Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

2019 SUPPLEMENTAL INFORMATION

The tables below provide supplemental consolidating financial information and other financial information. Company excluding Ford Credit includes our Automotive and Mobility reportable segments, Corporate Other, Interest on Debt, and Special Items. Eliminations, where presented, primarily represent eliminations of intersegment transactions and deferred tax netting.

Selected Cash Flow Information. The following tables provide supplemental cash flow information (in millions):

		For the Year Ended December 31, 2019
Cash flows from operating activities		Company excluding Ford Credit				Ford Credit				Eliminations				Consolidated
Net income/(loss)		$	(2,144	)		$	2,228			$	—			$	84
Depreciation and tooling amortization		6,023				3,666				—				9,689
Other amortization		48				(1,247		)		—				(1,199		)
Held-for-sale impairment charges		804				—				—				804
Provision for credit and insurance losses		14				399				—				413
Pension and OPEB expense/(income)		2,625				—				—				2,625
Equity investment dividends received in excess of (earnings)/losses		233				(30		)		—				203
Foreign currency adjustments		(18		)		(36		)		—				(54		)
Net (gain)/loss on changes in investments in affiliates		(36		)		7				—				(29		)
Stock compensation		220				8				—				228
Provision for deferred income taxes		(1,407		)		37				—				(1,370		)
Decrease/(Increase) in finance receivables (wholesale and other)		—				1,554				—				1,554
Decrease/(Increase) in intersegment receivables/payables		(193		)		193				—				—
Decrease/(Increase) in accounts receivable and other assets		(971		)		155				—				(816		)
Decrease/(Increase) in inventory		206				—				—				206
Increase/(Decrease) in accounts payable and accrued and other liabilities		5,228				32				—				5,260
Other		157				(116		)		—				41
Interest supplements and residual value support to Ford Credit		(4,681		)		4,681				—				—
Net cash provided by/(used in) operating activities		$	6,108			$	11,531			$	—			$	17,639

Cash flows from investing activities
Capital spending		$	(7,580	)		$	(52	)		$	—			$	(7,632	)
Acquisitions of finance receivables and operating leases		—				(55,576		)		—				(55,576		)
Collections of finance receivables and operating leases		—				50,182				—				50,182
Purchases of marketable and other investments		(11,589		)		(5,883		)		—				(17,472		)
Sales and maturities of marketable and other investments		12,998				3,931				—				16,929
Settlements of derivatives		107				(221		)		—				(114		)
Other		(34		)		(4		)		—				(38		)
Investing activity (to)/from other segments		2,980				—				(2,980		)		—
Net cash provided by/(used in) investing activities		$	(3,118	)		$	(7,623	)		$	(2,980	)		$	(13,721	)

Cash flows from financing activities
Cash payments for dividends and dividend equivalents		$	(2,389	)		$	—			$	—			$	(2,389	)
Purchases of common stock		(237		)		—				—				(237		)
Net changes in short-term debt		(186		)		(1,198		)		—				(1,384		)
Proceeds from issuance of long-term debt		3,082				44,522				—				47,604
Principal payments on long-term debt		(1,832		)		(44,665		)		—				(46,497		)
Other		(110		)		(116		)		—				(226		)
Financing activity to/(from) other segments		—				(2,980		)		2,980				—
Net cash provided by/(used in) financing activities		$	(1,672	)		$	(4,437	)		$	2,980			$	(3,129	)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		$	(5	)		$	50			$	—			$	45

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Selected Income Statement Information. The following table provides supplemental income statement information (in millions):

		For the Year Ended December 31, 2019
		Company excluding Ford Credit
		Automotive				Mobility				Other (a)				Subtotal				Ford Credit				Consolidated
Revenues		$	143,599			$	41			$	—			$	143,640			$	12,260			$	155,900
Total costs and expenses		140,736				1,379				3,739				145,854				9,472				155,326
Operating income/(loss)		2,863				(1,338		)		(3,739		)		(2,214		)		2,788				574
Interest expense on Automotive debt		—				—				963				963				—				963
Interest expense on Other debt		—				—				57				57				—				57
Other income/(loss), net		2,074				140				(2,619		)		(405		)		179				(226		)
Equity in net income of affiliated companies		(11		)		12				—				1				31				32
Income/(loss) before income taxes		4,926				(1,186		)		(7,378		)		(3,638		)		2,998				(640		)
Provision for/(Benefit from) income taxes		444				(284		)		(1,654		)		(1,494		)		770				(724		)
Net income/(loss)		4,482				(902		)		(5,724		)		(2,144		)		2,228				84
Less: Income attributable to noncontrolling interests		37				—				—				37				—				37
Net income/(loss) attributable to Ford Motor Company		$	4,445			$	(902	)		$	(5,724	)		$	(2,181	)		$	2,228			$	47

---

(a)	Other includes Corporate Other, Interest on Debt, and Special Items

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, 2019
Assets		Company excluding Ford Credit				Ford Credit				Eliminations				Consolidated
Cash and cash equivalents		$	8,437			$	9,067			$	—			$	17,504
Marketable securities		13,851				3,296				—				17,147
Ford Credit finance receivables, net		—				53,651				—				53,651
Trade and other receivables, less allowances		3,618				5,619				—				9,237
Inventories		10,786				—				—				10,786
Assets held for sale		685				1,698				—				2,383
Other assets		2,014				1,325				—				3,339
Receivable from other segments		125				2,228				(2,353		)		—
Total current assets		39,516				76,884				(2,353		)		114,047
Ford Credit finance receivables, net		—				53,703				—				53,703
Net investment in operating leases		1,612				27,618				—				29,230
Net property		36,257				212				—				36,469
Equity in net assets of affiliated companies		2,396				123				—				2,519
Deferred income taxes		13,856				171				(2,164		)		11,863
Other assets		8,736				1,970				—				10,706
Receivable from other segments		9				16				(25		)		—
Total assets		$	102,382			$	160,697			$	(4,542	)		$	258,537

Liabilities
Payables		$	19,681			$	992			$	—			$	20,673
Other liabilities and deferred revenue		21,340				1,647				—				22,987
Automotive debt payable within one year		1,445				—				—				1,445
Ford Credit debt payable within one year		—				52,371				—				52,371
Other debt payable within one year		130				—				—				130
Liabilities held for sale		481				45				—				526
Payable to other segments		2,353				—				(2,353		)		—
Total current liabilities		45,430				55,055				(2,353		)		98,132
Other liabilities and deferred revenue		24,280				1,044				—				25,324
Automotive long-term debt		13,233				—				—				13,233
Ford Credit long-term debt		—				87,658				—				87,658
Other long-term debt		470				—				—				470
Deferred income taxes		61				2,593				(2,164		)		490
Payable to other segments		25				—				(25		)		—
Total liabilities		$	83,499			$	146,350			$	(4,542	)		$	225,307

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Selected Other Information.

Equity. At December 31, 2018, total equity attributable to Ford was $35.9 billion, an increase of $354 million compared with December 31, 2017. At December 31, 2019, total equity attributable to Ford was $33.2 billion, a decrease of $2.7 billion compared with December 31, 2018. The detail for the changes is shown below (in billions):

	2018 vs 2017 Increase/ (Decrease)				2019 vs 2018 Increase/ (Decrease)
Net income	$	3.7			$	—
Shareholder distributions	(3.1		)		(2.6		)
Other comprehensive income	(0.4		)		(0.3		)
Common stock issued (including share-based compensation impacts)	0.2				0.2
Total	$	0.4			$	(2.7	)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

CRITICAL ACCOUNTING ESTIMATES

We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

Warranties and Field Service Actions

Nature of Estimates Required. We provide base warranties on the products we sell for specific periods of time and/or mileage, which vary depending upon the type of product and the geographic location of its sale. Separately, we also periodically perform field service actions related to safety recalls, emission recalls, and other product campaigns. Pursuant to these warranties and field service actions, we will repair, replace, or adjust all parts on a vehicle that are defective in factory-supplied materials or workmanship. We accrue the estimated cost of both base warranty coverages and field service actions at the time of sale. In addition, from time to time, we issue extended warranties at our expense, the estimated cost of which is accrued at the time of issuance.

Assumptions and Approach Used. We establish our estimate of base warranty obligations using a patterned estimation model. We use historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. We reevaluate our estimate of base warranty obligations on a regular basis. Experience has shown that initial data for any given model year may be volatile; therefore, our process relies on long-term historical averages until sufficient data are available. As actual experience becomes available, 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 are distinguishable from warranties in that they may occur in periods beyond the base warranty coverage period. We establish our estimates of field service action obligations using a patterned estimation model. We use historical information regarding the nature, frequency, severity, and average cost of claims for each model year. We assess our obligation for field service actions on a regular basis using actual claims experience and update our estimates as necessary.

Due to the uncertainty and potential volatility of the factors used in establishing our estimates, changes in our assumptions could materially affect our financial condition and results of operations. See Note 27 of the Notes to the Financial Statements for information regarding warranty and product recall related costs.

Pensions and Other Postretirement Employee Benefits

Nature of Estimates Required. The estimation of our defined benefit pension and OPEB plan obligations and expenses requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as demographic experience and health care cost increases. Plan obligations and expenses are based on existing retirement plan provisions. No assumption is made regarding any potential future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor contracts).

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 assumption is based primarily on the results of a cash flow matching analysis, which matches the future cash outflows for each major plan to a yield curve based on high-quality bonds specific to the country of the plan. Benefit payments are discounted at the rates on the curve to determine the year-end obligations.

•

Expected long-term rate of return on plan assets. Our expected long-term rate of return considers inputs from a range of advisors for capital market returns, inflation, bond yields, and other variables, adjusted for specific aspects of our investment strategy by plan. Historical returns also are considered where appropriate. The assumption is based on consideration of all inputs, with a focus on long-term trends to avoid short-term market influences.

•	Salary growth. Our salary growth assumption reflects our actual experience, long-term outlook, and assumed inflation.

•	Inflation. Our inflation assumption is based on an evaluation of external market indicators, including real gross domestic product growth and central bank inflation targets.

•	Expected contributions. Our expected amount and timing of contributions are based on an assessment of minimum requirements, cash availability, and other considerations (e.g., funded status, avoidance of regulatory premiums and levies, and tax efficiency).

•	Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.

•	Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.

•	Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends.

Assumptions are set at each year-end and are generally not changed during the year unless there is a major plan event such as a curtailment or settlement that would trigger a plan remeasurement.

See Note 18 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 2019 weighted average discount rate was 3.32% for U.S. plans and 1.74% for non-U.S. plans, reflecting decreases of 97 and 74 basis points, respectively, compared with year-end 2018. In 2019, the U.S. actual return on assets was 20.43%, which was higher than the expected long-term rate of return of 6.75%. Non-U.S. actual return on assets was 10.72%, which was higher than the expected long-term rate of return of 4.18%. In total, these differences, in addition to demographic and other updates, resulted in a net remeasurement loss of $1.9 billion which has been recognized within net periodic benefit cost and reported as a special item.

For 2020, the expected long-term rate of return on assets is 6.50% for U.S. plans, down 25 basis points from 2019, and 3.67% for non-U.S. plans, down 51 basis points compared with a year ago, primarily reflecting an increased allocation to fixed income assets and a lower consensus on capital market return expectations from advisors.

De-risking Strategy. We employ a broad global de-risking strategy which 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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Sensitivity Analysis. The December 31, 2019 pension funded status and 2020 expense are affected by year-end 2019 assumptions. Sensitivities to these assumptions may be asymmetric and are specific to the time periods noted. The effects of changes in the factors which 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 impact on our funded status of an increase/decrease in discount rates and interest rates (in millions):

		Basis Point Change		Increase/(Decrease) in December 31, 2019 Funded Status
Factor			U.S. Plans		Non-U.S. Plans
Discount rate - obligation		+/- 100 bps		$4,900/$(5,900)		$5,300/$(6,900)
Interest rate - fixed income assets		+/- 100		(4,700)/5,700		(3,900)/5,000
Net impact on funded status				$200/$(200)		$1,400/$(1,900)

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 impact net funded status (e.g., contributions) are not reflected.

Interest rates and the expected long-term rate of return on assets have the largest impact on pension expense. These assumptions are generally set at each year-end for expense recorded throughout the following year. The table below estimates the impact on pension expense of a higher/lower assumption for these factors (in millions):

		Basis Point Change		Increase/(Decrease) in December 31, 2019 Funded Status
Factor			U.S. Plans		Non-U.S. Plans
Interest rate - service cost and interest cost		+/- 25 bps		$40/$(40)		$30/$(30)
Expected long-term rate of return on assets		+/- 25		(110)/110		(70)/70

The impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities. The sensitivity of pension expense to an increase in discount rates 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, 2019 was 3.30%, compared with 4.08% at December 31, 2018, resulting in a worldwide net remeasurement loss of $551 million which has been recognized within net periodic benefit cost and reported as a special item.

Sensitivity Analysis. Discount rates and interest rates have the largest impact on our OPEB obligation and expense. The table below estimates the impact on 2020 OPEB expense of higher/lower assumptions for these factors (in millions):

				Worldwide OPEB
		Basis Point Change		(Increase)/Decrease 2019 YE Obligation		Increase/(Decrease) 2019 Expense
Factor
Discount rate - obligation		+/- 100 bps		$700/$(850)		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 and financial statement purposes that will ultimately be reported in tax returns, as well as (iii) the calculation of interest and penalties related to uncertain tax positions. Changes in these estimates and judgments may result in a material increase or decrease to our tax provision, which would be recorded in the period in which the change occurs.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Assumptions and Approach Used. We are subject to the income tax laws and regulations of the many jurisdictions in which we operate. These tax laws and regulations are complex and involve uncertainties in the application to our facts and circumstances that may be open to interpretation. We recognize benefits for these uncertain tax positions based upon a process that requires judgment regarding the technical application of the laws, regulations, and various related judicial opinions. If, in our judgment, it is more likely than not that the uncertain tax position will be settled favorably to us, we estimate an amount that ultimately will be realized. This process is inherently subjective, since it requires our assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis, including consideration of changes in facts and circumstances, such as new regulations or recent judicial opinions, as well as the status of audit activities by taxing authorities. Changes to our estimate of the amount to be realized are recorded in our provision for income taxes during the period in which the change occurred.

We must also assess the likelihood that we will be able to recover our deferred tax assets against future sources of taxable income and reduce the carrying amount of deferred tax assets by recording a valuation allowance if, based on all available evidence, it is more likely than not (defined as a likelihood of more than 50%) 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 a number of 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 would 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.

We presently believe that a valuation allowance of $843 million is required, primarily related to deferred tax assets in various non-U.S. operations. We believe that we ultimately will recover the remaining $11.3 billion of deferred tax assets. We have assessed recoverability of these assets and concluded that no valuation allowance is required for these assets.

For additional information regarding income taxes, see Note 7 of the Notes to the Financial Statements.

Impairment of Long-Lived Assets

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 and expenses, present cash flow losses combined with a history of present cash flow losses and a forecast that demonstrates significant continuing losses, significant negative industry or economic trends, a current expectation that a long-lived asset group will be disposed of significantly before the end of its useful life, a significant adverse change in the manner in which an asset group is used or in its physical condition, or when there is a change in the asset grouping. 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 test for recoverability identifies a possible impairment, the asset group’s fair value is measured relying primarily on a discounted cash flow method. To the extent available, we will also consider third-party valuations of our long-lived assets that were prepared for other business purposes. 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 amount of those assets is depreciated over their remaining useful life.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Nature of Estimates Required - Held-for-Sale Operations. We perform an impairment test on a disposal group to be discontinued, held for sale, or otherwise disposed of when we have committed to an action and the action is expected to be completed within one year. We estimate fair value to approximate the expected proceeds to be received less cost to sell and compare it to the carrying value of the disposal group. An impairment charge is recognized when the carrying value exceeds the estimated fair value.

Assumptions and Approach Used - Held-and-Used Long-Lived Assets. 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 generally estimate the fair value of the asset group using the income approach and/or the market 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 measurement of an asset group and, therefore, can affect the 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 interim cash flows. The growth rate is the expected rate at which a business unit’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.

During 2018, we embarked on a comprehensive strategy aimed at strengthening the competitive position and profitability of our operations. As part of this process, we have initiated several key fitness actions aimed at reducing structural costs while at the same time consulting with our key stakeholders and partners with regard to a fundamental redesign of our operations. This redesign includes changes to the Company’s vehicle portfolio, expanding offerings and volumes in its most profitable growth vehicle segments, while improving or exiting less profitable vehicle lines and addressing underperforming markets.

Against this backdrop, we determined that there were triggering events related to Asia Pacific Operations, China, and South America business units and tested our long-lived assets for impairment. We also tested the newly formed International Markets Group (“IMG”) business unit, which combined our Asia Pacific Operations, and Middle East & Africa business units and also includes the results of our joint venture in Russia. Using our internal economic and business projections, as well as third-party valuations of certain long-lived assets, we determined that the carrying value of the long-lived assets in these business units was recoverable at December 31, 2019. If in future quarters our economic or business projections were to change as a result of our plans or changes in the business environment, there was a significant adverse change in the extent or manner in which a long-lived asset is being used, or there is a current expectation that a long-lived asset group will be disposed of significantly before the end of its useful life, we would undertake additional testing, as appropriate, which could result in an impairment of long-lived assets.

Assumptions and Approach Used - Held-for-Sale Operations. In the third quarter of 2019, we committed to a plan to sell specific net assets in our India Automotive operations. We entered into a definitive agreement to form a joint venture with Mahindra & Mahindra Limited (“Mahindra”), with Mahindra owning a 51 percent controlling stake and Ford owning a 49 percent stake. Under the terms of the transaction, which is expected to close mid-2020, Ford will sell certain India Automotive operations to the joint venture.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Our commitment to sell the India Automotive operations triggered a held-for-sale impairment test. The fair value of the disposal group is measured using a market approach and estimated based on expected proceeds to be received less cost to sell, which we conclude is most representative of the value of the net assets given the current market conditions, the characteristics of viable market participants, and the pending sales transaction. As a result of the impairment testing, we recognized a pre-tax impairment charge of $804 million reported in Cost of sales.

Allowance for Credit Losses

The allowance for credit losses represents Ford Credit’s estimate of the probable credit loss 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. See Note 11 of the Notes to the Financial Statements for more information regarding allowance for credit losses.

Nature of Estimates Required. Ford Credit estimates the probable credit losses inherent in finance receivables based on several factors.

Consumer Portfolio. Ford Credit estimates the allowance for credit losses on consumer receivables using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses and recoveries (including key metrics such as delinquencies, repossessions, and bankruptcies), the composition of Ford Credit’s present portfolio (including vehicle brand, term, risk evaluation, and new/used vehicles), trends in historical used vehicle values, and economic conditions. Estimates from these models rely on historical information and may not fully reflect losses inherent in the present portfolio. Therefore, Ford Credit may adjust the estimate to reflect management judgment regarding observable changes in recent economic trends and conditions, portfolio composition, and other relevant factors.

Assumptions Used. Ford Credit’s allowance for credit losses is based on its assumptions regarding:

•	Frequency. The number of finance receivables that are expected to default over the loss emergence period (“LEP”), measured as repossessions; repossession ratio reflects the number of finance receivables that Ford Credit expects will default over a period of time divided by the average number of contracts outstanding; and

•	Loss severity. The expected difference between the amount a customer owes when the finance contract is charged off and the amount received, net of expenses, from selling the repossessed vehicle.

Collective Allowance for Credit Losses. The collective allowance is evaluated primarily using a collective loss-to- receivables (“LTR”) model that, based on historical experience, indicates credit losses have been incurred in the portfolio even though the particular accounts that are uncollectible cannot be specifically identified. The LTR model is based on the most recent years of history. An LTR for each product is calculated by dividing credit losses (i.e., charge-offs net of recoveries) by average net finance receivables, excluding unearned interest supplements, and allowance for credit losses. The average LTR that is calculated for each product is multiplied by the end-of-period balances for that given product.

Ford Credit’s largest markets also use a loss projection model to estimate losses inherent in the portfolio. The loss projection model applies recent monthly performance metrics, stratified by contract type (retail installment sale contract or finance lease), contract term (e.g., 60-month), and risk rating to Ford Credit’s active portfolio to estimate the losses that have been incurred.

The LEP is an assumption within Ford Credit’s models and represents the average amount of time between when a loss event first occurs to when it is charged off. This time period starts when the consumer begins to experience financial difficulty. It is evidenced, typically through delinquency, before eventually resulting in a charge-off. The LEP is a multiplier in the calculation of the collective consumer allowance for credit losses.

For accounts greater than 120 days past due, the uncollectible portion is charged off, such that the remaining recorded investment is equal to the estimated fair value of the collateral less costs to sell.

Specific Allowance for Impaired Receivables. Consumer receivables involved in Troubled Debt Restructurings are specifically assessed for impairment. A specific allowance is estimated based on the present value of the expected future cash flows of the receivable discounted at the contract’s original effective interest rate or the fair value of any collateral adjusted for estimated costs to sell.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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

Sensitivity Analysis. Changes in the assumptions used to derive frequency and severity 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 is as follows (in millions):

Assumption		Basis Point Change		Increase/(Decrease)
Frequency - repossession ratio		+/- 10 bps		$27/$(27)
Loss severity per unit		+/- 100		3/(3)

Non-Consumer Portfolio. Ford Credit estimates the allowance for credit losses for non-consumer receivables based on historical LTR ratios, expected future cash flows, and the fair value of collateral.

Collective Allowance for Credit Losses. Ford Credit estimates an allowance for non-consumer receivables that are not specifically identified as impaired using an LTR model for each financing product based on historical experience. This LTR is an average of the most recent historical experience and is calculated consistent with the consumer receivables LTR approach. All accounts that are specifically identified as impaired are excluded from the calculation of the non-specific or collective allowance.

Specific Allowance for Impaired Receivables. Dealer financing is evaluated by segmenting individual loans by the risk characteristics of the loan (such as the amount of the loan, the nature of the collateral, and the financial status of the debtor). The loans are analyzed to determine whether individual loans are impaired, and a specific allowance is estimated based on the present value of the expected future cash flows of the receivable discounted at the loan’s original effective interest rate or the fair value of the collateral adjusted for estimated costs to sell.

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

Changes in Ford Credit’s assumptions affect Ford Credit interest, operating, and other expenses on our income statement and the allowance for credit losses contained within Ford Credit finance receivables, net on our balance sheet.

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. Such adjustments to depreciation expense would result in a change in the depreciation rates of the vehicles subject to operating leases and are recorded prospectively on a straight-line basis.

Each lease customer has the option to buy the leased vehicle at the end of the lease or to return the vehicle to the dealer.

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, it establishes an expected residual value for the vehicle. Ford Credit estimates the expected residual value by evaluating recent auction values, return volumes for its leased vehicles, industrywide used vehicle prices, marketing incentive plans, and vehicle quality data.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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 13 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. The effect of the indicated increase/decrease in the assumptions for Ford Credit’s U.S. Ford and Lincoln operating lease portfolio is as follows (in millions):

Assumption		Basis Point Change		Increase/(Decrease)
Future auction values		+/- 100 bps		$(132)/$132
Return volumes		+/- 100		17/(17)

Adjustments to the amount of accumulated supplemental depreciation on operating leases would be reflected on our balance sheet as Net investment in operating leases and on the income statement in Ford Credit interest, operating, and other expenses.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standards Updates (“ASU”) which are not expected to have a material impact (with the exception of ASU 2016-13) to our financial statements or financial statement disclosures. For additional information, see Note 3 of the Notes to the Financial Statements.

ASU			Effective Date (a)
2018-18	Clarifying the Interaction between Collaborative Arrangements and Revenue from Contracts with Customers		January 1, 2020
2018-15	Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract		January 1, 2020
2016-13	Credit Losses - Measurement of Credit Losses on Financial Instruments		January 1, 2020 (b)
2020-01	Clarifying the Interaction between Equity Securities, Equity Method and Joint Ventures, and Derivatives and Hedging		January 1, 2021
2019-12	Simplifying the Accounting for Income Taxes		January 1, 2021
2018-12	Targeted Improvements to the Accounting for Long Duration Contracts		January 1, 2022

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(a)	Early adoption for each of the standards is permitted.

(b)	The FASB has issued the following update to the Credit Losses standard: ASU 2019-05 (Targeted Transition Relief). The new Credit Losses standard and the related amendments were effective January 1, 2020.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

AGGREGATE CONTRACTUAL OBLIGATIONS

We are party to many contractual obligations involving commitments to make payments to third parties. Most of these are debt obligations incurred by our Ford Credit segment. Long-term debt may have fixed or variable interest rates. For long-term debt with variable-rate interest, we estimate the future interest payments based on projected market interest rates for various floating-rate benchmarks received from third parties. In addition, as part of our normal business practices, we enter into contracts with suppliers for purchases of certain raw materials, components, and services to facilitate adequate supply of these materials and services. These arrangements may contain fixed or minimum quantity purchase requirements. “Purchase obligations” are defined as off-balance sheet agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms.

The table below summarizes our contractual obligations as of December 31, 2019 (in millions):

	Payments Due by Period
	2020				2021 - 2022				2023 - 2024				Thereafter				Total
Company excluding Ford Credit
On-balance sheet
Long-term debt (a)	$	1,169			$	2,823			$	157			$	10,919			$	15,068
Interest payments relating to long-term debt	780				1,466				1,317				10,141				13,704
Finance leases (b)	96				56				26				10				188
Operating leases	388				498				245				360				1,491
Pension funding (c)	181				385				373				—				939
Off-balance sheet
Purchase obligations	1,323				1,414				635				200				3,572
Total Company excluding Ford Credit	3,937				6,642				2,753				21,630				34,962
Ford Credit
On-balance sheet
Long-term debt (a)	38,671				53,016				21,136				13,158				125,981
Interest payments relating to long-term debt	3,307				3,995				1,840				988				10,130
Operating leases	18				27				25				27				97
Off-balance sheet
Purchase obligations	26				41				18				—				85
Total Ford Credit	42,022				57,079				23,019				14,173				136,293
Total Company	$	45,959			$	63,721			$	25,772			$	35,803			$	171,255

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(a)	Excludes unamortized debt discounts/premiums, unamortized debt issuance costs, and fair value adjustments.

(b)	Includes interest payments of $11 million.

(c)	Amounts represent our estimate of contractually obligated contributions to U.K. and Ford-Werke plans. See Note 18 of the Notes to the Financial Statements for further information regarding our expected 2020 pension contributions and funded status.

The amount of unrecognized tax benefits for 2019 of $1.9 billion (see Note 7 of the Notes to the Financial Statements for additional discussion) is excluded from the table above. Final settlement of a significant portion of these obligations will require bilateral tax agreements among us and various countries, the timing of which cannot reasonably be estimated.

For additional information regarding pension and OPEB obligations, operating lease obligations, and long-term debt, see Notes 18, 19, and 20, respectively, of the Notes to the Financial Statements.

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.

These risks affect our Automotive and Ford Credit segments differently. 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 Controller and Chief Financial Officer, Automotive, our Treasurer, and other members of senior management.

Our Automotive and Ford Credit segments 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 sales of receivables in securitizations and other structured financings, unsecured debt issuances, equity and equity-linked issuances, and bank borrowings.

We are exposed to a variety of insurable 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 retentions 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 21 of the Notes to the Financial Statements.

The market and counterparty risks of our Automotive and Ford Credit segments are discussed and quantified below.

AUTOMOTIVE MARKET RISK

Our Automotive segment frequently has 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 production of our vehicles 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).

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, 2019, was a liability of $596 million, compared with an asset of $363 million as of December 31, 2018. The potential decrease in fair value from a 10% adverse change in the underlying exchange rates, in U.S. dollar terms, would have been $2.3 billion at December 31, 2019, compared with $2.5 billion at December 31, 2018. 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 21 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 production of motor vehicles, such as base metals (e.g., steel, copper, and aluminum), precious metals (e.g., palladium), energy (e.g., natural gas and electricity), and plastics/resins (e.g., polypropylene). Accordingly, our practice is to use derivative instruments to hedge the price risk with respect to forecasted purchases of certain commodities that we can economically hedge (primarily base metals and precious metals) and 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 our ability to achieve designated hedge accounting.

The net fair value of commodity forward contracts (including adjustments for credit risk) as of December 31, 2019, was a liability of $24 million, compared with a liability of $62 million as of December 31, 2018. The potential decrease in fair value from a 10% adverse change in the underlying commodity prices would be $112 million at December 31, 2019, compared with $90 million at December 31, 2018.

In addition, our purchasing organization (with guidance from the GRMC, as appropriate) negotiates contracts to ensure 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 the investment portfolios includes cash and cash equivalents and net marketable securities. At December 31, 2019, we had $22.3 billion in our Company cash investment portfolios, compared to $23.1 billion at December 31, 2018. 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 our Company cash, 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 value of our portfolios would be reduced by $173 million, as calculated as of December 31, 2019. This compares to $205 million, as calculated as of December 31, 2018. While these are our best estimates of the impact of the specified interest rate scenario, actual results could differ from those projected. 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.