . The expected probability of payment and time to default, which include assumptions about macroeconomic factors and recent performance.
• Loss given default. The percentage of the expected balance due at default that is not recoverable. The loss given default takes into account expected collateral value and future recoveries.
Macroeconomic factors used in Ford Credit’s models are country specific and include variables such as unemployment rates, personal bankruptcy filings, housing prices, and gross domestic product.
Sensitivity Analysis. Changes in the probability of default and loss given default assumptions would affect the allowance for credit losses. The effect of the indicated increase/decrease in the assumptions for Ford Credit’s U.S. Ford and Lincoln retail financing portfolio at December 31, 2025 is as follows (in millions):
Assumption Basis Point Change
Increase/(Decrease) in Allowance for Credit Losses
Probability of default (lifetime) +/- 100 bps $225/$(225)
Loss given default +/- 100 15/(15)
Accumulated Depreciation on Vehicles Subject to Operating Leases
Accumulated depreciation on vehicles subject to operating leases reduces the value of the leased vehicles in Ford Credit’s operating lease portfolio from their original acquisition value to their expected residual value at the end of the lease term.
Ford Credit monitors residual values each month, and it reviews the adequacy of accumulated depreciation on a quarterly basis. If Ford Credit believes that the expected residual values for its vehicles have changed, it revises depreciation to ensure that net investment in operating leases (equal to the acquisition value of the vehicles less accumulated depreciation) will be adjusted to reflect Ford Credit’s revised estimate of the expected residual value at the end of the lease term. Adjustments to depreciation expense result in a change in the depreciation rates of the vehicles subject to operating leases and are recorded prospectively on a straight-line basis.
Generally, lease customers have the option to buy the leased vehicle at the end of the lease or to return the vehicle to the dealer.
92
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Nature of Estimates Required. Each operating lease in Ford Credit’s portfolio represents a vehicle it owns that has been leased to a customer. At the time Ford Credit purchases a lease from a dealer, it establishes an expected residual value for the vehicle. Ford Credit estimates the expected residual value by evaluating recent auction values, return volumes for Ford Credit’s leased vehicles, industrywide used vehicle prices, marketing incentive plans, and vehicle quality data and benchmarks to third-party data depending on availability. Similar factors are considered in the third-party data Ford Credit uses to revise its estimate of the expected residual value during the lease term.
Assumptions Used. Ford Credit’s accumulated depreciation on vehicles subject to operating leases is based on assumptions regarding:
• Auction value. Ford Credit’s projection of the market value of the vehicles when sold at the end of the lease; and
• Return volume. Ford Credit’s projection of the number of vehicles that will be returned at lease-end.
See Note 12 of the Notes to the Financial Statements for more information regarding accumulated depreciation on vehicles subject to operating leases.
Sensitivity Analysis. For returned vehicles, Ford Credit faces a risk that the amount it obtains from the vehicle sold at auction will be less than its estimate of the expected residual value for the vehicle. The impact of the change in assumptions on future auction values and return volumes would increase or decrease accumulated supplemental depreciation and depreciation expense over the remaining terms of the operating leases; however, the impact may be tempered or exacerbated based on future auction values in relation to the purchase price specified in the lease contract. A change in the assumption for an auction value will impact Ford Credit’s estimate of accumulated supplemental depreciation if the future auction value is lower than the purchase price specified in the lease contract. The effect of the indicated increase/decrease in the assumptions for Ford Credit’s U.S. Ford and Lincoln brand operating lease portfolio at December 31, 2025 is as follows (in millions):
Assumption Basis Point
Change
Increase/(Decrease) in Projected Lifetime Depreciation
Future auction values +/- 100 bps $(50)/$50
Return volumes +/- 100 10/(10)
Adjustments to the amount of accumulated supplemental depreciation on operating leases are reflected on our balance sheets as Net investment in operating leases and on our income statements in Ford Credit interest, operating, and other expenses.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
For a discussion of recent accounting standards, see Note 3 of the Notes to the Financial Statements.
93
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
OVERVIEW
We are exposed to a variety of market and other risks, including the effects of changes in foreign currency exchange rates, commodity prices, and interest rates, as well as risks to availability of funding sources, hazard events, and specific asset risks.
We monitor and manage these exposures as an integral part of our overall risk management program, which includes regular reports to a central management committee, the Global Risk Management Committee (“GRMC”). The GRMC is chaired by our Chief Financial Officer, and the committee includes our Chief Accounting Officer and Treasurer.
We are exposed to liquidity risk, including the possibility of having to curtail business or being unable to meet financial obligations as they come due because funding sources may be reduced or become unavailable. Our plan is to maintain funding sources to ensure liquidity through a variety of economic or business cycles. As discussed in greater detail in Item 7, our funding sources include unsecured debt issuances, sales of receivables in securitization transactions and other structured financings, equity and equity-linked issuances, and bank borrowings.
We are exposed to a variety of other risks, such as loss or damage to property, liability claims, and employee injury. We protect against these risks through the purchase of commercial insurance that is designed to protect us above our self-insured retention limits against events that could generate significant losses.
Direct responsibility for the execution of our market risk management strategies resides with our Treasurer’s Office and is governed by written policies and procedures. Separation of duties is maintained between the development and authorization of derivative trades, the transaction of derivatives, and the settlement of cash flows. Regular audits are conducted to ensure that appropriate controls are in place and that they remain effective. In addition, our market risk exposures and our use of derivatives to manage these exposures are approved by the GRMC and reviewed by the Audit Committee of our Board of Directors.
In accordance with our corporate risk management policies, we use derivative instruments, when available, such as forward contracts, swaps, and options that economically hedge certain exposures (foreign currency, commodity, and interest rates). We do not use derivative contracts for trading, market-making, or speculative purposes. In certain instances, we forgo hedge accounting, and in certain other instances, our derivatives do not qualify for hedge accounting. Either situation results in unrealized gains and losses that are recognized in income. For additional information on our derivatives, see Note 19 of the Notes to the Financial Statements.
The market and counterparty risks of the Company excluding Ford Credit as well as our Ford Credit segment are discussed and quantified below.
COMPANY EXCLUDING FORD CREDIT MARKET RISK
We frequently have expenditures and receipts denominated in foreign currencies, including the following: purchases and sales of finished vehicles and production parts, debt and other payables, subsidiary dividends, and investments in foreign operations. These expenditures and receipts create exposures to changes in exchange rates. We also are exposed to changes in prices of commodities used in the manufacture of our products and changes in interest rates.
Foreign currency risk, commodity risk, and interest rate risk are measured and quantified using a model to evaluate the sensitivity of market value to instantaneous, parallel shifts in rates and/or prices.
Foreign Currency Risk. Foreign currency risk is the possibility that our financial results could be worse than planned because of changes in currency exchange rates. Accordingly, our practice is to use derivative instruments to hedge our economic exposure with respect to forecasted revenues and costs, assets, liabilities, and firm commitments denominated in certain foreign currencies consistent with our overall risk management strategy. In our hedging actions, we use derivative instruments commonly used by corporations to reduce foreign exchange risk (e.g., forward contracts). The extent to which we hedge is also impacted by materiality of the risk in the context of our overall portfolio, market liquidity, and/or our ability to achieve designated hedge accounting.
94
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Continued)
The net fair value of foreign exchange forward contracts (including adjustments for credit risk) as of December 31, 2025 was an asset of $1 million, compared with an asset of $410 million as of December 31, 2024. The potential change in the fair value from a 10% change in the underlying exchange rates, in U.S. dollar terms, would have been $3.0 billion at December 31, 2025, compared with $2.9 billion at December 31, 2024. The sensitivity analysis presented is hypothetical and assumes foreign exchange rate changes are instantaneous and adverse across all currencies. In reality, some of our exposures offset and foreign exchange rates move in different magnitudes and at different times, and any changes in fair value would generally be offset by changes in the underlying exposure. See Note 19 of the Notes to the Financial Statements for more information regarding our foreign currency exchange contracts.
Commodity Price Risk. Commodity price risk is the possibility that our financial results could be worse than planned because of changes in the prices of commodities used in the manufacture of our products, such as base metals (e.g., steel, copper, and aluminum), precious metals (e.g., palladium), energy (e.g., natural gas and electricity), plastics/resins (e.g., polypropylene), and battery raw materials (e.g., lithium, cobalt, and nickel).
Our practice is to use derivative instruments to hedge the price risk with respect to forecasted purchases of certain commodities consistent with our overall risk management strategy. In our hedging actions, we use derivative instruments commonly used by corporations to reduce commodity price risk (e.g., financially settled forward contracts). The extent to which we hedge is also impacted by materiality of the risk in the context of our overall portfolio, market liquidity, and/or our ability to achieve designated hedge accounting.
The net fair value of commodity forward contracts (including adjustments for credit risk) as of December 31, 2025 was an asset of $177 million, compared with a liability of $8 million as of December 31, 2024. The potential change in the fair value from a 10% change in the underlying commodity prices would have been $192 million at December 31, 2025, compared with $189 million at December 31, 2024. The sensitivity analysis presented is hypothetical and assumes commodity price changes are instantaneous and adverse across all commodities. In reality, commodity prices move in different magnitudes and at different times, and any changes in fair value would generally be offset by changes in the underlying exposure.
In addition, our purchasing organization (with guidance from the GRMC, as appropriate) negotiates contracts for the continuous supply of raw materials. In some cases, these contracts stipulate minimum purchase amounts and specific prices, and, therefore, play a role in managing commodity price risk.
Interest Rate Risk. Interest rate risk relates to the loss we could incur in our Company cash investment portfolios due to a change in interest rates. Our interest rate sensitivity analysis on our investment portfolios includes cash and cash equivalents and net marketable securities. At December 31, 2025, we had Company cash of $28.7 billion in our investment portfolios, compared to $28.5 billion at December 31, 2024. We invest the portfolios in securities of various types and maturities, the value of which are subject to fluctuations in interest rates. The investment strategy is based on clearly defined risk and liquidity guidelines to maintain liquidity, minimize risk, and earn a reasonable return on the short-term investments. In investing the cash in our investment portfolios, safety of principal is the primary objective and risk-adjusted return is the secondary objective.
At any time, a rise in interest rates could have a material adverse impact on the fair value of our portfolios. Assuming a hypothetical increase in interest rates of one percentage point, the fair value of our portfolios would be reduced by $231 million, as calculated as of December 31, 2025. This compares to $233 million, as calculated as of December 31, 2024. While these are our best estimates of the impact of the specified interest rate scenario, actual results could differ from this projection. The sensitivity analysis presented assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate changes of this magnitude are rarely instantaneous or parallel.
95