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PART I.
ITEM 1. Business.
Ford Motor Company was incorporated in Delaware in 1919. We acquired the business of a Michigan company, also known as Ford Motor Company, which had been incorporated in 1903 to produce and sell automobiles designed and engineered by Henry Ford. We are a global company based in Dearborn, Michigan. With about 173,000 employees worldwide, the Company is committed to helping build a better world, where every person is free to move and pursue their dreams. The Company’s Ford+ plan for growth and value creation combines existing strengths, new capabilities, and always-on relationships with customers to enrich experiences for customers and deepen their loyalty. Ford develops and delivers innovative, must-have Ford trucks, sport utility vehicles, commercial vans and cars, and Lincoln luxury vehicles, along with connected services. With our change in segments effective January 1, 2023, the Company does that through three customer-centered business segments: Ford Blue, engineering iconic gas-powered and hybrid vehicles; Ford Model e, inventing breakthrough electric vehicles (“EVs”) along with embedded software that defines always-on digital experiences for all customers; and Ford Pro, helping commercial customers transform and expand their businesses with vehicles and services tailored to their needs. Additionally, the Company is pursuing mobility solutions through Ford Next (previously Mobility) and provides financial services through Ford Motor Credit Company LLC (“Ford Credit”).
In addition to the information about Ford and our subsidiaries contained in this Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K Report” or “Report”), extensive information about our Company can be found at http://corporate.ford.com, including information about our management team, brands, products, services, and corporate governance principles.
The corporate governance information on our website includes our Corporate Governance Principles, Code of Ethics for Senior Financial Personnel, Code of Ethics for the Board of Directors, Code of Corporate Conduct for all employees, and the Charters for each of the Committees of our Board of Directors. In addition, any amendments to our Code of Ethics or waivers granted to our directors and executive officers will be posted on our corporate website. All of these documents may be accessed by going to our corporate website, or may be obtained free of charge by writing to our Shareholder Relations Department, Ford Motor Company, One American Road, P.O. Box 1899, Dearborn, Michigan 48126-1899.
Our recent periodic reports filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge at http://shareholder.ford.com. This includes recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, and our Section 16 filings. We post each of these documents on our website as soon as reasonably practicable after it is electronically filed with the SEC. Our reports filed with the SEC also may be found on the SEC’s website at www.sec.gov.
Our Integrated Sustainability and Financial Report, which details our performance and progress toward our sustainability and corporate responsibility goals, is available at http://sustainability.ford.com.
The foregoing information regarding our website and its content is for convenience only and not deemed to be incorporated by reference into this Report nor filed with the SEC.
Item 1. Business (Continued)
OVERVIEW
On January 1, 2023, we implemented a new operating model and reporting structure. With this change, we will analyze the results of our business through the following reportable segments: Ford Blue, Ford Model e, and Ford Pro (combined, replacing the Automotive segment); Ford Next (previously Mobility); and Ford Credit. As a result of the change, beginning with our Quarterly Report on Form 10-Q for the quarter ending March 31, 2023, we will report our results in these five reportable segments. Company adjusted EBIT will include the financial results of these five reportable segments and Corporate Other, and net income will comprise the financial results of the five reportable segments and Corporate Other, as well as Interest on Debt, Special Items, and Taxes.
Below is a description of our reportable segments and other activities as of December 31, 2022.
AUTOMOTIVE SEGMENT
The Automotive segment primarily includes the sale of Ford and Lincoln vehicles, service parts, and accessories worldwide, together with the associated costs to develop, manufacture, distribute, and service the vehicles, parts, and accessories. This segment includes revenues and costs related to our electrification vehicle programs and enterprise connectivity. The segment includes the following regional business units: North America, South America, Europe, China (including Taiwan), and the International Markets Group.
General
Our vehicle brands are Ford and Lincoln. In 2022, we sold approximately 4,231,000 vehicles at wholesale throughout the world. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“Item 7”) for a discussion of our calculation of wholesale unit volumes.
Substantially all of our vehicles, parts, and accessories are sold through distributors and dealers (collectively, “dealerships”), the substantial majority of which are independently owned. At December 31, the approximate number of dealerships worldwide distributing our vehicle brands was as follows:
| | | | | | | | | | | |
Brand | 2021 | | 2022 |
Ford | 8,900 | | | 8,596 | |
Ford-Lincoln (combined) | 654 | | | 607 | |
Lincoln | 401 | | | 408 | |
Total | 9,955 | | | 9,611 | |
We do not depend on any single customer or a few customers to the extent that the loss of such customers would have a material adverse effect on our business.
In addition to the products we sell to our dealerships for retail sale, we also sell vehicles to our dealerships for sale to fleet customers, including commercial fleet customers, daily rental car companies, and governments. We also sell parts and accessories, primarily to our dealerships (which, in turn, sell these products to retail customers) and to authorized parts distributors (which, in turn, primarily sell these products to retailers). We also offer extended service contracts.
The worldwide automotive industry is affected significantly by general economic and political conditions over which we have little control. Vehicles are durable goods, and consumers and businesses have latitude in determining whether and when to replace an existing vehicle. The decision whether to purchase a vehicle may be affected significantly by slowing economic growth, geopolitical events, and other factors (including the cost of purchasing and operating cars, trucks, and utility vehicles and the availability and cost of financing and fuel). As a result, the number of cars, trucks, and utility vehicles sold may vary substantially from year to year. Further, the automotive industry is a highly competitive business that has a wide and growing variety of product and service offerings from a growing number of manufacturers.
Item 1. Business (Continued)
Our wholesale unit volumes vary with the level of total industry demand and our share of that industry demand. Our wholesale unit volumes also are influenced by the level of dealer inventory, and our ability to maintain sufficient production levels to support desired dealer inventory in the event of supplier disruptions or other types of disruptions affecting our production. Our share is influenced by how our products are perceived by customers in comparison to those offered by other manufacturers based on many factors, including price, quality, styling, reliability, safety, fuel efficiency, functionality, and reputation. Our share also is affected by the timing and frequency of new model introductions. Our ability to satisfy changing consumer and business preferences with respect to type or size of vehicle, as well as design and performance characteristics, affects our sales and earnings significantly.
As with other manufacturers, the profitability of our business is affected by many factors, including:
•Wholesale unit volumes
•Margin of profit on each vehicle sold - which, in turn, is affected by many factors, such as:
◦Market factors - volume and mix of vehicles and options sold, and net pricing (reflecting, among other factors, incentive programs)
◦Costs of components and raw materials necessary for production of vehicles
◦Costs for customer warranty claims and additional service actions
◦Costs for safety, emissions, and fuel economy technology and equipment
•A high proportion of relatively fixed structural costs, so that small changes in wholesale unit volumes can significantly affect overall profitability
Although recent supply disruptions have resulted in near-term upward pressure on new vehicle prices, our industry has historically had a very competitive pricing environment, driven in part by excess capacity. For the past several decades, manufacturers typically have offered price discounts and other marketing incentives to provide value for customers and maintain market share and production levels, and we are beginning to see indications that some of these actions will resume in 2023 as industry production and inventories improve. The decline in value of foreign currencies in the past has also contributed significantly to competitive pressures in many of our markets.
Competitive Position. The worldwide automotive industry consists of many producers, with no single dominant producer. Certain manufacturers, however, account for the major percentage of total sales within particular countries, especially their countries of origin.
Seasonality. We manage our vehicle production schedule based on a number of factors, including retail sales (i.e., units sold by our dealerships to their customers at retail) and dealer stock levels (i.e., the number of units held in inventory by our dealerships for sale to their customers). Historically, we have experienced some seasonal fluctuation in the business, with production in many markets tending to be higher in the first half of the year to meet demand in the spring and summer (typically the strongest sales months of the year). In recent years, due to COVID-19, the semiconductor shortage, and other supply constraints, production has been higher in the second half of the year.
Backlog Orders. During the past year, gross stock levels at dealers were lower than normal due largely to the semiconductor shortage and other supply constraints, and the amount of time required to fill orders for certain vehicles increased.
Raw Materials. We purchase a wide variety of raw materials from numerous suppliers around the world for use in the production of, and development of technologies in, our vehicles. These materials include base metals (e.g., steel and aluminum), precious metals (e.g., palladium), energy (e.g., natural gas), and plastics/resins (e.g., polypropylene). As we transition to a greater mix of electric vehicles, we expect to increase our reliance on lithium, cobalt, nickel, graphite, and manganese, among other materials, for batteries. We expect to have adequate supplies or sources of availability of raw materials necessary to meet our needs; however, there always are risks and uncertainties with respect to the supply of raw materials that could impact availability in sufficient quantities and at cost effective prices to meet our needs. See “Item 1A. Risk Factors” for a discussion of the risks associated with a shortage of components or raw materials, supplier disruptions, and inflationary pressures, the “Key Trends and Economic Factors Affecting Ford and the Automotive Industry” section of Item 7 for a discussion of supplier disruptions caused by a shortage of key components, as well as commodity and energy price changes, and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” (“Item 7A”) for a discussion of commodity price risks.
Item 1. Business (Continued)
Intellectual Property. We own or hold licenses to use numerous patents, trade secrets, copyrights, and trademarks on a global basis. We expect to continue building this portfolio as we actively pursue innovation in every part of our business. We also own numerous trademarks and service marks that contribute to the identity and recognition of our Company and its products and services globally. While our intellectual property rights in the aggregate are important to the operation of each of our businesses, we do not believe that our business would be materially affected by the expiration of any particular intellectual property right or termination of any particular intellectual property agreement.
Warranty Coverage, Field Service Actions, and Customer Satisfaction Actions. We provide warranties on vehicles we sell. Warranties are offered for specific periods of time and/or mileage, and vary depending upon the type of product and the geographic location of its sale. Pursuant to these warranties, we will repair, replace, or adjust parts on a vehicle that are defective in factory-supplied materials or workmanship during the specified warranty period. In addition to the costs associated with this warranty coverage provided on our vehicles, we also incur costs as a result of field service actions (i.e., safety recalls, emission recalls, and other product campaigns), and for customer satisfaction actions.
For additional information regarding warranty and related costs, see “Critical Accounting Estimates” in Item 7 and Note 25 of the Notes to the Financial Statements.
Wholesales
Wholesales consist primarily of vehicles sold to dealerships. For the majority of such sales, we recognize revenue when we ship the vehicles to our dealerships from our manufacturing facilities. See Item 7 for additional discussion of revenue recognition practices. Wholesales in each region and in certain key markets within each region during the past three years were as follows: | | | | | | | | | | | | | | | | | |
| Wholesales (a) |
| (in thousands of units) |
| 2020 | | 2021 | | 2022 |
United States | 1,826 | | | 1,716 | | | 2,012 | |
Canada | 210 | | | 233 | | | 258 | |
Mexico | 34 | | | 40 | | | 42 | |
North America | 2,081 | | | 2,006 | | | 2,335 | |
Brazil | 135 | | | 27 | | | 21 | |
Argentina | 31 | | | 26 | | | 31 | |
South America | 185 | | | 81 | | | 83 | |
United Kingdom | 208 | | | 227 | | | 263 | |
Germany | 211 | | | 152 | | | 182 | |
EU20 (b) | 904 | | | 806 | | | 910 | |
Türkiye | 102 | | | 72 | | | 85 | |
Europe | 1,020 | | | 891 | | | 1,014 | |
China (c) | 617 | | | 649 | | | 495 | |
Australia | 57 | | | 70 | | | 71 | |
India | 46 | | | 34 | | | — | |
ASEAN (d) | 67 | | | 75 | | | 102 | |
Russia | 14 | | | 22 | | | 3 | |
International Markets Group | 284 | | | 315 | | | 304 | |
Total Company | 4,187 | | | 3,942 | | | 4,231 | |
__________
(a)Wholesale unit volumes include sales of medium and heavy trucks. Wholesale unit volumes also include all Ford and Lincoln badged units (whether produced by Ford or by an unconsolidated affiliate) that are sold to dealerships or others, units manufactured by Ford that are sold to other manufacturers, units distributed by Ford for other manufacturers, local brand units produced by our unconsolidated Chinese joint venture Jiangling Motors Corporation, Ltd. (“JMC”) that are sold to dealerships or others, and from the second quarter of 2021, Ford badged vehicles produced in Taiwan by Lio Ho Group. Vehicles sold to daily rental car companies that are subject to a guaranteed repurchase option (i.e., rental repurchase), as well as other sales of finished vehicles for which the recognition of revenue is deferred (e.g., consignments), also are included in wholesale unit volumes. Revenue from certain vehicles in wholesale unit volumes (specifically, Ford badged vehicles produced and distributed by our unconsolidated affiliates, as well as JMC brand vehicles) are not included in our revenue.
(b)EU20 markets are United Kingdom, Germany, France, Italy, Spain, Austria, Belgium, Czech Republic, Denmark, Finland, Greece, Hungary, Ireland, the Netherlands, Norway, Poland, Portugal, Romania, Sweden, and Switzerland.
(c)China includes Taiwan.
(d)ASEAN includes Philippines, Thailand, and Vietnam.
Item 1. Business (Continued)
Retail Sales, Industry Volume, and Market Share
Retail sales, industry volume, and market share in each region and in certain key markets within each region during the past three years were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail Sales (a) | | Industry Volume (b) | | Market Share (c) |
| (in millions of units) | | (in millions of units) | | (as a percentage) |
| 2020 | | 2021 | | 2022 | | 2020 | | 2021 | | 2022 | | 2020 | | 2021 | | 2022 |
United States | 2.0 | | | 1.9 | | | 1.9 | | | 14.9 | | | 15.4 | | | 14.2 | | | 13.7 | % | | 12.4 | % | | 13.1 | % |
Canada | 0.2 | | | 0.2 | | | 0.2 | | | 1.6 | | | 1.7 | | | 1.6 | | | 15.1 | | | 14.3 | | | 15.2 | |
Mexico | — | | | — | | | — | | | 1.0 | | | 1.0 | | | 1.1 | | | 4.0 | | | 4.0 | | | 3.8 | |
North America | 2.3 | | | 2.2 | | | 2.2 | | | 17.6 | | | 18.4 | | | 17.3 | | | 13.2 | | | 12.0 | | | 12.5 | |
Brazil | 0.1 | | | — | | | — | | | 2.1 | | | 2.1 | | | 2.1 | | | 6.8 | | | 1.7 | | | 1.7 | |
Argentina | — | | | — | | | — | | | 0.3 | | | 0.4 | | | 0.4 | | | 9.7 | | | 7.9 | | | 7.0 | |
South America | 0.2 | | | 0.1 | | | 0.1 | | | 3.1 | | | 3.6 | | | 3.7 | | | 6.2 | | | 2.6 | | | 2.1 | |
United Kingdom | 0.2 | | | 0.2 | | | 0.2 | | | 1.9 | | | 2.0 | | | 1.9 | | | 12.9 | | | 11.8 | | | 12.1 | |
Germany | 0.2 | | | 0.2 | | | 0.2 | | | 3.3 | | | 3.0 | | | 3.0 | | | 7.4 | | | 5.7 | | | 5.7 | |
EU20 (d) | 1.0 | | | 0.9 | | | 0.8 | | | 13.7 | | | 13.7 | | | 13.0 | | | 7.1 | | | 6.4 | | | 6.4 | |
Türkiye | 0.1 | | | 0.1 | | | 0.1 | | | 0.8 | | | 0.8 | | | 0.8 | | | 12.4 | | | 9.7 | | | 10.5 | |
Europe | 1.1 | | | 1.0 | | | 0.9 | | | 15.1 | | | 15.1 | | | 14.4 | | | 7.2 | | | 6.4 | | | 6.5 | |
China (e) | 0.6 | | | 0.6 | | | 0.5 | | | 25.2 | | | 26.3 | | | 23.9 | | | 2.4 | | | 2.4 | | | 2.1 | |
Australia | 0.1 | | | 0.1 | | | 0.1 | | | 0.9 | | | 1.1 | | | 1.1 | | | 6.5 | | | 6.8 | | | 6.2 | |
India | 0.1 | | | — | | | — | | | 2.8 | | | 3.5 | | | 4.1 | | | 1.7 | | | 1.0 | | | — | |
ASEAN (f) | 0.1 | | | 0.1 | | | 0.1 | | | 1.3 | | | 1.4 | | | 1.7 | | | 5.3 | | | 5.3 | | | 5.7 | |
Russia | — | | | — | | | — | | | 1.5 | | | 1.7 | | | 1.7 | | | 0.9 | | | 1.2 | | | — | |
International Markets Group | 0.3 | | | 0.3 | | | 0.3 | | | 17.5 | | | 18.7 | | | 20.3 | | | 1.7 | | | 1.8 | | | 1.4 | |
Global / Total Company | 4.5 | | | 4.2 | | | 4.0 | | | 78.5 | | | 82.1 | | | 79.6 | | | 5.8 | % | | 5.1 | % | | 5.0 | % |
__________
(a)Retail sales represents primarily sales by dealers and is based, in part, on estimated vehicle registrations; includes medium and heavy trucks.
(b)Industry volume is an internal estimate based on publicly available data collected from various government, private, and public sources around the globe; includes medium and heavy trucks.
(c)Market share represents reported retail sales of our brands as a percent of total industry volume in the relevant market or region.
(d)EU20 markets are United Kingdom, Germany, France, Italy, Spain, Austria, Belgium, Czech Republic, Denmark, Finland, Greece, Hungary, Ireland, the Netherlands, Norway, Poland, Portugal, Romania, Sweden, and Switzerland.
(e)China includes Taiwan; China market share includes Ford brand and JMC brand vehicles produced and sold by our unconsolidated affiliates.
(f)ASEAN includes Philippines, Thailand, and Vietnam.
U.S. Sales by Type
The following table shows U.S. retail sales volume and U.S. wholesales segregated by truck, sport utility vehicle (“SUV”), and car sales. U.S. retail sales volume reflects transactions with (i) retail and fleet customers (as reported by dealers), (ii) government, and (iii) Ford management. U.S. wholesales reflect sales to dealers. | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Retail Sales | | U.S. Wholesales |
| 2021 | | 2022 | | 2021 | | 2022 |
Trucks | 1,011,198 | | | 955,543 | | | 942,472 | | | 1,051,900 | |
SUVs | 827,278 | | | 861,256 | | | 724,539 | | | 911,203 | |
Cars | 67,479 | | | 47,665 | | | 49,470 | | | 49,242 | |
Total Vehicles | 1,905,955 | | | 1,864,464 | | | 1,716,481 | | | 2,012,345 | |
MOBILITY SEGMENT
The Mobility segment primarily includes development costs for Ford’s autonomous vehicles and related businesses, Ford’s equity ownership in Argo AI (a developer of autonomous driving systems), and other mobility businesses and investments. For additional information about our investment in Argo AI, see Note 14 of our Notes to the Financial Statements.
Effective January 1, 2023, our Ford Next segment (formerly Mobility) primarily includes expenses and investments for emerging business initiatives aimed at creating value for Ford in complementary market segments.
Item 1. Business (Continued)
FORD CREDIT SEGMENT
The Ford Credit segment is comprised of the Ford Credit business on a consolidated basis, which is primarily vehicle-related financing and leasing activities.
Ford Credit offers a wide variety of automotive financing products to and through automotive dealers throughout the world. The predominant share of Ford Credit’s business consists of financing our vehicles and supporting our dealers. Ford Credit earns its revenue primarily from payments made under retail installment sale and finance lease (retail financing) and operating lease contracts that it originates and purchases; interest rate supplements and other support payments from us and our affiliates; and payments made under dealer financing programs.
As a result of these financing activities, Ford Credit has a large portfolio of finance receivables and operating leases which it classifies into two portfolios —“consumer” and “non-consumer.” Finance receivables and operating leases in the consumer portfolio include products offered to individuals and businesses that finance the acquisition of our vehicles from dealers for personal and commercial use. Retail financing includes retail installment sale contracts for new and used vehicles and finance leases (comprised of sales-type and direct financing leases) for new vehicles to retail and commercial customers, including leasing companies, government entities, daily rental companies, and fleet customers. Finance receivables in the non-consumer portfolio include products offered to automotive dealers. Ford Credit makes wholesale loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital and improvements to dealership facilities, finance the purchase of dealership real estate, and finance other dealer vehicle programs. Ford Credit also purchases receivables generated by us and our affiliates, primarily related to the sale of parts and accessories to dealers and certain used vehicles from daily rental fleet companies. Ford Credit also provides financing to us for vehicles that we lease to our employees.
The majority of Ford Credit’s business is in the United States and Canada. Outside of the United States, Europe is Ford Credit’s largest operation. Ford Credit’s European operations are managed primarily through its United Kingdom-based subsidiary, FCE Bank plc (“FCE”). Within Europe, Ford Credit’s largest markets are the United Kingdom and Germany.
See Item 7 and Notes 10 and 12 of the Notes to the Financial Statements for a detailed discussion of Ford Credit’s receivables, credit losses, allowance for credit losses, loss-to-receivables ratios, funding sources, and funding strategies. See Item 7A for a discussion of how Ford Credit manages its financial market risks.
We routinely sponsor special retail financing and lease incentives to dealers’ customers who choose to finance or lease our vehicles from Ford Credit. In order to compensate Ford Credit for the lower interest or lease payments offered to the retail customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or lease contract with the dealer’s customer. These programs increase Ford Credit’s financing volume and share. See Note 2 of the Notes to the Financial Statements for information about our accounting for these programs.
We have a Third Amended and Restated Relationship Agreement with Ford Credit, pursuant to which, if Ford Credit’s financial statement leverage for a calendar quarter were to be higher than 12.5:1 (as reported in its most recent periodic report), Ford Credit could require us to make or cause to be made a capital contribution to it in an amount sufficient to have caused such financial statement leverage to have been 12.5:1. No capital contributions have been made pursuant to this agreement. In a separate agreement with FCE, Ford Credit has agreed to maintain FCE’s net worth in excess of $500 million. No payments have been made pursuant to that agreement.
Ford Credit files periodic reports with the SEC that contain additional information regarding Ford Credit. The reports are available through Ford Credit’s website located at www.fordcredit.com/investor-center and can also be found on the SEC’s website located at www.sec.gov.
The foregoing information regarding Ford Credit’s website and its content is for convenience only and not deemed to be incorporated by reference into this Report nor filed with the SEC.
Item 1. Business (Continued)
CORPORATE OTHER
Corporate Other primarily includes corporate governance expenses, interest income (excluding interest earned on our extended service contract portfolio that is included in our Automotive segment) and gains and losses from our cash, cash equivalents, and marketable securities (excluding gains and losses on investments in equity securities), and foreign exchange derivatives gains and losses associated with intercompany lending. Corporate governance expenses are primarily administrative, delivering benefit on behalf of the global enterprise, that are not allocated to operating segments. These include expenses related to setting and directing global policy, providing oversight and stewardship, and promoting the Company’s interests.
Effective January 1, 2023, past service pension and other postretirement employee benefits (“OPEB”) income/expense and related assets, previously reported in the Automotive segment, were realigned to Corporate Other.
INTEREST ON DEBT
Interest on Debt consists of interest expense on Company debt excluding Ford Credit.
GOVERNMENTAL STANDARDS
Many governmental standards and regulations relating to safety, fuel economy, emissions control, noise control, vehicle recycling, substances of concern, vehicle damage, and theft prevention are applicable to new motor vehicles, engines, and equipment. In addition, manufacturing and other automotive assembly facilities are subject to stringent standards regulating air emissions, water discharges, and the handling and disposal of hazardous substances. The most significant of the standards and regulations affecting us are discussed below:
Vehicle Emissions Control
U.S. Requirements - Federal and California Tailpipe Emission Standards. Both the U.S. Environmental Protection Agency (“EPA”) and the California Air Resources Board (“CARB”) have established motor vehicle tailpipe and evaporative emissions standards that become increasingly stringent over time. Seventeen states have adopted California’s light-duty standards, four states have adopted California’s heavy-duty standards, and other states are expected to join. Both federal and California regulations also require motor vehicles to be equipped with on-board diagnostic (“OBD”) systems that monitor emission-related systems and components. In addition, light- and medium-duty vehicles and heavy-duty engines must be certified by EPA prior to sale in the United States and by CARB prior to sale in California and the relevant states. Canada accepts EPA certification. Compliance with emissions standards, OBD requirements, and related regulations can be challenging and can drive increased product development costs, warranty costs, and vehicle recalls.
CARB has adopted new emissions regulations applicable to model year 2024 heavy-duty engines, as well as extended heavy-duty warranty requirements beginning with the 2022 model year, and EPA has proposed more stringent heavy-duty standards beginning with the 2027 model year. These rules include more stringent emissions standards, as well as new requirements affecting durability testing, warranty, and OBD. CARB has also adopted new light-duty emissions standards applicable to 2026 model year vehicles, including a more stringent emissions standard and other new emissions requirements. These new rules are expected to impose increased challenges and costs on the development of light-duty vehicles and heavy-duty engines.
Compliance with automobile emissions standards depends in part on the widespread availability of high-quality and consistent automotive fuels that the vehicles were designed to use. Legislative, regulatory, and judicial developments related to fuel quality at both the national and state levels could affect vehicle manufacturers’ warranty costs as well as their ability to comply with vehicle emissions standards.
Item 1. Business (Continued)
The California vehicle emissions program also includes requirements for manufacturers to produce and deliver for sale zero-emission vehicles (“ZEVs”). California’s light-duty vehicle ZEV regulation, which uses a system based on credits that can be banked and carried forward, mandates annual increases in the production and sale of battery-electric, fuel cell, and plug-in hybrid vehicles. For 2025 model year, this regulation will require approximately 22% of a manufacturer’s California light-duty vehicle sales volume be ZEVs. In August 2022, California approved a sweeping revision to the ZEV regulation. Beginning with the 2026 model year, the revised ZEV rule mandates a 35% ZEV sales requirement, rising to 100% by 2035. The revised regulation also imposes significant restrictions on credit usage, and new requirements for EV battery durability. California has also instituted ZEV regulations governing medium- and heavy-duty vehicles, beginning with the 2024 model year. These stringent ZEV requirements covering light-, medium-, and heavy-duty vehicles could entail significant costs and compliance challenges, and include complex warranty and recall requirements. Compliance with ZEV rules depends on market conditions (including the pace of adoption of EVs), technology readiness, and battery raw material availability as well as the availability of adequate infrastructure to support vehicle charging.
European Requirements. European Union (“EU”) and U.K. regulations, directives, and related legislation limit the amount of regulated pollutants that may be emitted by new motor vehicles and engines sold in the EU and the United Kingdom. Regulatory stringency has increased significantly with the application of Stage VI emission standards (first introduced in 2014) and the implementation of a laboratory test cycle for CO2 and emissions and the introduction of on-road emission testing using portable emission analyzers (Real Driving Emission or “RDE”). These on-road emission tests are in addition to the laboratory-based tests (first introduced in 2017). The divergence between the regulatory limit that is tested in laboratory conditions and the allowed values measured in RDE tests will ultimately be reduced to zero as the regulatory demands increase. In addition, new requirements for tailpipe and non-tailpipe emissions will be included in the upcoming Euro 7 regulation, and the lead-time for engineering and type approval may potentially be too short. The costs associated with complying with all of these requirements are significant, and following the EU Commission’s indication of its intent to accelerate emissions rules in its road map publication “EU Green Deal” as well as the EU sustainable mobility action plan, these challenges will continue in European markets, including the United Kingdom. In addition, the Whole Vehicle Type Approval (“WVTA”) regulation has been updated to increase the stringency of in-market surveillance. Moreover, following the U.K.’s withdrawal from the European Union, we may be subject to diverging requirements in our European markets, which could increase vehicle complexity and duties.
There is an increasing trend of city access restrictions for internal combustion engine powered vehicles. The access rules being introduced are developed by individual cities based on their specific concerns, resulting in rapid deployment of access rules that differ greatly among cities. The speed of implementation of access rules may directly influence customer vehicle residual values and choice of next purchase. In an effort to support the Paris Accord, some countries are adopting yearly increases in CO2 taxes, where such a system is in place, and publishing dates by when internal combustion powered vehicles may no longer be registered, e.g., Norway in 2025 and the United Kingdom and the Netherlands in 2030.
Other National Requirements. Many countries, in an effort to address air quality and climate change concerns, are adopting previous versions of European or United Nations Economic Commission for Europe (“UN-ECE”) mobile source emission regulations. Some countries have adopted more advanced regulations based on the most recent version of European or U.S. regulations. For example, the China Stage VI light-duty vehicle emission standards, based on European Stage VI emission standards for light-duty vehicles, U.S. evaporative and refueling emissions standards, and CARB OBD II requirements, incorporate two levels of stringency for tailpipe emissions. Under the level one (VI(a)) standard, which is currently in place nationwide in China, the emissions limits are comparable to the EU Stage VI limits, except for carbon monoxide, which is 30% lower than the EU Stage VI limit. The more stringent level two (VI(b)) standard’s emissions limits are approximately 30-50% lower than the EU Stage VI limits, depending on the pollutant. While level two (VI(b)) is not slated for nationwide implementation until July 2023, the government has encouraged the more economically developed cities and provinces to pull ahead implementation. For example, Beijing, Shanghai, Tianjin, Hebei province, and Guangdong province have all begun implementing level two (VI(b)). Both China Stage VII light-duty vehicle and heavy duty vehicle emission regulations are currently under pre-study, and the Ministry of Ecology and Environment has advised that the Stage VII regulations will have more stringent limits on pollutant emissions and will establish limits for greenhouse gas (primarily CO2) tailpipe emissions. In South America, most countries are evolving to implement more stringent requirements accepting Europe and U.S. regulations, except Brazil, which has a unique local process called PROCONVE based on U.S. regulations for light-duty vehicles and European regulations for heavy-duty vehicles.
Item 1. Business (Continued)
Canadian criteria emissions regulations are largely aligned with U.S. requirements; however, the existing ZEV regulations in Quebec and those published in British Columbia in July 2020 are more stringent than those in place in California. Both British Columbia and Quebec have proposed draft amendments to their regulations to increase requirements starting in 2025 and 2026, respectively. The federal government has published draft light-duty ZEV sales requirements through an amendment to the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations and has also published its intent to develop ZEV sales requirements for heavy-duty vehicles. Other provinces have signaled their interest in light-duty ZEV sales regulations but are awaiting the finalization of the federal ZEV regulations.
Elsewhere, there is a mix of regulations and processes based on U.S. and EU standards. Not all countries have adopted appropriate fuel quality standards to accompany the stringent emission standards adopted. This could lead to compliance problems, particularly if OBD or in-use surveillance requirements are implemented.
Global Developments. In recent years, EPA and CARB have increased their focus on the use of “defeat devices.” Defeat devices are elements of design (typically embedded in software) that improperly cause the emission control system to function less effectively during normal on-road driving than during an official laboratory emissions test, without justification. They are prohibited by law in many jurisdictions, and we do not use defeat devices in our vehicles.
Regulators around the world continue to scrutinize automakers’ emission testing, which has led to a number of defeat device settlements by various manufacturers. EPA is carrying out additional non-standard tests as part of its vehicle certification program. CARB has also been conducting extensive non-standard emission tests, which in some cases have resulted in certification delays for diesel vehicles. In the past, several European countries have conducted non-standard emission tests and published the results, and, in some cases, this supplemental testing has triggered investigations of manufacturers for possible defeat devices. Testing is expected to continue on an ongoing basis. In addition, plaintiffs’ attorneys are pursuing consumer class action lawsuits based on alleged excessive emissions from cars and trucks, which could, in turn, prompt further investigations by regulators.
Vehicle Fuel Economy and Greenhouse Gas Standards
U.S. Requirements - Light-Duty Vehicles. Federal law requires that light-duty vehicles meet minimum corporate average fuel economy (“CAFE”) standards set by the National Highway Traffic Safety Administration (“NHTSA”). Manufacturers are subject to substantial civil penalties if they fail to meet the CAFE standard in any model year, after taking into account all available credits for the preceding five model years and expected credits for the three succeeding model years. The law requires NHTSA to promulgate and enforce separate CAFE standards applicable to each manufacturer’s fleet of domestic passenger cars, imported passenger cars, and light-duty trucks.
EPA also regulates vehicle greenhouse gas (“GHG”) emissions under the Clean Air Act. Because the vast majority of GHGs emitted by a vehicle are the result of fuel combustion, GHG emission standards are similar to fuel economy standards. Thus, NHTSA and EPA coordinate with each other on their fuel economy and GHG standards, respectively, to avoid potential inconsistencies.
Beginning with the 2012 model year, EPA and NHTSA jointly promulgated harmonized GHG and fuel economy regulations under what came to be known as the “One National Program” (“ONP”) framework. California, which had promulgated its own state-specific set of GHG regulations, agreed that compliance with the federal program would satisfy compliance with its own GHG requirements, thereby avoiding a patchwork of potentially conflicting federal and state GHG standards. ONP has required manufacturers to achieve increasingly stringent year-over-year standards.
ONP was envisioned to continue at least through the 2025 model year. In 2020, EPA introduced significantly less stringent fuel economy and GHG standards applicable to model years 2021-2026. The federal government also revoked California’s authority to set and enforce its own vehicle GHG standards, as well as the authority of other states that opted in to California’s standards. California continued to assert its authority to regulate vehicle GHGs, challenged in court the federal government’s preemption actions, withdrew from ONP, and planned to return to enforcing its own state-specific GHG standards.
Item 1. Business (Continued)
The litigation over both standards and preemption, with uncertain outcomes, created difficulty for purposes of Ford’s future product planning. To avoid a “bifurcated” regulatory scenario in which California and the 15 other states that adopted California’s GHG standards enforce one set of rules, while a different set of rules applies in the rest of the country, Ford reached an agreement with California on a set of terms for an alternative framework in which Ford committed to meet a designated set of standards on a national basis in lieu of the California regulatory program. This framework enabled Ford to continue its product planning on a nationwide basis, while being consistent with Ford’s environmental goals. Ford finalized its agreement with California in 2020, and other states that adopted the California standards indicated they would respect the agreement.
In 2021, EPA again re-evaluated the stringency of light-duty fuel economy and GHG standards through the 2026 model year, and considered whether to restore the stringency to the previous ONP levels, or greater. EPA finalized this evaluation in December 2021, establishing GHG standards applicable to model years 2023-2026 with stringency that exceeded ONP levels. In 2022, NHTSA finalized more stringent fuel economy standards for model years 2024-2026, which are substantially aligned with EPA’s GHG standards. The federal government also acted in December 2021 to repeal its rule blocking California’s authority to set and enforce its own vehicle GHG standards, as well as the authority of other states that adopted California’s standards, and EPA took similar action in early 2022 under the Clean Air Act. In late 2022, EPA began consideration of sweeping changes to light-duty GHG regulations for model years 2027 and beyond. These regulations are expected to extend through at least the 2030 model year, and to drive significant ZEV sales mix, along with rapid improvement of ICE vehicle performance, by virtue of greatly increased stringency. These new rules are expected to impose increased challenges and costs on the development of light-duty vehicles. If any federal or state agency imposes and enforces fuel economy and GHG standards that are misaligned with market conditions, Ford would likely be forced to take various actions that could have substantial adverse effects on its sales volumes and results of operations. Such actions likely would include restricting offerings of selected engines and popular options; increasing market support programs for Ford’s most fuel-efficient vehicles; and ultimately curtailing the production and sale of certain vehicles, such as high-performance cars, utilities, and/or full-size light trucks in order to maintain compliance.
U.S. Requirements - Heavy-Duty Vehicles. EPA and NHTSA have jointly promulgated GHG and fuel economy standards for heavy-duty vehicles (generally, vehicles over 8,500 pounds gross vehicle weight rating) through the 2027 model year, and EPA is preparing a major update to these standards for the 2027 model year and beyond. In Ford’s case, the standards primarily affect heavy-duty pickup trucks and vans, plus vocational vehicles such as shuttle buses and delivery trucks. As the heavy-duty standards increase in stringency, it may become more difficult to comply while continuing to offer a full lineup of heavy-duty trucks.
European Requirements. The European Union regulates passenger car and light commercial vehicle CO2 emissions using sliding scales with different CO2 targets for each manufacturer based on the respective average vehicle weight for its fleet of vehicles first registered in a calendar year, with separate targets for passenger cars and light commercial vehicles. A penalty system applies to manufacturers failing to meet the individual CO2 targets. Pooling agreements between manufacturers to utilize credits are possible under certain conditions, and we have entered into such pooling agreements in order to comply with fuel economy regulations without paying a penalty and to enable other manufacturers to benefit from our positive CO2 performance. For “multi-stage vehicles” (e.g., Ford’s Transit chassis cabs), the base manufacturer (e.g., Ford) is fully responsible for the CO2 performance of the final up-fitted vehicles. The initial target levels get significantly more stringent every five years (2025, 2030, and 2035, after which all new vehicles must be zero emission), requiring significant investments in propulsion technologies and extensive fleet management forcing low CO2 emissions. The United Kingdom and Switzerland have introduced similar rules, and the United Kingdom is considering adopting ZEV mandates.
The EU Commission is investigating the introduction of Real Driving CO2 and Life Cycle Assessment elements, and heavy-duty vehicles are addressed in separate regulations with analogous requirements and challenges. As discussed above, the EU Commission has announced a “Green Deal” that is likely to trigger more stringent requirements for CO2 emissions (including stricter CO2 fleet regulations) and other regulated emissions and include recycling and substance restrictions. While the EU Commission targets net climate neutrality by 2050 and a more ambitious 2030 interim target (a 55% instead of 40% CO2 reduction compared to 1990), several countries, such as Germany, have adopted stricter interim targets and earlier net climate neutrality targets.
Ford also faces the risk of advance premium payments for both passenger cars and light commercial vehicles in all European markets due to, for example, unexpected market fluctuations and shorter lead times impacting average fleet performance.
Item 1. Business (Continued)
The United Nations developed a technical regulation for passenger car emissions and CO2. This world light-duty test procedure (“WLTP”) is focused primarily on better aligning laboratory CO2 and fuel consumption figures with customer-reported figures. The introduction of WLTP in Europe started in September 2017 and requires updates to CO2 labeling, thereby impacting taxes in countries with a CO2 tax scheme as well as CO2 fleet regulations for passenger cars and light commercial vehicles. Costs associated with new or incremental testing for WLTP are significant.
Some European countries have implemented or are considering other initiatives for reducing CO2 vehicle emissions, including fiscal measures and CO2 labeling to address country specific targets associated with the Paris Accord. For example, the United Kingdom, France, Germany, Spain, Portugal, and the Netherlands, among others, have introduced taxation based on CO2 emissions. The EU CO2 requirements are likely to trigger further measures. In addition, delayed vehicle launches and supply shortages, as well as an insufficient charging infrastructure and lower demand for ZEV and low CO2 emission vehicles as certain electric vehicle incentives are reduced, can trigger compliance risks in all European markets.
Other National Requirements. The Canadian federal government regulates vehicle GHG emissions under the Canadian Environmental Protection Act. In October 2014, the Canadian federal government published the final changes to the regulation for light-duty vehicles, which maintain alignment with U.S. EPA vehicle GHG standards for the 2017-2025 model years. The revised U.S. EPA standards were automatically adopted in Canada by reference for the 2022-2025 model years, and draft amendments for a few standalone administrative elements not automatically adopted by reference were published in December 2022. The heavy-duty vehicle and engine GHG emissions regulations for the 2021 model year and beyond were published in May 2018 and are in line with U.S. requirements, subject to any change in those requirements.
China’s Corporate Average Fuel Consumption and New Energy Vehicle (“NEV”) Credit Administrative Rules contain fuel consumption requirements as well as credit mandates for NEV passenger vehicles, i.e., plug-in hybrids, battery electric vehicles, or fuel cell vehicles. The fuel consumption requirement uses a weight-based approach to establish targets, with year-over-year target reductions. China set a target of 5.0L/100km for the 2020 passenger vehicle industry fuel consumption fleet average, which lowers to 4.0L/100km by 2025 based on the New European Driving Cycle system. The government is projecting a further fuel consumption reduction in 2030, and is targeting 3.5L/100km based on the WLTP cycle (“WLTC”) system. The NEV mandate requires that OEMs generate a specific amount of NEV credits each year, with NEV credits of at least 16%, 18%, 28%, and 38% of the annual ICE passenger vehicle production or import volume required in 2022, 2023, 2024, and 2025, respectively. Future percentages are currently under consideration.
As discussed below in Item 1A. Risk Factors under “Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations,” a production disruption, stop ship, lower than planned market acceptance of our vehicles, or other intervening events may cause us to modify our product plans or, in some cases, purchase credits in order to comply with fuel economy standards.
Vehicle Safety
U.S. Requirements. The National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates vehicles and vehicle equipment in two primary ways. First, the Safety Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable vehicle safety standards established by NHTSA. Meeting or exceeding many safety standards is costly and has continued to evolve as global compliance and public domain (e.g., New Car Assessment Programs (“NCAPs”), Insurance Institute for Highway Safety (“IIHS”)) requirements continue to evolve, are increasing in demands, and lack harmonization globally. As we expand our business priorities to include autonomous vehicles and broader mobility products and services, our financial exposure has increased. Second, the Safety Act requires that defects related to motor vehicle safety be remedied through safety recall campaigns. A manufacturer is obligated to recall vehicles if it determines the vehicles do not comply with a safety standard. Should we or NHTSA determine that either a safety defect or noncompliance issue exists with respect to any of our vehicles, the cost of such recall campaigns could be substantial.
European Requirements. The EU has established vehicle safety standards and regulations and is likely to adopt additional or more stringent requirements in the future, especially in the areas of access to in-vehicle data, artificial intelligence, and autonomous vehicles.
Item 1. Business (Continued)
The European General Safety Regulation (“GSR”) introduced UN-ECE regulations, which are required for the European Type Approval process. The GSR includes the mandatory introduction of multiple active and passive safety features, including cybersecurity requirements for new vehicle models from 2022 and for all registrations in 2024. EU regulators are focusing on active safety features, such as lane departure warning systems, electronic stability control, and automatic brake assist. Furthermore, mobile network providers in certain EU Member States have begun shutting down their 2G and 3G networks, which form the basis for e-Call system functionality in existing vehicles. The e-Call systems in existing vehicles may need to be updated as these systems are phased out. It is also possible that the EU may mandate Member States to maintain these networks to allow for the continued functionality of existing e-Call systems.
Other National Requirements. Globally, governments generally have been adopting UN-ECE based regulations with minor variations to address local concerns. Any difference between North American and UN-ECE based regulations can add complexity and costs to the development of global platform vehicles, and we continue to support efforts to harmonize regulations to reduce vehicle design complexity while providing a common level of safety performance; several on-going bilateral negotiations on free trade can potentially contribute to this goal.
Safety and recall requirements in Brazil, China, India, South Korea, and Gulf Cooperation Council (“GCC”) countries may add substantial costs and complexity to our global recall practice. Brazil has set mandatory fleet safety targets and penalties are applied if these levels are not maintained, while a tax reduction may be available for over-performance. In Canada, regulatory requirements are currently aligned with U.S. regulations; however, under the Canadian Motor Vehicle Safety Act, the Minister of Transport has broad powers to order manufacturers to submit a notice of defect or non-compliance when the Minister considers it to be in the interest of safety. In 2021, Canada started preliminary consultations on several new proposed regulations, including Administrative Monetary Penalties (“AMPs”) and Analysis of Technical Information for Vehicles and Equipment (“ACTIVE”) regulations. Draft language for the AMPs regulation was published in May 2022 with final regulations expected to be published at the end of 2023. In China, a new mandatory Event Data Recorder regulation that is more comprehensive than U.S. requirements has been released, and in China, Malaysia, and South Korea, mandatory e-Call requirements are being drafted. E-Call is mandatory in the UAE for new vehicles starting with the 2021 model year, and in Saudi Arabia from the 2025 model year.
New Car Assessment Programs. Organizations around the world rate and compare motor vehicles in NCAPs to provide consumers and businesses with additional information about the safety of new vehicles. NCAPs use crash tests and other evaluations that are different than what is required by applicable regulations, and use stars to rate vehicle safety, with five stars awarded for the highest rating and one for the lowest. Achieving high NCAP ratings, which may vary by country or region, can add complexity and cost to vehicles. Similarly, environmental rating systems exist in various regions, e.g., Green NCAP in Europe. In China, C-NCAP has a stringent rating structure to decrease the number of five-star ratings. Further, the China Insurance Auto Safety Index (similar to IIHS) has been implemented, with higher standards for passenger and pedestrian protection and driver assistance technologies. These protocols impose additional requirements relating to testing, evaluation, and mandatory safety features, and compliance with them (or any subsequent updates to them) may be costly.
Item 1. Business (Continued)
HUMAN CAPITAL RESOURCES
People Strategy and Governance
We strive to create an employee experience that enables an inclusive environment of excellence, focus, and collaboration among team members, allowing us to deliver short- and long-term business success. Ford maintains an Executive People Forum consisting of the CEO and top leadership team that meets monthly with a specific focus on people and organizational topics that will enable and accelerate delivery of the business plan. Key topic areas include Compensation & Retention, Diversity, Equity, and Inclusion (“DEI”), Organization Design, Talent Planning & Development, and Culture.
Our Board of Directors and Board committees provide important oversight on certain human capital matters, including items discussed at the Executive People Forum. The Compensation, Talent and Culture Committee maintains responsibility to review, discuss, and set strategic direction for various people-related business strategies, including: compensation and benefit programs; leadership succession planning; culture; DEI; and talent development programs. The Sustainability, Innovation and Policy Committee is responsible for discussing and advising management on maintaining and improving sustainability strategies, the implementation of which creates value consistent with the long-term preservation and enhancement of shareholder value and social wellbeing, including human rights, working conditions, and responsible sourcing. The collective recommendations to the Board and its committees are how we proactively manage our human capital and create an employee experience that allows employees and our organization to thrive.
Diversity, Equity, and Inclusion
At Ford, we believe that creating a Culture of Inclusion for all our employees is both foundational to achieving our Ford+ plan and the right thing to do. Ford offers 12 Employee Resource Groups (“ERGs”) that represent various dimensions of our employee population, including racial, ethnic, gender, religious, sexual orientation and gender identity, ability, and generational communities with chapters throughout the world, in addition to Ford Advocacy for Belonging (“FAB”) Councils in every region. Our ERGs and FAB Councils are instrumental in providing a voice to our globally diverse workforce as well as sharing valuable insights into the development of products, services, and experiences.
Our business has developed DEI action plans specific to each region’s unique needs and culture. From an enterprise perspective, we have taken several concrete steps to further these efforts, including embedding DEI into our corporate strategy and governance, ensuring that revisions to employee expected behaviors enable an inclusive culture, and establishing objectives for progress for every salaried employee. This holistic DEI strategy includes a strong focus on racial equity, growing representation of diverse talent throughout the pipeline, and DEI education.
Our diversity statistics include the following as of December 31, 2022 (based on self-reporting at the date of hire): 28.8% of our salaried employees worldwide are females (excludes certain employees in Europe in accordance with the European Union’s General Data Protection Regulation); 25.4% of our total salaried and hourly employees in the United States are females; and 36.2% of our total salaried and hourly employees in the United States are minorities.
Talent Attraction, Growth, and Capability Assessment
The workplace is quickly evolving, and new working practices are constantly developing. Many employees are no longer bound to physical locations, where and how we source our talent is evolving, and employee expectations have shifted. From a growth perspective, we are focused on several key areas vital to our success (e.g., software, electrification, and data science). Ford continues to accelerate its efforts to attract new employees with diverse skill sets and capabilities, and more resources have been dedicated to recruiting these employees, who are critical to supporting our business model.
From a capability perspective, we are leveraging best practices in assessments and talent management to strengthen our current capabilities and future pipeline while reinforcing a culture of belonging, collaboration, empowerment, and innovation. The performance management process is reviewed regularly to ensure we set clear expectations, measure individual performance, and reward appropriately. We are also creating targeted learning experiences, democratizing learning and career development opportunities across the organization, and empowering employees to design their own career paths with skill development targeted for the roles of today and the future.
Item 1. Business (Continued)
Finally, the extent to which our People Leaders are equipped to care for, inspire, and empower our people plays a vital role in our strategy, and we are committed to helping our leaders strengthen these capabilities with dedicated learning paths and non-traditional learning opportunities. Our Leadership+ mechanism for developing People Leaders guides how we think about performance management and how we assess our talent to meet our organizational needs. Leadership+ will continue to prepare and empower our People Leaders to lead our teams through significant change at our Company and in our industry.
Employee Health and Safety
Nothing is more important than the health, safety, and wellbeing of our employees, and we consistently strive to achieve world-class levels of safety through the application of sound policies and best practices. We maintain a robust safety culture to reduce workplace injuries, supported by effective communication, reporting, and external benchmarking. We verify compliance with regulatory requirements as well as our internal safety standards and regularly report to Company management on key safety issues, including significant incidents and high potential near-misses, to prevent recurrences. We also participate in multi-industry groups, within and outside the automotive sector, to share safety best practices and collaborate to address common issues.
Our Safety Record
Any loss of life or serious injury in the workplace is unacceptable and deeply regretted. Unfortunately, there were two fatal incidents in 2022 in our China region. Another key safety indicator is our global lost-time case rate (“LTCR”), which is defined as the number of cases where one or more working days is lost due to work-related injury/illness per 200,000 hours worked. While our global LTCR remains stable overall, there was an increase to 0.39 in 2022 from 0.35 in 2021. We will continue our efforts to reduce workplace injuries.
Employee Wellbeing Initiatives
Our global, holistic approach to wellbeing encompasses the financial, social, mental/emotional, physical, and professional needs of our employees. Foundational to our wellbeing philosophy is providing a broad array of resources and solutions to educate employees, build capability, and meet individual and organizational wellbeing needs and goals. Wellbeing is an integral part of our total rewards strategy as we work to address business and employee challenges through a multi-channel approach that provides our diverse populations and global regions flexibility and choice to meet their specific needs.
We use data-driven insights gathered through surveys, focus groups, and claims data to understand employee needs and prioritize our wellbeing efforts. We provide global wellbeing programs, such as Employee Assistance Programs and mindfulness sessions, among other things. In addition, we provide employees with experiences, self-guided tools, and social connection opportunities, as well as access to the professional support and resources they need to achieve their own sense of wellbeing. We are committed to creating an environment where employees and People Leaders care for each other as we deliver Ford+.
Employee Sentiment Strategy
We leverage our ask/listen/observe framework to understand employee sentiment at Ford. This approach is a holistic and consistent methodology that enables us to understand how employees are feeling in real time and act accordingly. Our measurement focuses on several areas that are key to our business: Employee Mental and Emotional Wellbeing, Health & Safety, Employee Experience, Culture, DEI, Leadership, and Strategic Alignment. Our employee sentiment surveys guide the actions we take to address employee concerns and related risks, and also help us understand whether our efforts to drive change in these areas are effective.
A critical element of our measurement program is ensuring that data ends up in the hands of those who are best positioned to drive meaningful change. To this end, leaders at all levels have access to dashboards with data from their teams and organizations, as well as personalized next step recommendations embedded into action planning tools. Our measurement approach is also used to inform our areas of focus as an organization and to evaluate the effectiveness of talent initiatives across the enterprise.
Item 1. Business (Continued)
Employment Data
The approximate number of individuals employed by us and entities that we consolidated as of December 31 was as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2022 |
North America | 99 | | | 98 | |
South America | 4 | | | 4 | |
Europe | 42 | | | 35 | |
China (including Taiwan) | 3 | | | 4 | |
International Markets Group | 16 | | | 14 | |
Total Automotive | 164 | | | 155 | |
Ford Credit | 5 | | | 5 | |
Mobility | 2 | | | 0 |
Corporate and Other | 12 | | | 13 | |
Total Company | 183 | | | 173 | |
The reduction in employees in 2022 is primarily a result of certain divestitures in Europe and in our Mobility segment, and the cessation of operations at certain plants in India.
Substantially all of the hourly employees in our Automotive operations are represented by unions and covered by collective bargaining agreements. In the United States, approximately 99% of these unionized hourly employees in our Automotive segment are represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW” or “United Auto Workers”). At December 31, 2022, approximately 57,000 hourly employees in the United States were represented by the UAW.
ITEM 1A. Risk Factors.
We have listed below the material risk factors applicable to us grouped into the following categories: Operational Risks; Macroeconomic, Market, and Strategic Risks; Financial Risks; and Legal and Regulatory Risks.
Operational Risks
Ford and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19. We face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the global outbreak of COVID-19. The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has periodically created significant volatility in the global economy. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. For example, in 2020, consistent with the actions taken by governmental authorities, we idled our manufacturing operations in regions around the world before ultimately resuming our manufacturing operations taking a phased approach and after introducing new safety protocols at our plants. To the extent cases surge in any locations, stringent limitations on daily activities that may have been eased previously could be reinstated in those areas. A future suspension of our manufacturing operations could have a significant adverse effect on our financial condition and results of operations. Moreover, outbreaks in certain regions continue to cause intermittent disruptions in our supply chain and local manufacturing operations. For example, in China, outbreaks of COVID-19 have led the government to impose lockdowns and other restrictions, which have adversely affected our and our supply chain’s production operations, our wholesales, and consumer demand for our products. Further, as new strains or variants of COVID-19 or other viruses, diseases, or public health issues develop or sufficient amounts of vaccines or treatments are not available, not widely administered for a significant period of time, or otherwise prove ineffective, the impact of a widespread public health issue on the global economy, and, in turn, our financial condition, liquidity, and results of operations could be material.
The predominant share of Ford Credit’s business consists of financing Ford and Lincoln vehicles, and the duration or resurgence of public health issues such as COVID-19 may negatively impact the level of originations at Ford Credit. For example, Ford’s suspension of manufacturing operations, a significant decline in dealer showroom traffic, and/or a reduction of operations at dealers may lead to a significant decline in Ford Credit’s consumer and non-consumer originations. Moreover, economic uncertainty and higher unemployment arising from widespread public health issues or otherwise may result in higher defaults in Ford Credit’s consumer portfolio, and prolonged unemployment may have a negative impact on both new and used vehicle demand.
As described in more detail below under “Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors,” the volatility created by COVID-19 adversely affected Ford and Ford Credit’s access to the debt and securitization markets and its cost of funding, and any volatility in the capital markets as a result of a public health issue or for any other reason could have an adverse impact on Ford and Ford Credit’s access to those markets and its cost of funding.
The full impact of COVID-19 or any widespread public health issue on our financial condition and results of operations will depend on the duration and scope of an outbreak (including any potential future waves, the emergence or re-emergence of variants and their transmissibility, and the success of vaccination programs and treatments), its impact on our customers, dealers, and suppliers, how quickly normal economic conditions, operations, and the demand for our products can resume, and any permanent behavioral changes that the pandemic may cause. For example, the duration of a suspension of manufacturing operations and a return to our full production schedule will depend, in part, on not only a sufficient number of employees being able to return to work but also whether our suppliers and dealers have resumed normal operations. Our Ford Blue, Ford Model e, and Ford Pro operations generally do not realize revenue while our manufacturing operations are suspended, but we continue to incur operating and non-operating expenses, resulting in a deterioration of our cash flow. Accordingly, any significant future disruption to our production schedule, regionally or globally, whether as a result of our own or a supplier’s suspension of operations, could have a substantial adverse effect on our financial condition, liquidity, and results of operations. Moreover, our supply and distribution chains may be disrupted by supplier or dealer bankruptcies or their permanent discontinuation of operations triggered by a shutdown of operations due to a widespread public health issue or for other reasons.
Item 1A. Risk Factors (Continued)
Public health issues may also exacerbate other risks disclosed in our 2022 Form 10-K Report, including, but not limited to, our competitiveness, demand or market acceptance for our products and services, and shifting consumer preferences, and our ability to successfully execute our strategy.
Ford is highly dependent on its suppliers to deliver components in accordance with Ford’s production schedule and specifications, and a shortage of or inability to acquire key components, such as semiconductors, or raw materials, such as lithium, cobalt, nickel, graphite, and manganese, can disrupt Ford’s production of vehicles. Our products contain components that we source globally from suppliers who, in turn, source components from their suppliers. If there is a shortage of a key component in our supply chain or a supplier is unable to deliver a component to us in accordance with our specifications, because of a production issue, limited availability of materials, shipping problems, restrictions on transactions with certain countries or companies, or other reason, and the component cannot be easily sourced from a different supplier, or we are unable to obtain a component on a timely basis, the shortage may disrupt our operations or increase our costs of production. For example, the automotive industry continues to face a significant shortage of semiconductors, which has a complex supply chain with long lead times required to increase production and capacity. The shortage is due in large part to strong cross-industry demand, which has presented challenges and production disruptions globally, including at our assembly plants, and COVID-19-related work restrictions in various parts of the world have further impacted semiconductor production. Accordingly, we and our competitors who need integrated circuits are experiencing various levels of semiconductor impact.
For the production of our electric vehicles, we are dependent on the supply of batteries and the raw materials (e.g., lithium, cobalt, nickel, graphite, and manganese) used by our suppliers to produce those batteries. As we increase our production of electric vehicles, we expect our need for such materials to increase significantly. At the same time, other companies are increasing their production of electric vehicles, which will further increase the demand for such raw materials. As a result, we may be unable to acquire raw materials needed for electric vehicle production in sufficient amounts that are responsibly sourced or at reasonable prices. As described below under “To facilitate access to the raw materials necessary for the production of electric vehicles, Ford has entered into, and expects to continue to enter into, multi-year commitments to raw material suppliers that subject Ford to risks associated with lower future demand for such materials as well as costs that fluctuate and are difficult to accurately forecast” as well as in the Liquidity and Capital Resources section in Item 7 below, we have entered into, and expect to continue to enter into, offtake agreements and other long-term purchase contracts that obligate us, subject to certain conditions such as quality or minimum output, to purchase a certain percentage or minimum amount of output from certain raw materials suppliers. In the event the supplier under those agreements or any of our or our suppliers’ raw material supply contracts is unable to deliver sufficient quantities of raw materials needed for our or our suppliers’ production operations, e.g., if a mine does not produce at expected levels, or the raw materials do not otherwise satisfy our requirements, and we or our suppliers are unable to find an alternative resource with sufficient quantities, at reasonable prices, responsibly sourced, and in a timely manner, it could impact our ability to produce electric vehicles.
A shortage of, or our inability to acquire or find adequate suppliers of, key components or raw materials as a result of disruptions in the supply chain, capacity constraints, limited availability, competition for those items within the automotive industry and other sectors, or otherwise can cause a significant disruption to our production schedule and have a substantial adverse effect on our financial condition or results of operations.
To facilitate access to the raw materials necessary for the production of electric vehicles, Ford has entered into, and expects to continue to enter into, multi-year commitments to raw material suppliers that subject Ford to risks associated with lower future demand for such materials as well as costs that fluctuate and are difficult to accurately forecast. We have announced plans to significantly increase our electric vehicle production volumes; however, our ability to produce higher volumes of electric vehicles is dependent upon the availability of raw materials necessary for the production of batteries, e.g., lithium, cobalt, nickel, graphite, and manganese, among others. As described above under “Ford is highly dependent on its suppliers to deliver components in accordance with Ford’s production schedule and specifications, and a shortage of or inability to acquire key components, such as semiconductors, or raw materials, such as lithium, cobalt, nickel, graphite, and manganese, can disrupt Ford’s production of vehicles,” to facilitate our access to such raw materials, we have entered into, and expect to continue to enter into, offtake agreements and other long-term purchase contracts. Such agreements obligate us, subject to certain conditions such as quality or minimum output, to purchase a certain percentage or minimum amount of output from raw material suppliers over an agreed upon period of time pursuant to an agreed upon purchase price mechanism that is typically based upon the market price of the material at the time of delivery.
Item 1A. Risk Factors (Continued)
Unlike our historical arrangements with suppliers, which are typically annual commitments, under multi-year offtake agreements and other long-term purchase contracts, the risks associated with lower-than-expected electric vehicle production volumes or changes in battery technology that reduce the need for certain raw materials are borne by Ford rather than our suppliers. In the event we do not purchase the materials pursuant to the terms of these agreements, even if the supplier finds another purchaser, we may be obligated to reimburse the supplier for costs it incurs in finding the new purchaser as well as any lost revenue attributable to the replacement purchaser paying a lower price than required under the pricing mechanism in our agreement.
As a result of the competition for and limited availability of the raw materials needed for our electric vehicle business, the costs of such materials are difficult to accurately forecast as they may fluctuate during the term of the offtake agreements and other long-term purchase contracts based on market conditions. Accordingly, we may be subject to increases in the prices we pay for those raw materials, and our ability to recoup such costs through increased pricing to our customers may be limited. As a result, our margins, results of operations, financial condition, and reputation may be adversely impacted by commitments we make pursuant to offtake agreements and other long-term purchase contracts.
Ford’s long-term competitiveness depends on the successful execution of Ford+. We previously announced our plan for growth and value creation – Ford+. Ford+ is focused on delivering distinctive and increasingly electric products plus “Always-On” customer relationships and user experiences. Our Ford+ plan is designed to leverage our foundational strengths to build new capabilities – enriching customer experiences and deepening loyalty. As we undertake this transformation of our business, we must integrate our strategic initiatives into a cohesive business model, and balance competing priorities, or we will not be successful. To facilitate this transformation, we are making substantial investments, recruiting new talent, and optimizing our business model, management system, and organization. Accordingly, maintaining discipline in our capital allocation continues to be important, as a strong core business and a balance sheet that provides the flexibility to invest in these new growth opportunities is critical to the success of our Ford+ plan. If we are unable to optimize our capital allocation among vehicles, services, technology, and other calls on capital, or we are otherwise not successful in executing Ford+ (or are delayed for reasons outside of our control), we may not be able to realize the full benefits of our plan, which could have an adverse effect on our financial condition or results of operations. Furthermore, if we fail to make progress on our plan at the pace that shareholders expect, it may lead to an increase in shareholder activism, which may disrupt the conduct of our business and divert management’s attention and resources.
Ford’s vehicles could be affected by defects that result in delays in new model launches, recall campaigns, or increased warranty costs. Government safety standards require manufacturers to remedy defects related to vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard. We may also be obligated to remedy defects or potentially recall our vehicles due to defective components provided to us by our suppliers, arising from their quality issues or otherwise. NHTSA’s enforcement strategy has resulted in significant civil penalties being levied and the use of consent orders requiring direct oversight by NHTSA of certain manufacturers’ safety processes, a trend that could continue. Should we or government safety regulators determine that a safety or other defect or a noncompliance exists with respect to certain of our vehicles prior to the start of production, the launch of such vehicle could be delayed until such defect is remedied. The cost of recall and customer satisfaction actions to remedy defects in vehicles that have been sold could be substantial, particularly if the actions relate to global platforms or involve defects that are identified years after production. For example, NHTSA and the automotive industry are currently engaged in a study of the safety of approximately 56 million Takata desiccated airbag inflators in the United States. Of these, approximately three and a half million of the inflators are in our vehicles. Should NHTSA determine that the inflators contain a safety defect, Ford and other manufacturers could potentially face significant incremental recall costs. Further, to the extent recall and customer satisfaction actions relate to defective components we receive from suppliers, our ability to recover from the suppliers may be limited by the suppliers’ financial condition. We accrue the estimated cost of both base warranty coverages and field service actions at the time a vehicle is sold, and we reevaluate the adequacy of our accruals on a regular basis. 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. For additional information regarding warranty and field service action costs, including our process for establishing our reserves, see “Critical Accounting Estimates” in Item 7 and Note 25 of the Notes to the Financial Statements. If warranty costs are greater than anticipated as a result of increased vehicle and component complexity, the adoption of new technologies, or otherwise, such costs could have an adverse effect on our financial condition or results of operations. Furthermore, launch delays, recall actions, and increased warranty costs could adversely affect our reputation or market acceptance of our products as discussed below under “Ford’s new and existing products and digital, software, and physical services are subject to market acceptance and face significant competition from existing and new entrants in the automotive and digital and software services industries, and its reputation may be harmed if it is unable to achieve the initiatives it has announced.”
Item 1A. Risk Factors (Continued)
Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, restructurings, or new business strategies. We have invested in, formed strategic alliances with, and announced or formed joint ventures with a number of companies, and we may expand those relationships or enter into similar relationships with additional companies. These initiatives typically involve enormous complexity, may require a significant amount of capital, and may involve a lengthy regulatory approval process. As a result, we may not be able to complete anticipated transactions, the anticipated benefits of these transactions may not be realized, or the benefits may be delayed. For example, we may not successfully integrate an alliance or joint venture with our operations, including the implementation of our controls, systems, procedures, and policies, or unforeseen expenses or liabilities may arise that were not discovered during due diligence prior to an investment or entry into a strategic alliance, or a misalignment of interests may develop between us and the other party. Further, to the extent we share ownership, control, or management with another party in a joint venture, our ability to influence the joint venture may be limited, and we may be unable to prevent misconduct or implement our compliance or internal control systems. In order to secure critical materials for production of electric vehicles, we have entered into and plan to continue to enter into offtake agreements and other long-term purchase contracts with raw materials suppliers and make investments in certain raw material and battery suppliers; however, we may not realize the anticipated benefits of these actions and our efforts to have such suppliers, particularly those in less developed markets, adopt Ford’s sustainability and other standards may be unsuccessful, which could have an adverse impact on our reputation. In addition, a restructuring or the implementation of a new or different business strategy may lead to the disruption of our existing business operations, including distracting management from current operations. Results of operations from new activities may be lower than our existing activities, and, if a strategy is unsuccessful, we may not recoup our investments, which may be significant, in that strategy. Moreover, we may continue to have financial exposure following a strategic divestiture or cessation of operations in a market, and restructuring actions may cause us to incur significant costs, record impairments or other charges, subject us to potential claims from employees, suppliers, dealers, or governmental authorities or harm our reputation. Failure to successfully and timely realize the anticipated benefits of the transactions or strategies described herein could have an adverse effect on our financial condition or results of operations.
Operational systems, security systems, vehicles, and services could be affected by cyber incidents, ransomware attacks, and other disruptions and impact Ford and Ford Credit as well as their suppliers and dealers. We rely on information technology networks and systems, including in-vehicle systems and mobile devices, some of which are managed by suppliers, to process, transmit, and store electronic information that is important to the operation of our business, our vehicles, and the services we offer. Despite security measures, we are at risk for interruptions, outages, and compromises of: (i) operational systems (including business, financial, accounting, product development, consumer receivables, data processing, or manufacturing processes); (ii) facility security systems; and/or (iii) in-vehicle systems or mobile devices, whether caused by a ransomware or other cyber attack, security breach, or other reasons, e.g., a natural disaster, fire, acts of terrorism or war, or an overburdened infrastructure system. Such incidents could materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise the privacy of personal information of consumers, employees, or others; jeopardize the security of our facilities; affect the performance of in-vehicle systems or services we offer; and/or impact the safety of our vehicles. This risk exposure rises as we continue to develop and produce vehicles with increased connectivity. Moreover, we, our suppliers, and our dealers have been the target of cyber attacks in the past, and such attacks will continue and evolve in the future, which may cause cyber incidents to be more difficult to detect for periods of time. Our networks and in-vehicle systems, sharing similar architectures, could also be impacted by, or a data breach may result from, the negligence or misconduct of insiders or third parties who have access to our networks and systems. We continually employ capabilities, processes, and other security measures designed to reduce and mitigate the risk of cyber attacks, and we rely on our suppliers to do the same for their operations; however, we may not be aware of all vulnerabilities and such preventative measures cannot provide absolute security and may not be sufficient in all circumstances or mitigate all potential risks, including potential production disruption. Moreover, a cyber incident could harm our reputation, cause customers to lose trust in our security measures, and/or subject us to regulatory actions or litigation, which may result in fines, penalties, judgments, or injunctions, and a cyber incident involving us or one of our suppliers could impact production, our internal operations, or our ability to deliver products and services to our customers.
Item 1A. Risk Factors (Continued)
Ford’s production, as well as Ford’s suppliers’ production, and/or the ability to deliver products to consumers could be disrupted by labor issues, natural or man-made disasters, adverse effects of climate change, financial distress, production difficulties, capacity limitations, or other factors. A work stoppage or other limitation on production could occur at Ford’s facilities, at a facility in its supply chain, or at one of its logistics providers for any number of reasons, including as a result of labor issues, including shortages of available employees, disputes under existing collective bargaining agreements with labor unions or in connection with negotiation of new collective bargaining agreements, absenteeism, public health issues (e.g., COVID-19), stay-at-home orders, or in response to potential restructuring actions (e.g., plant closures); as a result of supplier financial distress or other production constraints, such as limited quantities of components, including but not limited to semiconductors, or raw materials, quality issues, capacity limitations, or other difficulties; as a result of a natural disaster (including climate-related physical risk); cyber incidents; or for other reasons. Further, the limited availability of components, labor shortages, COVID-19, and supplier operating issues has led to an inconsistent production schedule at our facilities. This has exacerbated the disruption to our suppliers’ operations, which, in turn, has led to higher costs and production shortfalls.
Given the worldwide scope of our supply chain and operations, we and our suppliers face a risk of disruption or operating inefficiencies that may increase costs due to the adverse physical effects of climate change, which are predicted to increase the frequency and severity of weather and other natural events, e.g., wildfires, extended droughts, and extreme temperatures. In addition, in the event a weather-related event, strike, international conflict, or other occurrence limits the ability of freight carriers to deliver components and other materials from suppliers to us or logistics providers to transport our vehicles for an extended period of time, it may increase our costs and delay or otherwise impact both our production operations and customers’ ability to receive our vehicles.
Many components used in our vehicles are available only from a single or limited number of suppliers and, therefore, cannot be re-sourced quickly or inexpensively to another supplier (due to long lead times, new contractual commitments that may be required by another supplier before ramping up to provide the components or materials, etc.). Such suppliers also could threaten to disrupt our production as leverage in negotiations. In addition, when we undertake a model changeover, significant downtime at one or more of our production facilities may be required, and our ability to return to full production may be delayed if we experience production difficulties at one of our facilities or a supplier’s facility. Moreover, as vehicles, components, and their integration become more complex, we may face an increased risk of a delay in production of new vehicles. Regardless of the cause, our ability to recoup lost production volume may be limited. Accordingly, a significant disruption to our production schedule could have a substantial adverse effect on our financial condition or results of operations and may impact our strategy to comply with fuel economy standards as discussed below under “Ford may need to substantially modify its product plans and facilities to comply with safety, emissions, fuel economy, autonomous driving technology, environmental, and other regulations.”
Ford’s ability to maintain a competitive cost structure could be affected by labor or other constraints. The vast majority of the hourly employees in our Ford Blue and Ford Model e manufacturing operations in the United States and Canada are represented by unions and covered by collective bargaining agreements. These agreements provide guaranteed wage and benefit levels throughout the contract term and some degree of income security, subject to certain conditions. These agreements may restrict our ability to close plants and divest businesses. A substantial number of our employees in other regions are represented by unions or government councils, and legislation or custom promoting retention of manufacturing or other employment in the state, country, or region may constrain as a practical matter our ability to sell or close manufacturing or other facilities.
Ford’s ability to attract and retain talented, diverse, and highly skilled employees is critical to its success and competitiveness. Our success depends on our ability to continue to recruit and retain talented and diverse employees who are highly skilled in engineering, software, technology (including digital capabilities and connectivity), marketing, and finance, among other areas. Competition for such employees is intense, which has led to an increase in compensation throughout a tight labor market, and, accordingly, may increase costs for employers. We have struggled to hire and retain salaried, skilled hourly, and production hourly employees in some of our manufacturing and parts, supplies, and logistics locations. In addition to compensation considerations, current and potential employees are increasingly placing a premium on various intangibles, such as working for companies with a clear purpose and strong brand reputation, flexible work arrangements, and other considerations, such as embracing sustainability and diversity, equity, and inclusion initiatives. If we are not perceived as an employer of choice, we may be unable to recruit highly skilled employees. Further, if we lose existing employees with needed skills, or we are unable to upskill and develop existing employees, particularly with the introduction of new technologies, it could have a substantial adverse effect on our business.
Item 1A. Risk Factors (Continued)
Macroeconomic, Market, and Strategic Risks
Ford’s new and existing products and digital, software, and physical services are subject to market acceptance and face significant competition from existing and new entrants in the automotive and digital and software services industries, and its reputation may be harmed if it is unable to achieve the initiatives it has announced. Although we conduct extensive market research before launching new or refreshed vehicles and introducing new services, many factors both within and outside our control affect the success of new or existing products and services in the marketplace, and we may not be able to accurately predict or identify emerging trends or preferences or the success of new products or services in the market. It takes years to design and develop a new vehicle or change an existing vehicle. Because customers’ preferences may change quickly, our new and existing products may not generate sales in sufficient quantities and at costs low enough to be profitable and recoup investment costs. Offering vehicles and services that customers want and value can mitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less desirable (whether in terms of price, quality, styling, safety, overall value, fuel efficiency, or other attributes) can exacerbate these risks. For example, if we are unable to differentiate our products and services from those of our competitors, develop innovative new products and services, or sufficiently tailor our products and services to customers in other markets, there could be insufficient demand for our products and services, which could have an adverse impact on our financial condition or results of operations.
With increased consumer interconnectedness through the internet, social media, and other media, mere allegations relating to quality, safety, fuel efficiency, sustainability, corporate social responsibility, or other key attributes can negatively impact our reputation or market acceptance of our products or services, even where such allegations prove to be inaccurate or unfounded. Further, our ability to successfully grow through capacity expansion and investments in the areas of electrification, connectivity, digital and physical services, and software services depends on many factors, including advancements in technology, regulatory changes, infrastructure development (e.g., a widespread vehicle charging network), and other factors that are difficult to predict, that may significantly affect the future of electric and autonomous vehicles, digital and physical services, and software services. The automotive, software, and digital service businesses are very competitive and are undergoing rapid changes. Traditional competitors are expanding their offerings, and new types of competitors (particularly in our areas of strength, e.g., pick-up trucks, utilities, and commercial vehicles) that may possess superior technology, may have business models with certain aspects that are more efficient, and are not subject to the same level of fixed costs as us, are entering the market. This level of competition increases the importance of our ability to anticipate, develop, and deliver products and services that customers desire on a timely basis, in quantities in line with demand, and at costs low enough to be profitable.
We have announced our intent to continue making multi-billion dollar investments in electrification and software services. Our plans include offering electrified versions of many of our vehicles, including the F-150 Lightning and E-Transit. If the market for electrified vehicles does not develop at the rate we expect, even if the regulatory framework encourages a rapid adoption of electrified vehicles, there is a negative perception of our vehicles or about electric vehicles in general, or if consumers prefer our competitors’ vehicles, there could be an adverse impact on our financial condition or results of operations. Further, as discussed below under “Ford may need to substantially modify its product plans and facilities to comply with safety, emissions, fuel economy, autonomous driving technology, environmental, and other regulations,” lower than planned market acceptance of our vehicles may impact our strategy to comply with fuel economy standards.
Ford is addressing its impact on climate change aligned with the United Nations Framework Convention on Climate Change (Paris Agreement) by working to reduce our carbon footprint over time across our vehicles, operations, and supply chain. We have announced interim emissions targets approved by the Science Based Targets initiative (SBTi) and made other statements about similar initiatives, e.g., our expected electric vehicle volumes in future years. Achievement of these initiatives will require significant investments and the implementation of new processes; however, there is no assurance that the desired outcomes will be achieved. To the extent we are unable to achieve these initiatives or our transition to electrification is slower than expected, it may harm our reputation or we may not otherwise receive the expected return on the investment. For example, we are exposed to reputational risk if we do not reduce vehicle CO2 emissions in line with our targets or in compliance with applicable regulations. Further, our customers and investors evaluate how well we are progressing on our announced climate goals and aspirations, and if we are not on track to achieve those goals and aspirations on a timely basis, or if the expectations of our customers and investors change and we do not adequately address their expectations, our reputation could be impacted, and customers may choose to purchase the products and services of, investors may choose to invest in, and suppliers and vendors may choose to do business with other companies.
Item 1A. Risk Factors (Continued)
Moreover, new offerings, including those related to electric vehicles and autonomous driving technologies, may present technological challenges that could be costly to implement and overcome and may subject us to customer claims if they do not operate as anticipated. In addition, since new technologies are subject to market acceptance, a malfunction involving any manufacturer’s autonomous vehicle may negatively impact the perception of autonomous vehicles and erode customer trust.
Ford’s results are dependent on sales of larger, more profitable vehicles, particularly in the United States. A shift in consumer preferences away from larger, more profitable vehicles with internal combustion engines (including trucks and utilities) to electric or other vehicles in our portfolio that may be less profitable could result in an adverse effect on our financial condition or results of operations. If demand for electric vehicles grows at a rate greater than our ability to increase our production capacity for those vehicles, lower market share and revenue, as well as facility and other asset-related charges (e.g., accelerated depreciation) associated with the production of internal combustion vehicles, may result. In addition, government regulations aimed at reducing emissions and increasing fuel efficiency (e.g., ZEV mandates and low emission zones) and other factors that accelerate the transition to electric vehicles may increase the cost of vehicles by more than the perceived benefit to consumers and dampen margins.
With a global footprint, Ford’s results could be adversely affected by economic or geopolitical developments, including protectionist trade policies such as tariffs, or other events. Because of the interconnectedness of the global economy, the challenges of a pandemic, a financial crisis, economic downturn or recession, natural disaster, war, geopolitical crises, or other significant events in one area of the world can have an immediate and material adverse impact on markets around the world. Changes in international trade policy can also have a substantial adverse effect on our financial condition or results of operations. Steps taken by governments to apply or consider applying tariffs on automobiles, parts, and other products and materials have the potential to disrupt existing supply chains, impose additional costs on our business, and may lead to other countries attempting to retaliate by imposing tariffs, which would make our products more expensive for customers, and, in turn, could make our products less competitive. In particular, China presents unique risks to U.S. automakers due to the strain in U.S.-China relations, China’s unique regulatory landscape, and the level of integration with key components in our global supply chain.
Ford has operations in various markets with volatile economic or political environments. This may expose us to heightened risks as a result of economic, geopolitical, or other events, including governmental takeover (i.e., nationalization) of our manufacturing facilities or intellectual property, restrictive exchange or import controls, disruption of operations as a result of systemic political or economic instability, outbreak of war or expansion of hostilities (such as the actions taken by Russia in Ukraine), and acts of terrorism, each of which could impact our supply chain as well as our operations and have a substantial adverse effect on our financial condition or results of operations. Further, the U.S. government, other governments, and international organizations could impose additional sanctions or export controls that could restrict us from doing business directly or indirectly in or with certain countries or parties, which could include affiliates.
Industry sales volume can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event. Because we, like other manufacturers, have a higher proportion of fixed structural costs, relatively small changes in industry sales volume can have a substantial effect on our cash flow and results of operations. Vehicle sales are affected by overall economic and market conditions and developing trends such as shared vehicle ownership and the transportation as a service model, e.g., ridesharing services. If industry vehicle sales were to decline to levels significantly below our planning assumption, the decline could have a substantial adverse effect on our financial condition, results of operations, and cash flow. For a discussion of economic trends, see Item 7.
Ford may face increased price competition or a reduction in demand for its products resulting from industry excess capacity, currency fluctuations, competitive actions, or other factors. The global automotive industry is intensely competitive, with installed manufacturing capacity generally exceeding current demand. Historically, industry overcapacity has resulted in many manufacturers offering marketing incentives on vehicles in an attempt to maintain and grow market share; these incentives historically have included a combination of subsidized financing or leasing programs, price rebates, and other incentives. As a result, we are not necessarily able to set our prices to offset higher marketing incentives, commodity or other cost increases, tariffs, or the impact of adverse currency fluctuations. This risk includes cost advantages foreign competitors may have because of their weaker home market currencies, which may, in turn, enable those competitors to offer their products at lower prices. Further, higher inventory levels put downward pressure on pricing, which may have an adverse effect on our financial condition and results of operations. As the automotive industry transitions to electric vehicles, excess capacity, particularly for internal combustion engine trucks and utilities, may continue or increase. This excess capacity may further increase price competition in that segment of the market, which could have a substantial adverse effect on our financial condition or results of operations.
Item 1A. Risk Factors (Continued)
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. We and our suppliers are exposed to inflationary pressure and a variety of market risks, including the effects of changes in commodity and energy prices, foreign currency exchange rates, and interest rates. We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce potentially adverse effects on our business. Changes in commodity and energy prices (from tariffs and the actions taken by Russia in Ukraine, as discussed above under “With a global footprint, Ford’s results could be adversely affected by economic or geopolitical developments, including protectionist trade policies such as tariffs, or other events,” or otherwise), currency exchange rates, and interest rates cannot always be predicted, hedged, or offset with price increases to eliminate earnings volatility. As a result, significant changes in commodity and energy prices, foreign currency exchange rates, or interest rates as well as increased material, freight, logistics, and similar costs could have a substantial adverse effect on our financial condition or results of operations. See Item 7 and Item 7A for additional discussion of currency, commodity and energy price, and interest rate risks. For example, interest rates have increased significantly as central banks in developed countries attempt to subdue inflation while government deficits and debt remain at high levels in many global markets. Accordingly, the eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for the business. At Ford Credit, rising interest rates may impact Ford Credit’s ability to source funding and offer financing at competitive rates, which could reduce its financing margin. In addition, our results are impacted by fluctuations in the market value of our investments, with unrealized gains and losses that could be material in any period.
Financial Risks
Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors. Ford and Ford Credit’s ability to obtain unsecured funding at a reasonable cost is dependent on their credit ratings or their perceived creditworthiness. Further, Ford Credit’s ability to obtain securitized funding under its committed asset-backed liquidity programs and certain other asset-backed securitization transactions is subject to having a sufficient amount of assets eligible for these programs, as well as Ford Credit’s ability to obtain appropriate credit ratings and, for certain committed programs, derivatives to manage the interest rate risk. Over time, and particularly in the event of credit rating downgrades, market volatility, market disruption, or other factors, Ford Credit may reduce the amount of receivables it purchases or originates because of funding constraints. In addition, Ford Credit may reduce the amount of receivables it purchases or originates if there is a significant decline in the demand for the types of securities it offers or Ford Credit is unable to obtain derivatives to manage the interest rate risk associated with its securitization transactions. A significant reduction in the amount of receivables Ford Credit purchases or originates would significantly reduce its ongoing results of operations and could adversely affect its ability to support the sale of Ford vehicles.
Furthermore, in addition to rising interest rates adversely affecting overall economic activity and the financial condition of our customers, increases in interest rates could cause credit market disruptions, which have historically resulted in higher borrower costs and made it more difficult to access the markets, obtain financing on favorable terms, and fund our operations.
The impact of government incentives on Ford’s business could be significant, and Ford’s receipt of government incentives could be subject to reduction, termination, or clawback. We receive economic benefits from national, state, and local governments in various regions of the world in the form of incentives designed to encourage manufacturers to establish, maintain, or increase investment, workforce, or production. These incentives may take various forms, including grants, loan subsidies, or tax abatements or credits. The impact of these incentives can be significant in a particular market during a reporting period. A decrease in, expiration without renewal of, or other cessation or clawback of government incentives for any of our business units, as a result of administrative decision or otherwise, could have a substantial adverse impact on our financial condition or results of operations. Until 2021, most of our manufacturing facilities in South America were located in Brazil, where the state or federal governments historically offered significant incentives to manufacturers to encourage capital investment, increase manufacturing production, and create jobs. As a result, the performance of our South American operations had been impacted favorably by government incentives to a substantial extent. The federal government in Brazil has levied assessments against us concerning the federal incentives we previously received, and the State of São Paulo has challenged the grant to us of tax incentives by the State of Bahia. See Note 2 of the Notes to the Financial Statements for discussion of our accounting for government incentives, and “Item 3. Legal Proceedings” for a discussion of tax proceedings in Brazil and the potential requirement for us to post collateral.
Item 1A. Risk Factors (Continued)
The U.S. Inflation Reduction Act (“IRA”) provides, among other things, financial incentives in the form of tax credits to grow the domestic supply chain and domestic manufacturing base for electric vehicles, plug-in hybrid vehicles (PHEVs), and other “clean” vehicles. The law likewise incentivizes the purchase of clean vehicles and the infrastructure to fuel them. These incentives are phasing in and will remain in effect until approximately 2032, unless modified by Congress. The IRA’s incentives are having and are expected to have material impacts on the automotive industry and Ford. The IRA authorizes tax credits to manufacturers for the domestic production of batteries and battery components for EVs and PHEVs and to purchasers of qualified commercial and retail clean vehicles. Ford expects that many customers will be able to monetize the commercial clean vehicle credit in light of Ford’s range of electrified product offerings for commercial applications. When paired with the IRA’s tax credit for the construction of certain electric vehicle charging infrastructure, Ford expects the commercial clean vehicle credit will significantly influence commercial fleets in their evaluation of a transition from internal combustion engine vehicles to EVs and PHEVs.
To claim the retail tax credit, the IRA establishes numerous and complex prerequisites, including that the vehicle must be assembled in North America; the vehicle must be under specified limitations on manufacturer suggested retail price (“MSRP”); purchaser income limitations; starting in 2024, any vehicle that contains “battery components” that were “manufactured or assembled” by a “foreign entity of concern” will be ineligible; and, starting in 2025, any vehicle that contains battery materials that were “extracted, processed, or recycled” by a “foreign entity of concern” will be ineligible. A “Critical Minerals Credit” is available for those vehicles that have a specified percentage of critical minerals that are “extracted or produced” in the United States, in a country with which the United States has a Free Trade Agreement, or that is “recycled” in North America. A “Battery Components Credit” is available for those vehicles that have a specified percentage of “value” of its battery “components” that are “manufactured or assembled” in North America.
Although we ultimately expect the IRA to benefit Ford and the automotive industry in general, the availability of such benefits will depend on the further development and improvement of the U.S. battery supply, sufficient access to raw materials within the scope of the IRA, and the terms of the regulations and guidance (and the limitations therein) the U.S. government issues to implement the IRA, which will ultimately determine which vehicles qualify for incentives and the amount thereof. For example, in late 2022 interim guidance was released on how to apply the MSRP limitations to the retail clean vehicle credit, and subjected a significant number of SUVs to a lower MSRP limitation than the industry expected, thereby excluding vehicles that may otherwise be eligible for the credit. Automakers that better optimize eligibility for their vehicles, as compared to their competition, will have a competitive advantage.
Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles. Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit risk (which is heavily dependent upon economic factors including unemployment, consumer debt service burden, personal income growth, dealer profitability, and used car prices) has a significant impact on Ford Credit’s business. The level of credit losses Ford Credit may experience could exceed its expectations and adversely affect its financial condition or results of operations. In addition, Ford Credit projects expected residual values (including residual value support payments from Ford) and return volumes for the vehicles it leases. Actual proceeds realized by Ford Credit upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which would reduce Ford Credit’s return on the lease transaction. Among the factors that can affect the value of returned lease vehicles are the volume and mix of vehicles returned industry-wide, economic conditions, marketing programs, and quality or perceived quality, safety, fuel efficiency, or reliability of the vehicles, or changes in propulsion technology and related legislative changes. Actual return volumes may be influenced by these factors, as well as by contractual lease-end values relative to auction values. In 2022, Ford Credit experienced lower-than-expected return volumes. If auction values decrease significantly in the future, return volumes could exceed Ford Credit’s expectations. Each of these factors, alone or in combination, has the potential to adversely affect Ford Credit’s results of operations if actual results were to differ significantly from Ford Credit’s projections. See “Critical Accounting Estimates” in Item 7 for additional discussion.
Economic and demographic experience for pension and OPEB plans (e.g., discount rates or investment returns) could be worse than Ford has assumed. The measurement of our obligations, costs, and liabilities associated with benefits pursuant to our pension and OPEB plans requires that we estimate the present value of projected future payments to all participants. We use many assumptions in calculating these estimates, including assumptions related to discount rates, investment returns on designated plan assets, and demographic experience (e.g., mortality and retirement rates). We generally remeasure these estimates at each year end and recognize any gains or losses associated with changes to our plan assets and liabilities in the year incurred. To the extent actual results are less favorable than our assumptions, we may recognize a remeasurement loss in our results, which could be substantial. For additional information regarding our assumptions, see “Critical Accounting Estimates” in Item 7 and Note 17 of the Notes to the Financial Statements.
Item 1A. Risk Factors (Continued)
Pension and other postretirement liabilities could adversely affect Ford’s liquidity and financial condition. We have defined benefit retirement plans in the United States that cover many of our hourly and salaried employees. We also provide pension benefits to non-U.S. employees and retirees, primarily in Europe. In addition, we sponsor plans to provide OPEB for retired employees (primarily health care and life insurance benefits). See Note 17 of the Notes to the Financial Statements for more information about these plans. These benefit plans impose significant liabilities on us and could require us to make additional cash contributions, which could impair our liquidity. If our cash flows and capital resources are insufficient to meet any pension or OPEB obligations, we could be forced to reduce or delay investments and capital expenditures, suspend dividend payments, seek additional capital, or restructure or refinance our indebtedness.
Legal and Regulatory Risks
Ford and Ford Credit could experience unusual or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, services, perceived environmental impacts, or otherwise. We spend substantial resources to comply with governmental safety regulations, mobile and stationary source emissions regulations, consumer and automotive financial regulations, and other standards, but we cannot ensure that employees or other individuals affiliated with us will not violate such laws or regulations. In addition, as discussed below under “Ford may need to substantially modify its product plans and facilities to comply with safety, emissions, fuel economy, autonomous driving technology, environmental, and other regulations” and “Ford Credit could be subject to new or increased credit regulations, consumer protection regulations, or other regulations,” regulatory standards and interpretations may change on short notice and impact our compliance status. Government investigations against Ford or Ford Credit could result in fines, penalties, or orders that could have an adverse impact on our financial condition, results of operations, or the operation of our business. Moreover, compliance with governmental standards does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk. In certain circumstances, courts may permit civil actions even where our vehicles, services, and financial products comply with federal and/or other applicable law. Furthermore, simply responding to actual or threatened litigation or government investigations of our compliance with regulatory standards, whether related to our products, services, or business or commercial relationships, requires significant expenditures of time and other resources. Litigation also is inherently uncertain, and we could experience significant adverse results, including compensatory and punitive damage awards, a disgorgement of profits or revenue, or injunctive relief, any of which could have an adverse effect on our financial condition, results of operations, or our business in general. In addition, adverse publicity surrounding an allegation may cause significant reputational harm that could have a significant adverse effect on our sales.
Ford may need to substantially modify its product plans and facilities to comply with safety, emissions, fuel economy, autonomous driving technology, environmental, and other regulations. The automotive industry is subject to regulations worldwide that govern product characteristics and that differ by global region, country, and sometimes within national boundaries. Further, additional and new regulations continue to be proposed to address concerns regarding the environment (including concerns about global climate change and its impact), vehicle safety, and energy independence, and the regulatory landscape can change on short notice. These regulations vary, but generally require that over time motor vehicles and engines emit less air pollution, including greenhouse gas emissions, oxides of nitrogen, hydrocarbons, carbon monoxide, and particulate matter. Similarly, we are making substantial investments in our facilities and revising our processes to not only comply with applicable regulations but also to make our operations more efficient and sustainable. As our suppliers make similar investments, those higher costs may be passed on to us. In the United States, legal and policy debates on environmental regulations are continuing, with a primary trend toward reducing GHG emissions and increasing vehicle electrification. Recently, different federal administrations have either sought to make standards more strict or to make them less strict, with one administration often replacing the regulations enacted by the last. Various third parties routinely seek judicial review of these federal regulatory and deregulatory efforts. In parallel, California continues to enact increasingly strict emissions standards and requirements for zero emission vehicles, and those actions are also the subject of legal challenges from third parties. Court rulings regarding regulatory actions by federal, California, and other state regulators create uncertainty and the potential for applicable regulatory standards to change quickly. In addition, many governments regulate local product content and/or impose import requirements with the aim of creating jobs, protecting domestic producers, and influencing the balance of payments.
Item 1A. Risk Factors (Continued)
We are continuing to make changes to our product cycle plan to improve the fuel economy of our petroleum-powered vehicles and to offer more propulsion choices, such as electrified vehicles, with lower GHG emissions. Electrification is our core strategy to comply with current and anticipated environmental laws and regulations in major markets. However, there are limits on our ability to reduce emissions and increase fuel economy over a given time frame and many factors are involved that could delay or impede our plans, primarily relating to the cost and effectiveness of available technologies, consumer acceptance of new technologies and changes in vehicle mix (as described in more detail above under “Ford’s new and existing products and digital, software, and physical services are subject to market acceptance and face significant competition from existing and new entrants in the automotive and digital and software services industries, and its reputation may be harmed if it is unable to achieve the initiatives it has announced”), willingness of consumers to absorb the additional costs of new technologies, the appropriateness (or lack thereof) of certain technologies for use in particular vehicles, the widespread availability (or lack thereof) of supporting infrastructure for new technologies, including charging for electric vehicles, the availability (or lack thereof) of the raw materials and component supply to make batteries and other elements of electric vehicles, and the human, engineering, and financial resources necessary to deploy new technologies across a wide range of products and powertrains in a short time. If fuel prices are relatively low and market conditions do not drive consumers to purchase electric vehicles and other highly fuel-efficient vehicles in large numbers, it may be difficult to meet applicable environmental standards without compromising results. Moreover, a production disruption, stop ship, limited availability of necessary components, e.g., batteries or the raw materials necessary for their production, lower than planned market acceptance of our vehicles, or other intervening events may cause us to modify our product plans, or, in some cases, purchase credits, in order to comply with standards regarding fuel economy and air pollution, which could have an adverse effect on our financial condition or results of operations and/or cause reputational harm.
Increased scrutiny of automaker emission compliance by regulators around the world has led to new regulations, more stringent enforcement programs, additional field actions, demands for reporting on the field performance of emissions components and higher scrutiny of field data, and/or delays in regulatory approvals. The cost to comply with existing government regulations (in addition to the cost of any field service actions that may result from regulatory actions) is substantial and additional regulations, changes in regulatory interpretations, or changes in consumer preferences that affect vehicle mix, as well as a non-compliance with applicable laws and regulations, could have a substantial adverse impact on our financial condition or results of operations. In addition, a number of governments, as well as non-governmental organizations, publicly assess vehicles to their own protocols. The protocols could change, and any negative perception regarding the performance of our vehicles subjected to such tests could reduce future sales. Court decisions arising out of consumer and investor litigation could give rise to de facto changes in the interpretation of existing emission laws and regulations, thereby imposing new burdens on manufacturers. For more discussion of the impact of standards on our global business, see the “Governmental Standards” discussion in “Item 1. Business” above.
We and other companies continue to develop autonomous vehicle technologies, and the U.S. and foreign governments are continuing to develop the regulatory framework that will govern autonomous vehicles. The evolution of the regulatory framework for autonomous vehicles, and the pace of the development of such regulatory framework, may subject us to increased costs and uncertainty, and may ultimately impact our ability to deliver autonomous vehicles and related services that customers want.
Ford and Ford Credit could be affected by the continued development of more stringent privacy, data use, and data protection laws and regulations as well as consumers’ heightened expectations to safeguard their personal information. We are subject to laws, rules, guidelines from privacy regulators, and regulations in the United States and other countries (such as the European Union’s and the U.K.’s General Data Protection Regulations and the California Consumer Privacy Act) relating to the collection, use, cross-border data transfer, and security of personal information of consumers, employees, or others, including laws that may require us to notify regulators and affected individuals of a data security incident. Existing and newly developed laws and regulations may contain broad definitions of personal information, are subject to change and uncertain interpretations by courts and regulators, and may be inconsistent from state to state or country to country. Accordingly, complying with such laws and regulations may lead to a decline in consumer engagement or cause us to incur substantial costs to modify our operations or business practices. Moreover, regulatory actions seeking to impose significant financial penalties for noncompliance and/or legal actions (including pursuant to laws providing for private rights of action by consumers) could be brought against us in the event of a data compromise, misuse of consumer information, or perceived or actual non-compliance with data protection or privacy requirements. Further, any unauthorized release of personal information could harm our reputation, disrupt our business, cause us to expend significant resources, and lead to a loss of consumer confidence resulting in an adverse impact on our business and/or consumers deciding to withhold or withdraw consent for our collection or use of data.
Item 1A. Risk Factors (Continued)
Ford Credit could be subject to new or increased credit regulations, consumer protection regulations, or other regulations. As a finance company, Ford Credit is highly regulated by governmental authorities in the locations in which it operates, which can impose significant additional costs and/or restrictions on its business. In the United States, for example, Ford Credit’s operations are subject to regulation and supervision under various federal, state, and local laws, including the federal Truth-in-Lending Act, Consumer Leasing Act, Equal Credit Opportunity Act, and Fair Credit Reporting Act.
The Dodd-Frank Act directs federal agencies to adopt rules to regulate the finance industry and the capital markets and gives the Consumer Financial Protection Bureau (“CFPB”) broad rule-making and enforcement authority for a wide range of consumer financial protection laws that regulate consumer finance businesses, such as Ford Credit’s automotive financing business. Exercise of these powers by the CFPB may increase the costs of, impose additional restrictions on, or otherwise adversely affect companies in the automotive finance business. The CFPB has authority to supervise and examine the largest nonbank automotive finance companies, such as Ford Credit, for compliance with consumer financial protection laws.
Failure to comply with applicable laws and regulations could subject Ford Credit to regulatory enforcement actions, including consent orders or similar orders where Ford Credit may be required to revise practices, remunerate customers, or pay fines. An enforcement action against Ford Credit could harm Ford Credit’s reputation or lead to further litigation.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
Our principal properties include manufacturing and assembly facilities, distribution centers, warehouses, sales or administrative offices, and engineering centers.
We own substantially all of our U.S. manufacturing and assembly facilities. Our facilities are situated in various sections of the country and include assembly plants, engine plants, casting plants, metal stamping plants, transmission plants, and other component plants. Most of our distribution centers are leased (we own approximately 35% of the total square footage, and lease the balance). The majority of the warehouses that we operate are leased, although many of our manufacturing and assembly facilities contain some warehousing space. Substantially all of our sales offices are leased space. Approximately 85% of the total square footage of our testing, prototype, and operations space is owned by us.
In addition, we maintain and operate manufacturing plants, assembly facilities, parts distribution centers, and engineering centers outside of the United States. We own substantially all of our non-U.S. manufacturing plants, assembly facilities, and engineering centers. The majority of our parts distribution centers outside of the United States are either leased or provided by vendors under service contracts.
We and the entities that we consolidated as of December 31, 2022 use 13 engineering and research facilities and 44 manufacturing and assembly plants, which includes plants that are operated by us or our consolidated joint venture that support our Automotive segment.
We have one significant consolidated joint venture in our Automotive segment:
•Ford Vietnam Limited — a joint venture between Ford (75% partner) and Diesel Song Cong One Member Limited Liability Company (a subsidiary of the Vietnam Engine and Agricultural Machinery Corporation, which in turn is majority owned (87.43%) by the State of Vietnam represented by the Ministry of Industry and Trade) (25% partner). Ford Vietnam Limited assembles and distributes a variety of Ford passenger and commercial vehicle models. The joint venture operates one plant in Vietnam.
In addition to the plants that we operate directly or that are operated by our consolidated joint venture, additional plants that support our Automotive segment are operated by unconsolidated joint ventures of which we are a partner. The most significant of our Automotive segment unconsolidated joint ventures are as follows:
•AutoAlliance (Thailand) Co., Ltd. (“AAT”) — a 50/50 joint venture between Ford and Mazda that owns and operates a manufacturing plant in Rayong, Thailand. AAT produces Ford and Mazda products for domestic and export sales.
•BlueOval SK, LLC — a 50/50 joint venture among Ford, SK On Co., Ltd., and SK Battery America, Inc. (a wholly owned subsidiary of SK On) that will build and operate electric vehicle battery plants in Tennessee and Kentucky to supply batteries to Ford and Ford affiliates.
•Changan Ford Automobile Corporation, Ltd. (“CAF”) — a 50/50 joint venture between Ford and Chongqing Changan Automobile Co., Ltd. (“Changan”). CAF operates four assembly plants, an engine plant, and a transmission plant in China where it produces and distributes a variety of Ford passenger vehicle models.
•Ford Lio Ho Motor Company Ltd. (“FLH”) — a joint venture in Taiwan between Ford (26% partner) and local partners (74% ownership in aggregate) that assembles a variety of Ford vehicles sourced from Ford. In addition to domestic assembly, FLH imports Ford brand built-up vehicles from Asia Pacific, Europe, and the United States. The joint venture operates one plant in Taiwan.
•Ford Otomotiv Sanayi Anonim Sirketi (“Ford Otosan”) — a joint venture in Türkiye among Ford (41% partner), the Koc Group of Türkiye (41% partner), and public investors (18%) that is the sole supplier to us of the Transit, Transit Custom, and Transit Courier commercial vehicles, and, as of July 2022, the sole supplier of the Puma and EcoSport for Europe and is the sole distributor of Ford vehicles in Türkiye. Ford Otosan also manufactures Ford heavy trucks for markets in Europe, the Middle East, and Africa. The joint venture owns three plants, a parts distribution depot, and a research and development center in Türkiye, and, as of July 2022, a combined vehicle and engine plant in Romania.
Item 2. Properties (Continued)
•JMC — a publicly-traded company in China with Ford (32% shareholder) and Nanchang Jiangling Investment Co., Ltd. (41% shareholder) as its controlling shareholders. Nanchang Jiangling Investment Co., Ltd. is a 50/50 joint venture between Changan and Jiangling Motors Company Group. The public investors in JMC own 27% of its total outstanding shares. JMC assembles Ford Transit, a series of Ford SUVs, Ford engines, and non-Ford vehicles and engines for distribution in China and in other export markets. JMC operates two assembly plants and one engine plant in Nanchang.
The facilities described above are, in the opinion of management, suitable and adequate for the manufacture and assembly of our and our joint ventures’ products.
The furniture, equipment, and other physical property owned by our Ford Credit operations are not material in relation to the operations’ total assets.
ITEM 3. Legal Proceedings.
The litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. See Note 25 of the Notes to the Financial Statements for a discussion of loss contingencies. Following is a discussion of our significant pending legal proceedings:
PRODUCT LIABILITY MATTERS
We are a defendant in numerous actions in state and federal courts within and outside of the United States alleging damages from injuries resulting from (or aggravated by) alleged defects in our vehicles. In many actions, no monetary amount of damages is specified or the specific amount alleged is the jurisdictional minimum. Our experience with litigation alleging a specific amount of damages suggests that such amounts, on average, bear little relation to the actual amount of damages, if any, that we will pay in resolving such matters.
In addition to pending actions, we assess the likelihood of incidents that likely have occurred but not yet been reported to us. We also take into consideration specific matters that have been raised as claims but have not yet proceeded to litigation. Individual product liability matters that have more than a remote risk of loss and such loss would likely be significant if the matter is resolved unfavorably to us would be described herein. Currently there are no such matters to report.
Below is a product liability matter currently pending against Ford:
Hill v. Ford. Plaintiffs in this product liability action pending in Georgia state court allege that the roof of a 2002 Ford F-250 involved in a rollover accident was defectively designed. During the first trial in 2018, the judge declared a mistrial, ruled that Ford’s attorneys had violated pre-trial rulings while presenting evidence, and sanctioned Ford by prohibiting Ford from introducing any evidence at the second trial to show that the roof design of the F-250 was not defective. During the second trial in August 2022, a jury found that Pep Boys (the party that sold the tires on the vehicle involved in the rollover accident) was responsible for 30% of the damages, and Ford, as a direct result of the sanctions order prohibiting Ford from presenting its defense, was responsible for 70% of the damages, resulting in $16.8 million in damages being apportioned to Ford. The jury subsequently awarded punitive damages against Ford in the amount of $1.7 billion. We have filed post-trial motions and are seeking a new trial. A hearing on our post-trial motions was held on December 19, 2022, and we believe the law supports our position that Ford is entitled to a new trial with the right to present evidence in its defense.
Item 3. Legal Proceedings (Continued)
ASBESTOS MATTERS
Asbestos was used in some brakes, clutches, and other automotive components from the early 1900s. Along with other vehicle manufacturers, we have been the target of asbestos litigation and, as a result, are a defendant in various actions for injuries claimed to have resulted from alleged exposure to Ford parts and other products containing asbestos. Plaintiffs in these personal injury cases allege various health problems as a result of asbestos exposure, either from component parts found in older vehicles, insulation or other asbestos products in our facilities, or asbestos aboard our former maritime fleet. We believe that we are targeted more aggressively in asbestos suits because many previously targeted companies have filed for bankruptcy or emerged from bankruptcy relieved of liability for such claims.
Most of the asbestos litigation we face involves individuals who claim to have worked on the brakes of our vehicles. We are prepared to defend these cases and believe that the scientific evidence confirms our long-standing position that there is no increased risk of asbestos-related disease as a result of exposure to the type of asbestos formerly used in the brakes on our vehicles. The extent of our financial exposure to asbestos litigation remains very difficult to estimate and could include both compensatory and punitive damage awards. The majority of our asbestos cases do not specify a dollar amount for damages; in many of the other cases the dollar amount specified is the jurisdictional minimum, and the vast majority of these cases involve multiple defendants. Some of these cases may also involve multiple plaintiffs, and we may be unable to tell from the pleadings which plaintiffs are making claims against us (as opposed to other defendants). Annual payout and defense costs may become significant in the future. Our accrual for asbestos matters includes probable losses for both asserted and unasserted claims.
CONSUMER MATTERS
We provide warranties on the vehicles we sell. Warranties are offered for specific periods of time and/or mileage and vary depending upon the type of product and the geographic location of its sale. Pursuant to these warranties, we will repair, replace, or adjust parts on a vehicle that are defective in factory-supplied materials or workmanship during the specified warranty period. We are a defendant in numerous actions in state and federal courts alleging breach of warranty and claiming damages based on state and federal consumer protection laws. Remedies under these statutes may include vehicle repurchase, civil penalties, and payment by Ford of the plaintiff’s attorneys’ fees. In some cases, plaintiffs also include an allegation of fraud. Remedies for a fraud claim may include contract rescission, vehicle repurchase, and punitive damages.
The cost of these litigation matters is included in our warranty costs. We accrue obligations for warranty costs at the time of sale using a patterned estimation model that includes historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. We reevaluate the adequacy of our accruals on a regular basis.
We are currently a defendant in a significant number of litigation matters relating to the performance of vehicles, including those equipped with DPS6 transmissions.
ENVIRONMENTAL MATTERS
We have received notices under various federal and state environmental laws that we (along with others) are or may be a potentially responsible party for the costs associated with remediating numerous hazardous substance storage, recycling, or disposal sites in many states and, in some instances, for natural resource damages. We also may have been a generator of hazardous substances at a number of other sites. The amount of any such costs or damages for which we may be held responsible could be significant. Any legal proceeding arising under any federal, state, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment, in which (i) a governmental authority is a party, and (ii) we believe there is the possibility of monetary sanctions (exclusive of interest and costs) in excess of $1,000,000 is described herein.
On June 16, 2022, the New Jersey Department of Environmental Protection (“NJDEP”) filed a complaint in the Superior Court of New Jersey (Bergen County) seeking natural resource damages and other claims related to the Ringwood Mines/Landfill Site located in Ringwood, New Jersey. We are defending the NJDEP’s allegations and have filed a motion to dismiss.
Item 3. Legal Proceedings (Continued)
CLASS ACTIONS
In light of the fact that few of the purported class actions filed against us in the past have been certified by the courts as class actions, in general we list those actions that (i) have been certified as a class action by a court of competent jurisdiction (and any additional purported class actions that raise allegations substantially similar to an existing and certified class), and (ii) have more than a remote risk of loss, and such loss would likely be significant if the action is resolved unfavorably to us. At this time, we have no such class actions filed against us.
OTHER MATTERS
Brazilian Tax Matters. One Brazilian state (São Paulo) and the Brazilian federal tax authority currently have outstanding substantial tax assessments against Ford Motor Company Brasil Ltda. (“Ford Brazil”) related to state and federal tax incentives Ford Brazil received for its operations in the Brazilian state of Bahia. The São Paulo assessment is part of a broader conflict among various states in Brazil. The federal legislature enacted laws designed to encourage the states to end that conflict, and in 2017 the states reached an agreement on a framework for resolution. Ford Brazil continues to pursue a resolution under the framework and expects the amount of any remaining assessments by the states to be resolved under that framework. The federal assessments are outside the scope of the legislation.
All of the outstanding assessments have been appealed to the relevant administrative court of each jurisdiction. To proceed with an appeal within the judicial court system, an appellant may be required to post collateral. To date, we have not been required to post any collateral. If we are required to post collateral, which could be in excess of $1 billion, we expect it to be in the form of fixed assets, surety bonds, and/or letters of credit, but we may be required to post cash collateral. Although the ultimate resolution of these matters may take many years, we consider our overall risk of loss to be remote.
Transit Connect Customs Penalty Notice. U.S. Customs and Border Protection (“CBP”) ruled in 2013 that Transit Connects imported as passenger wagons and later converted into cargo vans are subject to the 25% duty applicable to cargo vehicles, rather than the 2.5% duty applicable to passenger vehicles. We filed a challenge in the U.S. Court of International Trade (“CIT”), and CIT ruled in our favor in 2017. CBP subsequently filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit, which ruled in favor of CBP. Following the U.S. Supreme Court’s denial of our petition for a writ of certiorari in 2020, we paid the increased duties for certain prior imports, plus interest, and disclosed that CBP might assert a claim for penalties. Subsequently, CBP issued a penalty notice to us dated July 22, 2021, and on November 18, 2021, CBP assessed against us a monetary penalty of $1.3 billion and additional duties of $181 million, plus interest. We intend to vigorously defend our actions and contest payment of the penalty and the additional duties.
European Commission and U.K. Competition and Markets Authority Matter. On March 15, 2022, the European Commission (the “Commission”) and the U.K. Competition and Markets Authority (the “CMA”) conducted unannounced inspections at the premises of, and sent formal requests for information to, several companies and associations active in the automotive sector, including Ford. The inspections and requests for information concern possible collusion in relation to the collection, treatment, and recovery of end-of-life cars and vans (“ELVs”). We understand that the scope of the investigations includes determining whether manufacturers and importers of passenger cars and vans agreed to an approach to (i) the compensation of ELV collection, treatment, and recovery companies, and (ii) the use of data relating to the recyclability or recoverability of ELVs in marketing materials, and whether such conduct violates relevant competition laws. If a violation is found, a broad range of remedies is potentially available to the Commission and/or CMA, including imposing a fine and/or the prohibition or restriction of certain business practices. Given that this investigation is in its early stages, it is difficult to predict the outcome or what remedies, if any, may be imposed. We are cooperating with the Commission and the CMA as they complete their investigations.
ITEM 4. Mine Safety Disclosures.
Not applicable.
ITEM 4A. Executive Officers of Ford.
Our executive officers are as follows, along with each executive officer’s position and age at February 1, 2023: | | | | | | | | | | | | | | | | | | | | |
Name | | Position | | Position Held Since | | Age |
William Clay Ford, Jr. (a) | | Executive Chair and Chair of the Board | | September 2006 | | 65 |
James D. Farley, Jr. (b) | | President and Chief Executive Officer | | October 2020 | | 60 |
John Lawler | | Chief Financial Officer | | October 2020 | | 56 |
Michael Amend | | Chief Enterprise Technology Officer | | September 2021 | | 45 |
Steven P. Croley | | Chief Policy Officer and General Counsel | | July 2021 | | 57 |
J. Doug Field | | Chief Advanced Product Development and Technology Officer | | September 2022 | | 57 |
Marin Gjaja | | Chief Customer Officer, Ford Model e | | March 2022 | | 53 |
Jennifer Waldo | | Chief People and Employee Experience Officer | | May 2022 | | 46 |
Theodore Cannis | | CEO, Ford Pro | | May 2022 | | 56 |
Anning Chen | | President and Chief Executive Officer, Ford of China | | December 2018 | | 61 |
Ashwani (“Kumar”) Galhotra | | President, Ford Blue | | March 2022 | | 57 |
Cathy O’Callaghan | | Controller | | June 2018 | | 54 |
__________
(a)Also a Director, Chair of the Office of the Chair and Chief Executive, Chair of the Finance Committee, and a member of the Sustainability, Innovation and Policy Committee of the Board of Directors. Mr. Ford’s daughter, Alexandra Ford English, is a member of the Board of Directors.
(b)Also a Director and member of the Office of the Chair and Chief Executive.
Except as noted below, each of the officers listed above has been employed by Ford or its subsidiaries in one or more capacities during the past five years.
Prior to joining Ford:
•Michael Amend was President, Online, at Lowe’s from 2018 to 2021. From 2015 to 2018, Mr. Amend served as Executive Vice President, Omnichannel, at JCPenney.
•Steven Croley was a partner in the Washington, D.C., office of Latham & Watkins from 2017 to 2021. From 2014 to 2017, Mr. Croley served as General Counsel for the U.S. Department of Energy.
•J. Doug Field was Vice President, Special Projects Group, at Apple from 2018 to 2021. From 2013 to 2018, Mr. Field served as Tesla’s Senior Vice President of Engineering.
•Marin Gjaja was Senior Partner and Managing Director at Boston Consulting Group (“BCG”). He had been at BCG since 1996.
•Jennifer Waldo was Vice President, People Business Partners at Apple from March 2019 to April 2022. From September 2015 to February 2019, Ms. Waldo was Chief Human Resources Officer at GE Digital.
•Anning Chen held several leadership roles in Chery Automobile LTD, China from 2010 to 2018, including: Chief Executive Officer; Executive Vice President and Chief Operating Officer; and Vice President of Products and Engineering. He also held the positions of Chairman of the Board of Directors, Chery Jaguar Land Rover Automotive, China; and Chairman of the Board, Qoros Automotive, China.
Under our by-laws, executive officers are elected by the Board of Directors at an annual meeting of the Board held for this purpose or by a resolution to fill a vacancy. Each officer is elected to hold office until a successor is chosen or as otherwise provided in the by-laws.
NOTES TO THE FINANCIAL STATEMENTS
Table of Contents | | | | | | | | |
Footnote | | Page |
Note 1 | Presentation | |
Note 2 | Summary of Significant Accounting Policies | |
Note 3 | New Accounting Standards | |
Note 4 | Revenue | |
Note 5 | Other Income/(Loss) | |
Note 6 | Share-Based Compensation | |
Note 7 | Income Taxes | |
Note 8 | Capital Stock and Earnings/(Loss) Per Share | |
Note 9 | Cash, Cash Equivalents, and Marketable Securities | |
Note 10 | Ford Credit Finance Receivables and Allowance for Credit Losses | |
Note 11 | Inventories | |
Note 12 | Net Investment in Operating Leases | |
Note 13 | Net Property | |
Note 14 | Equity in Net Assets of Affiliated Companies | |
Note 15 | Other Investments | |
Note 16 | Other Liabilities and Deferred Revenue | |
Note 17 | Retirement Benefits | |
Note 18 | Lease Commitments | |
Note 19 | Debt and Commitments | |
Note 20 | Derivative Financial Instruments and Hedging Activities | |
Note 21 | Employee Separation Actions and Exit and Disposal Activities | |
Note 22 | Acquisitions and Divestitures | |
Note 23 | Accumulated Other Comprehensive Income/(Loss) | |
Note 24 | Variable Interest Entities | |
Note 25 | Commitments and Contingencies | |
Note 26 | Segment Information | |
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. PRESENTATION
For purposes of this report, “Ford,” the “Company,” “we,” “our,” “us,” or similar references mean Ford Motor Company, our consolidated subsidiaries, and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise. We also make reference to Ford Motor Credit Company LLC, herein referenced to as Ford Credit. Our consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We reclassified certain prior year amounts in our consolidated financial statements to conform to the current year presentation.
Certain Transactions Between Automotive, Mobility, and Ford Credit
Intersegment transactions occur in the ordinary course of business. Additional detail regarding certain transactions and the effect on each segment at December 31 was as follows (in billions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2022 |
| Automotive | | Mobility | | Ford Credit | | Automotive | | Mobility | | Ford Credit |
Trade and other receivables (a) | | | | | $ | 7.4 | | | | | | | $ | 10.6 | |
Unearned interest supplements and residual support (b) | | | | | (4.6) | | | | | | | (3.4) | |
Finance receivables and other (c) | | | | | 1.2 | | | | | | | 1.3 | |
Intersegment receivables/(payables) | $ | (1.4) | | | $ | — | | | 1.4 | | | $ | (1.5) | | | $ | — | | | 1.5 | |
__________ (a)Automotive receivables (generated primarily from vehicle and parts sales to third parties) sold to Ford Credit.
(b)Automotive pays amounts to Ford Credit at the point of retail financing or lease origination, which represent interest supplements and residual support.
(c)Primarily receivables with entities that are consolidated subsidiaries of Ford, including a sale-leaseback agreement between Automotive and Ford Credit relating primarily to vehicles that we lease to our employees.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For each accounting topic that is addressed in its own note, the description of the accounting policy may be found in the related note. Other significant accounting policies are described below.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect our results. Estimates are used to account for certain items such as marketing accruals, warranty costs, employee benefit programs, allowance for credit losses, and other items requiring judgment. Estimates are based on assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.
Foreign Currency
When an entity has monetary assets and liabilities denominated in a currency that is different from its functional currency, we remeasure those assets and liabilities from the transactional currency to the entity’s functional currency. The effect of this remeasurement process and the results of our related foreign currency hedging activities are reported in Cost of sales and Other income/(loss), net and were $(46) million, $(74) million, and $180 million, for the years ended 2020, 2021, and 2022, respectively.
Generally, our foreign subsidiaries use the local currency as their functional currency. We translate the assets and liabilities of our foreign subsidiaries from their respective functional currencies to U.S. dollars using end-of-period exchange rates. Changes in the carrying value of these assets and liabilities attributable to fluctuations in exchange rates are recognized in Foreign currency translation, a component of Other comprehensive income/(Ioss), net of tax. Upon sale or upon complete or substantially complete liquidation of an investment in a foreign subsidiary, the amount of accumulated foreign currency translation related to the entity is reclassified to income and recognized as part of the gain or loss on the investment.
Cash Equivalents
Cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal. A debt security is classified as a cash equivalent if it meets these criteria and if it has a remaining time to maturity of three months or less from the date of purchase. Amounts on deposit and available upon demand, or negotiated to provide for daily liquidity without penalty, are classified as Cash and cash equivalents. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are reported at par value on our consolidated balance sheets.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in Other assets in the non-current assets section of our consolidated balance sheets. Our Company excluding Ford Credit restricted cash balances primarily include various escrow agreements related to legal, insurance, customs, and environmental matters and cash held under the terms of certain contractual agreements. Our Ford Credit segment restricted cash balances primarily include cash held to meet certain local governmental and regulatory reserve requirements and cash held under the terms of certain contractual agreements. Restricted cash does not include required minimum balances or cash securing debt issued through securitization transactions.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Marketable Securities
Investments in debt securities with a maturity date greater than three months at the date of purchase and other debt securities for which there is more than an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal are classified and accounted for as either trading or available-for-sale marketable securities. Equity securities with a readily determinable fair value are classified and accounted for as trading marketable securities.
Realized gains and losses, interest income, and dividend income on all of our marketable securities and unrealized gains and losses on securities not classified as available for sale are recorded in Other income/(loss), net. Unrealized gains and losses on available-for-sale securities are recognized in Unrealized gains and losses on securities, a component of Other comprehensive income/(loss), net of tax. Realized gains and losses and reclassifications of accumulated other comprehensive income into net income are measured using the specific identification method.
On a quarterly basis, we review our available-for-sale debt securities for credit losses. We compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, we determine if a credit loss allowance is necessary. If a credit loss allowance is necessary, we will record an allowance, limited by the amount that fair value is less than the amortized cost basis, and recognize the corresponding charge in Other income/(loss), net. Factors we consider include the severity of the impairment, the reason for the decline in value, interest rate changes, and counterparty long-term ratings.
Trade, Notes, and Other Receivables
Trade, notes, and other receivables consist primarily of receivables from contracts with customers for the sale of vehicles, parts, and accessories. The current portion of trade and notes receivables is reported in Trade and other receivables, net. The non-current portion of notes receivables is reported in Other assets. Trade and notes receivables are initially recorded at transaction cost. Trade receivables are typically outstanding for 30 days or less. Each reporting period, we evaluate the collectibility of the trade and notes receivables and record an allowance for credit losses representing our estimate of the expected losses that result from all possible default events over the expected life of the receivables. Additions to the allowance for credit losses are made by recording charges to bad debt expense reported in Selling, administrative, and other expenses and Cost of sales. Trade and notes receivables are written off against the allowance for credit losses when the account is deemed to be uncollectible.
Net Intangible Assets and Goodwill
Indefinite-lived intangible assets and goodwill are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate the assets may be impaired. Goodwill impairment testing is also performed following an allocation of goodwill to a business to be disposed or a change in reporting units. We test for impairment by assessing qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit allocated the goodwill is less than its carrying amount. If the qualitative assessment indicates a possible impairment, the carrying value of the asset or reporting unit is compared with its fair value. Fair value is measured relying primarily on the income approach by applying a discounted cash flow method, the market approach using market values or multiples, and/or third-party valuations. We capitalize and amortize our finite-lived intangible assets over their estimated useful lives.
The carrying amount of intangible assets and goodwill is reported in Other assets in the non-current assets section of our consolidated balance sheets. Intangible assets are comprised primarily of advertising agreements, land rights, and technology licenses. The net carrying amount of our intangible assets was $111 million and $86 million at December 31, 2021 and 2022, respectively. For the periods presented, we have not recorded any material impairments for indefinite-lived intangibles. The net carrying amount of goodwill was $619 million and $603 million at December 31, 2021 and 2022, respectively. In 2021, we fully impaired goodwill for two investments in our Mobility segment. In 2022, we have not recorded any impairments for goodwill.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Held-and-Used Long-Lived Asset Impairment
We test long-lived asset groups when changes in circumstances indicate the carrying value may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected revenues or expenses, present cash flow losses combined with a history of 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. In addition, investing in new, emerging products (e.g., EVs) or services (e.g., connectivity) may require substantial upfront investment, 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, we also conduct a qualitative evaluation of the business growth trajectory, which includes updating our assessment of when positive cash flows are expected to be generated, confirming whether established milestones are being 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 forecasted cash flows are less than the carrying value of the assets, 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 amounts of those assets are depreciated over their remaining useful life. For the periods presented, we have not recorded any material impairments.
Held-for-Sale Asset Impairment
We perform an impairment test on a disposal group to be discontinued, held for sale (“HFS”), or otherwise disposed 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 (see Note 22). We also assess fair value if circumstances arise that were considered unlikely and, as a result, we decide not to sell a disposal group previously classified as HFS upon reclassification as held and used. When there is a change to a plan of sale, and the assets are reclassified from HFS to held and used, the long-lived assets would be reported at the lower of (i) the carrying amount before HFS designation, adjusted for depreciation that would have been recognized if the assets had not been classified as HFS, or (ii) the fair value at the date the assets no longer satisfy the criteria for classification as HFS.
Fair Value Measurements
We measure fair value of our financial instruments, including those held within our pension plans, using various valuation methods and prioritize the use of observable inputs. The use of observable and unobservable inputs and their significance in measuring fair value are reflected in our fair value hierarchy:
•Level 1 - inputs include quoted prices for identical instruments and are the most observable
•Level 2 - inputs include quoted prices for similar instruments and observable inputs such as interest rates, currency exchange rates, and yield curves
•Level 3 - inputs include data not observable in the market and reflect management judgment about the assumptions market participants would use in pricing the instruments
Fixed income securities, equities, commingled funds, derivative financial instruments, and alternative assets are remeasured and presented within our consolidated financial statements at fair value on a recurring basis. Finance receivables and debt are measured at fair value for the purpose of disclosure. Other assets and liabilities are measured at fair value on a nonrecurring basis.
Transfers into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Valuation Method
Fixed Income Securities. Fixed income securities primarily include government securities, government agency securities, corporate bonds, and asset-backed securities. We generally measure fair value using prices obtained from pricing services or quotes from dealers that make markets in such securities. Pricing methods and inputs to valuation models used by the pricing services depend on the security type (i.e., asset class). Where possible, fair values are generated using market inputs, including quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information. For fixed income securities that are not actively traded, the pricing services use alternative methods to determine fair value for the securities, including quotes for similar fixed income securities, matrix pricing, discounted cash flow using benchmark curves, or other factors. In certain cases, when market data are not available, we may use broker quotes or pricing services that use proprietary pricing models to determine fair value. The proprietary models incorporate unobservable inputs primarily consisting of prepayment curves, discount rates, default assumptions, recovery rates, yield assumptions, and credit spread assumptions.
An annual review is performed on the security prices received from our pricing services, which includes discussion and analysis of the inputs used by the pricing services to value our securities. We also compare the price of certain securities sold close to the quarter end to the price of the same security at the balance sheet date to ensure the reported fair value is reasonable.
Equities. Equity securities are primarily exchange-traded and are valued based on the closing bid, official close, or last trade pricing on an active exchange. If closing prices are not available, securities are valued at the last quoted bid price or may be valued using the last available price. Securities that are thinly traded or delisted are valued using unobservable pricing data.
Commingled Funds. Fixed income and public equity securities may each be combined into commingled fund investments. Most commingled funds are valued to reflect our interest in the fund based on the reported year-end net asset value (“NAV”).
Derivative Financial Instruments. Exchange-traded derivatives for which market quotations are readily available are valued at the last reported sale price or official closing price as reported by an independent pricing service on the primary market or exchange on which they are traded. Over-the-counter derivatives are not exchange traded and are valued using independent pricing services or industry-standard valuation models such as a discounted cash flow. When discounted cash flow models are used, projected future cash flows are discounted to a present value using market-based expectations for interest rates, foreign exchange rates, commodity prices, and the contractual terms of the derivative instruments. The discount rate used is the relevant benchmark interest rate (e.g., LIBOR, SOFR, SONIA) plus an adjustment for non-performance risk. The adjustment reflects the full credit default swap (“CDS”) spread applied to a net exposure, by counterparty, considering the master netting agreements and any posted collateral. We use our counterparty’s CDS spread when we are in a net asset position and our own CDS spread when we are in a net liability position. In cases when market data are not available, we use broker quotes and models (e.g., Black-Scholes) to determine fair value. This includes situations where there is a lack of liquidity for a particular currency or commodity, or when the instrument is longer dated. When broker quotes or models are used to determine fair value, the derivative is categorized within Level 3 of the hierarchy. All other derivatives are categorized within Level 2.
Alternative Assets. Hedge funds generally hold liquid and readily-priced securities, such as public equities, exchange-traded derivatives, and corporate bonds. Private equity and real estate investments are less liquid. External investment managers typically report valuations reflecting initial cost or updated appraisals, which are adjusted for cash flows, and realized and unrealized gains/losses. All alternative assets are valued at the NAV provided by the investment sponsor or third party administrator, as they do not have readily-available market quotations. Valuations may be lagged up to six months. The NAV will be adjusted for cash flows (additional investments or contributions, and distributions) through year end. We may make further adjustments for any known substantive valuation changes not reflected in the NAV.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We may hold annuity contracts within some of our non-U.S. pension plans (see Note 17). Generally, the contract valuation method is applied for markets where we have purchased non-participating annuity contracts from an insurer as a plan asset. The Ford-Werke GmbH (“Ford-Werke”) defined benefit plan is primarily funded through a participating group insurance contract. For the Ford-Werke plan, we measure the fair value of the insurance asset by projecting expected future cash flows from the contract and discounting them to present value based on current market rates as well as an assessment for non-performance risk of the insurance company. The assumptions used to project expected future cash flows are based on actuarial estimates and are unobservable. We include all annuity contracts within Level 3 of the hierarchy.
Finance Receivables. We measure finance receivables at fair value using internal valuation models (see Note 10). These models project future cash flows of financing contracts based on scheduled contract payments (including principal and interest) and assumptions regarding expected credit losses and pre-payment speed. The projected cash flows are discounted to present value at current rates that incorporate present yield curve and credit spread assumptions. The fair value of finance receivables is categorized within Level 3 of the hierarchy.
On a nonrecurring basis, we also measure at fair value retail contracts greater than 120 days past due or deemed to be uncollectible, and individual dealer loans probable of foreclosure. We use the fair value of collateral, adjusted for estimated costs to sell, to determine the fair value of these receivables. The collateral for a retail financing or wholesale receivable is the vehicle financed, and for dealer loans is real estate or other property.
The fair value of collateral for retail receivables is calculated as the outstanding receivable balances multiplied by the average recovery value percentage. The fair value of collateral for wholesale receivables is based on the wholesale market value or liquidation value for new and used vehicles. The fair value of collateral for dealer loans is determined by reviewing various appraisals, which include total adjusted appraised value of land and improvements, alternate use appraised value, broker’s opinion of value, and purchase offers.
Debt. We measure debt at fair value using quoted prices for our own debt with approximately the same remaining maturities (see Note 19). Where quoted prices are not available, we estimate fair value using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt instruments. For certain short-term debt with an original maturity date of one year or less, we assume that book value is a reasonable approximation of the debt’s fair value. The fair value of debt is categorized within Level 2 of the hierarchy.
Finance and Lease Incentives
We routinely sponsor special retail financing and lease incentives to dealers’ customers who choose to finance or lease our vehicles from Ford Credit. The cost for these incentives is included in our estimate of variable consideration when the vehicle is sold to the dealer. Ford Credit records a reduction to the finance receivable or reduces the cost of the vehicle operating lease when it records the underlying finance contract, and we transfer to Ford Credit the amount of the incentive on behalf of the dealer’s customer. See Note 1 for additional information regarding transactions between Automotive and Ford Credit. The Ford Credit segment recognized interest revenue of $2.4 billion, $2.4 billion, and $2.1 billion in 2020, 2021, and 2022, respectively, and lower depreciation of $2.3 billion, $1.9 billion, and $1.2 billion in 2020, 2021, and 2022, respectively, associated with these incentives.
Supplier Price Adjustments
We frequently negotiate price adjustments with our suppliers throughout a production cycle, even after receiving production material. These price adjustments relate to changes in design specification or other commercial terms such as economics, productivity, and competitive pricing. We recognize price adjustments when we reach final agreement with our suppliers. In general, we avoid direct price changes in consideration of future business; however, when these occur, our policy is to defer the recognition of any such price change given explicitly in consideration of future business.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Government Incentives
We receive incentives from U.S. and non-U.S. governmental entities in the form of tax rebates or credits, grants, and loans. Government incentives are recorded in our consolidated financial statements in accordance with their purpose as a reduction of expense or other income. The benefit is generally recorded when all conditions attached to the incentive have been met and there is reasonable assurance of receipt. Government incentives related to capital investment are recognized in Net Property as a reduction to the net book value of the related asset. The incentives are recognized over the life of the asset as a reduction to depreciation and amortization expense.
During 2022, we were awarded incentives by the State of Tennessee related to land, capital, and property tax abatements in connection with Ford’s capital investment in our new electric vehicle assembly plant and job commitments. These incentives are available until December 2051. The fair value of the land benefit in 2022 was $144 million and was recorded in Net Property fully offset by the value of the incentive. A capital grant of $285 million is expected to be received in 2023 and will reduce the depreciation and amortization expense over the life of the related assets.
In 2022, we were also awarded incentives by the Canadian government and Province of Ontario in connection with the development of electric vehicles at our Oakville Assembly Plant. Equipment, tooling, and labor incentives of C$590 million are expected to be received over the terms of the agreements beginning in 2024 through 2033 and will be recognized as a reduction of the related expenses.
Ford may also indirectly benefit from incentives and grants awarded to companies with which we are affiliated but are not included in our consolidated financial statements.
Ford’s receipt of government incentives could be subject to reduction, termination, or claw back. Claw back provisions are monitored for ongoing compliance and are accrued for when losses are deemed probable and estimable (see Note 25).
Selected Other Costs
Engineering, research, and development expenses are reported in Cost of sales and primarily consist of salaries, materials, and associated costs. Engineering, research, and development costs are expensed as incurred when performed internally or when performed by a supplier if we guarantee reimbursement. Advertising costs are reported in Selling, administrative, and other expenses and are expensed as incurred. Engineering, research, development, and advertising expenses for the years ended December 31 were as follows (in billions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Engineering, research, and development | $ | 7.1 | | | $ | 7.6 | | | $ | 7.8 | |
Advertising | 2.8 | | | 3.1 | | | 2.2 | |
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3. NEW ACCOUNTING STANDARDS
Adoption of New Accounting Standards
Accounting Standards Update (“ASU”) 2021-10, Government Assistance: Disclosures by Business Entities about Government Assistance. Effective January 1, 2022, we adopted the new standard, which requires entities to provide certain disclosures in annual period financial statements for those transactions with governments that are accounted for by applying a grant or contribution accounting model via analogy to other applicable accounting standards. Adoption of the new standard did not have a material impact to our consolidated financial statement disclosures.
We also adopted the following ASUs during 2022, none of which had a material impact to our consolidated financial statements or financial statement disclosures:
| | | | | | | | | | | |
ASU | | | Effective Date |
2021-04 | Issuer’s Accounting for Certain Modifications or Exchanges of Warrants | | January 1, 2022 |
2021-05 | Lessors - Certain Leases with Variable Lease Payments | | January 1, 2022 |
2021-08 | Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | | January 1, 2022 |
2022-06 | Reference Rate Reform: Deferral of the Sunset Date of Topic 848 | | December 21, 2022 |
Accounting Standards Issued But Not Yet Adopted
ASU 2022-02, Financial Instruments – Credit Losses, Troubled Debt Restructurings and Vintage Disclosures. In March 2022, the FASB issued a new accounting standard that eliminates the troubled debt recognition and measurement guidance. The new standard requires that an entity apply the loan refinancing and restructuring guidance in ASC 310 to all loan modifications and/or receivable modifications. It also enhances disclosure requirements for certain refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requires disclosure of current-period gross charge-offs by year of origination in the vintage disclosure. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The adoption of the new standard is not expected to have a material impact on our consolidated financial statements or financial statement disclosures.
All other ASUs issued but not yet adopted were assessed and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements or financial statement disclosures.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. REVENUE
The following tables disaggregate our revenue by major source for the years ended December 31 (in millions): | | | | | | | | | | | | | | | | | |
| 2020 |
| Company Excluding Ford Credit | | Ford Credit | | Consolidated |
Vehicles, parts, and accessories | $ | 110,180 | | | $ | — | | | $ | 110,180 | |
Used vehicles | 2,935 | | | — | | | 2,935 | |
Services and other revenue (a) | 2,514 | | | 161 | | | 2,675 | |
Revenues from sales and services | 115,629 | | | 161 | | | 115,790 | |
| | | | | |
Leasing income | 312 | | | 5,653 | | | 5,965 | |
Financing income | — | | | 5,261 | | | 5,261 | |
Insurance income | — | | | 128 | | | 128 | |
Total revenues | $ | 115,941 | | | $ | 11,203 | | | $ | 127,144 | |
| | | | | | | | | | | | | | | | | |
| 2021 |
| Company Excluding Ford Credit | | Ford Credit | | Consolidated |
Vehicles, parts, and accessories | $ | 120,973 | | | $ | — | | | $ | 120,973 | |
Used vehicles | 2,358 | | | — | | | 2,358 | |
Services and other revenue (a) | 2,651 | | | 161 | | | 2,812 | |
Revenues from sales and services | 125,982 | | | 161 | | | 126,143 | |
| | | | | |
Leasing income | 286 | | | 5,291 | | | 5,577 | |
Financing income | — | | | 4,560 | | | 4,560 | |
Insurance income | — | | | 61 | | | 61 | |
Total revenues | $ | 126,268 | | | $ | 10,073 | | | $ | 136,341 | |
| | | | | | | | | | | | | | | | | |
| 2022 |
| Company Excluding Ford Credit | | Ford Credit | | Consolidated |
Vehicles, parts, and accessories | $ | 144,471 | | | $ | — | | | $ | 144,471 | |
Used vehicles | 1,719 | | | — | | | 1,719 | |
Services and other revenue (a) | 2,688 | | | 100 | | | 2,788 | |
Revenues from sales and services | 148,878 | | | 100 | | | 148,978 | |
| | | | | |
Leasing income | 201 | | | 4,569 | | | 4,770 | |
Financing income | — | | | 4,254 | | | 4,254 | |
Insurance income | — | | | 55 | | | 55 | |
Total revenues | $ | 149,079 | | | $ | 8,978 | | | $ | 158,057 | |
__________
(a)Includes extended service contract revenue.
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs when we transfer control of our vehicles, parts, or accessories, or provide services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. For the majority of sales, this occurs when products are shipped from our manufacturing facilities. However, we defer a portion of the consideration received when there is a separate future or stand-ready performance obligation, such as extended service contracts or ongoing vehicle connectivity. Sales, value-added, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with our base warranties and field service actions are recognized as expense when the products are sold (see Note 25). We do not have any material significant payment terms as payment is received at or shortly after the point of sale.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. REVENUE (Continued)
Company Excluding Ford Credit
Vehicles, Parts, and Accessories. For the majority of vehicles, parts, and accessories, we transfer control and recognize a sale when we ship the product from our manufacturing facility to our customer (dealers and distributors). We receive cash equal to the invoice price for most vehicle sales at the time of wholesale. When the vehicle sale is financed by our wholly-owned subsidiary Ford Credit, the dealer is obligated to pay Ford Credit when it sells the vehicle to the retail customer (see Note 10). Payment terms on part sales to dealers, distributors, and retailers range from 30 to 120 days. The amount of consideration we receive and revenue we recognize varies with changes in return rights and marketing incentives we offer to our customers and their customers. When we give our dealers the right to return eligible parts and accessories, we estimate the expected returns based on an analysis of historical experience. Estimates of marketing incentives are based on expected retail and fleet sales volumes, mix of products to be sold, and incentive programs to be offered. Customer acceptance of products and programs, as well as other market conditions, will impact these estimates. We adjust our estimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed. As a result of changes in our estimate of marketing incentives, we recorded a decrease in revenue of $973 million during 2020 and an increase in revenue of $252 million and $209 million during 2021 and 2022, respectively, related to revenue recognized in prior annual periods.
We have elected to recognize the cost for freight and shipping when control over vehicles, parts, or accessories have transferred to the customer as an expense in Cost of sales.
We sell vehicles to daily rental companies and may guarantee that we will pay them the difference between an agreed amount and the value they are able to realize upon resale. At the time of transfer of vehicles to the daily rental companies, we record the probable amount we will pay under the guarantee to Other liabilities and deferred revenue (see Note 25).
Used Vehicles. We sell used vehicles both at auction and through our consolidated dealerships. Proceeds from the sale of these vehicles are recognized in Company excluding Ford Credit revenues upon transfer of control of the vehicle to the customer, and the related vehicle carrying value is recognized in Cost of sales.
Services and other revenue. For separate or stand-ready performance obligations that are included as part of the vehicle consideration received (e.g., free extended service contracts, vehicle connectivity, over-the-air updates), we use an observable price to determine the stand-alone selling price or, when one is not available, we use a cost-plus margin approach. We also sell separately priced service contracts that extend mechanical and maintenance coverages beyond our base warranty agreements to vehicle owners. We receive payment at contract inception and the contracts generally range from 12 to 120 months. We recognize revenue for vehicle service contracts that extend mechanical and maintenance coverages beyond our base warranties over the term of the agreement in proportion to the costs we expect to incur in satisfying the contract obligations. Revenue related to other future or stand-ready performance obligations is generally recognized on a straight-line basis over the period in which services are expected to be performed.
We had a balance of $4.2 billion and $4.3 billion of unearned revenue associated primarily with outstanding extended service contracts reported in Other liabilities and deferred revenue at December 31, 2020 and 2021, respectively. We recognized $1.3 billion and $1.4 billion of the unearned amounts as revenue during the years ended December 31, 2021 and 2022, respectively. At December 31, 2022, the unearned amount was $4.4 billion. We expect to recognize approximately $1.3 billion of the unearned amount in 2023, $1.1 billion in 2024, and $2 billion thereafter.
We record a premium deficiency reserve to the extent we estimate the future costs associated with extended service contracts exceed the unrecognized revenue. Amounts paid to dealers to obtain these contracts are deferred and recorded as Other assets. These costs are amortized to expense consistent with how the related revenue is recognized. We had a balance of $309 million and $315 million in deferred costs as of December 31, 2021 and 2022, respectively. We recognized $79 million, $81 million, and $88 million of amortization during the years ended December 31, 2020, 2021, and 2022, respectively.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. REVENUE (Continued)
We also receive other revenue related to vehicle-related design and testing services we perform for others, various Mobility operations, and net commissions for serving as the agent in facilitating the sale of a third party’s products or services to our customers. We have applied the practical expedient to recognize Automotive revenues for vehicle-related design and testing services over the two to three year term of these agreements in proportion to the amount we have the right to invoice.
Leasing Income. We sell vehicles to daily rental companies with an obligation to repurchase the vehicles for a guaranteed amount, exercisable at the option of the customer. The transactions are accounted for as operating leases. Upon the transfer of vehicles to the daily rental companies, we record proceeds received in Other liabilities and deferred revenue. The difference between the proceeds received and the guaranteed repurchase amount is recorded in Company excluding Ford Credit revenues over the term of the lease using a straight-line method. The cost of the vehicle is recorded in Net investment in operating leases on our consolidated balance sheets and the difference between the cost of the vehicle and the estimated auction value is depreciated in Cost of sales over the term of the lease.
Ford Credit Segment
Leasing Income. Ford Credit offers leasing plans to retail consumers through Ford and Lincoln brand dealers that originate the leases. Ford Credit records an operating lease upon purchase of a vehicle subject to a lease from the dealer. The retail consumer makes lease payments representing the difference between Ford Credit’s purchase price of the vehicle and the contractual residual value of the vehicle plus lease fees, which we recognize on a straight-line basis over the term of the lease agreement. Depreciation and the gain or loss upon disposition of the vehicle is recorded in Ford Credit interest, operating, and other expenses.
Financing Income. Ford Credit originates and purchases finance installment contracts. Financing income represents interest earned on the finance receivables (including sales-type and direct financing leases). Interest is recognized using the interest method and includes the amortization of certain direct origination costs.
Insurance Income. Income from insurance contracts is recognized evenly over the term of the agreement. Insurance commission revenue is recognized on a net basis at the time of sale of the third party’s product or service to our customer.
NOTE 5. OTHER INCOME/(LOSS)
The amounts included in Other income/(loss), net for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Net periodic pension and OPEB income/(cost), excluding service cost (Note 17) | $ | 69 | | | $ | 5,997 | | | $ | 1,336 | |
Investment-related interest income | 452 | | | 254 | | | 639 | |
Interest income/(expense) on income taxes | (2) | | | 7 | | | (23) | |
Realized and unrealized gains/(losses) on cash equivalents, marketable securities, and other investments (a) | 325 | | | 9,159 | | | (7,518) | |
Gains/(Losses) on changes in investments in affiliates (Note 21 and Note 22) | 3,446 | | | 368 | | | (147) | |
Gains/(Losses) on extinguishment of debt (Note 19) | (1) | | | (1,702) | | | (121) | |
Royalty income | 493 | | | 619 | | | 483 | |
Other | 117 | | | 31 | | | 201 | |
Total | $ | 4,899 | | | $ | 14,733 | | | $ | (5,150) | |
__________
(a) Includes a $9.1 billion gain and $7.4 billion loss on our Rivian investment during the year ended December 31, 2021 and December 31, 2022, respectively.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6. SHARE-BASED COMPENSATION
Under our Long-Term Incentive Plans, we may issue restricted stock units (“RSUs”), restricted stock shares (“RSSs”), and stock options. RSUs and RSSs consist of time-based and performance-based awards. The number of shares that may be granted in any year is limited to 2% of our issued and outstanding Common Stock as of December 31 of the prior calendar year. The limit may be increased up to 3% in any year, with a corresponding reduction in shares available for grants in future years. Granted RSUs generally cliff vest or ratably vest over a three-year service period. Performance-based RSUs have two components: one based on internal financial performance metrics and the other based on total shareholder return relative to an industrial and automotive peer group. At the time of vest, RSU awards are net settled (i.e., shares are withheld to cover the employee tax obligation). Stock options ratably vest over a three-year service period and expire ten years from the grant date.
The fair value of both the time-based and the internal performance metrics portion of the performance-based RSUs and RSSs is determined using the closing price of our Common Stock at grant date. For awards that include a market condition, we measure the fair value using a Monte Carlo simulation. The weighted average per unit grant date fair value for the years ended December 31, 2020, 2021, and 2022 was $7.11, $13.02, and $15.63, respectively.
Time-based RSUs generally have a graded vesting feature whereby one-third of each grant vests after the first anniversary of the grant date, one-third after the second anniversary, and one-third after the third anniversary. The graded vesting method recognizes expense over the service period for each separately-vesting tranche, which results in accelerated recognition of expense. The fair value of time-based RSUs, RSSs, and stock options is expensed over the shorter of each separate vesting period, using the graded vesting method, or the time period an employee becomes eligible to retain the award at retirement. The fair value of performance-based RSUs and RSSs is expensed when it is probable and estimable as measured against the performance metrics over the shorter of the performance or required service periods. We measure the fair value of our stock options on the date of grant using either the Black-Scholes option-pricing model (for options without a market condition) or a Monte Carlo simulation (for options with a market condition). We have elected to recognize forfeitures as an adjustment to compensation expense for all RSUs, RSSs, and stock options in the same period as the forfeitures occur. Expense is recorded in Selling, administrative, and other expenses.
Restricted Stock Units and Restricted Stock Shares
The fair value of vested RSUs and RSSs as well as the compensation cost for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Fair value of vested shares | $ | 264 | | | $ | 217 | | | $ | 252 | |
Compensation cost (a) | 156 | | | 229 | | | 223 | |
__________ (a) Net of tax benefit of $31 million, $74 million, and $113 million in 2020, 2021, and 2022, respectively.
As of December 31, 2022, there was approximately $265 million in unrecognized compensation cost related to non-vested RSUs. This expense will be recognized over a weighted average period of 1.9 years.
The performance-based RSUs granted in March 2020, 2021, and 2022 include a relative Total Shareholder Return (“TSR”) metric. Inputs and assumptions used to calculate the fair value at grant date through a Monte Carlo simulation were as follows: | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Fair value per stock award | $ | 7.21 | | | $ | 13.45 | | | $ | 18.10 | |
Grant date stock price | 7.08 | | | 11.93 | | | 16.85 | |
Assumptions: | | | | | |
Ford’s stock price expected volatility (a) | 25.4 | % | | 39.9 | % | | 44.8 | % |
Expected average volatility of peer companies (a) | 26.4 | | | 39.6 | | | 39.6 | |
Risk-free interest rate | 0.68 | | | 0.32 | | | 1.62 | |
__________ (a)Expected volatility based on three years of daily closing share price changes ending on the grant date.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6. SHARE-BASED COMPENSATION (Continued)
During 2022, activity for RSUs and RSSs was as follows (in millions, except for weighted-average fair value): | | | | | | | | | | | | | |
| Shares | | Weighted- Average Fair Value | | |
Outstanding, beginning of year | 62.5 | | | $ | 10.31 | | | |
Granted (a) | 35.9 | | | 15.63 | | | |
Vested (a) | (25.6) | | | 9.84 | | | |
Forfeited | (8.9) | | | 12.94 | | | |
Outstanding, end of year (b) | 63.9 | | | 12.90 | | | |
__________ (a)Includes shares awarded to non-employee directors.
(b)Excludes 1,047,856 non-employee director shares that were vested but unissued at December 31, 2022.
Stock Options
Activity related to stock options for 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares (millions) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value (millions) |
Outstanding, beginning of period | | 11.9 | | | $ | 11.15 | | | | | |
Granted | | — | | | — | | | | | |
Exercised (a) | | (1.8) | | | 12.35 | | | | | |
Forfeited (including expirations) | | — | | | — | | | | | |
Outstanding, end of period | | 10.1 | | | 10.84 | | | | | |
Exercisable, end of period | | 7.9 | | | 12.10 | | | 3.1 | | $ | 13.4 | |
Options expected to vest | | 2.2 | | | 6.40 | | | 7.6 | | 11.7 | |
__________
(a)Exercised at option prices ranging from $6.96 to $15.37 during 2022.
We received approximately $22 million in proceeds with an equivalent of about $36 million in new issues used to settle the exercised options. For options exercised during the year ended December 31, 2022, the difference between the fair value of the Common Stock issued and the respective exercise price was $13 million. Compensation cost for stock options for the year ended December 31, 2022 was $0. As of December 31, 2022, there was no unrecognized compensation cost related to non-vested stock options. During 2022, no new stock options were granted.
NOTE 7. INCOME TAXES
We recognize income tax-related penalties in Provision for/(Benefit from) income taxes on our consolidated income statements. We recognize income tax-related interest income and interest expense in Other income/(loss), net on our consolidated income statements.
We account for U.S. tax on global intangible low-taxed income in the period incurred.
Valuation of Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES (Continued)
Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized on our consolidated financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.
Components of Income Taxes
Components of income taxes excluding cumulative effects of changes in accounting principles, other comprehensive income/(loss), and equity in net results of affiliated companies accounted for after-tax for the years ended December 31 were as follows: | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Income/(Loss) before income taxes (in millions) | | | | | |
U.S. | $ | (231) | | | $ | 10,043 | | | $ | (6,548) | |
Non-U.S. | (885) | | | 7,737 | | | 3,532 | |
Total | $ | (1,116) | | | $ | 17,780 | | | $ | (3,016) | |
Provision for/(Benefit from) income taxes (in millions) | | | | | |
Current | | | | | |
Federal | $ | (23) | | | $ | 102 | | | $ | 68 | |
Non-U.S. | 554 | | | 598 | | | 781 | |
State and local | (45) | | | 26 | | | 123 | |
Total current | 486 | | | 726 | | | 972 | |
Deferred | | | | | |
Federal | (523) | | | 2,290 | | | (2,292) | |
Non-U.S. | 168 | | | (3,254) | | | 688 | |
State and local | 29 | | | 108 | | | (232) | |
Total deferred | (326) | | | (856) | | | (1,836) | |
Total | $ | 160 | | | $ | (130) | | | $ | (864) | |
Reconciliation of effective tax rate | | | | | |
U.S. statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Non-U.S. tax rate differential | (2.6) | | | 1.3 | | | (8.7) | |
State and local income taxes | 8.9 | | | 0.5 | | | 2.3 | |
General business credits | 35.1 | | | (2.3) | | | 13.0 | |
Nontaxable foreign currency gains and losses | (1.1) | | | — | | | (4.2) | |
Dispositions and restructurings (a) | (0.4) | | | (18.8) | | | (7.0) | |
U.S. tax on non-U.S. earnings | 28.1 | | | 2.4 | | | 2.8 | |
Prior year settlements and claims | 8.3 | | | (0.3) | | | 1.5 | |
Tax incentives | (6.0) | | | (0.6) | | | 2.0 | |
Enacted change in tax laws | 1.5 | | | 1.1 | | | (2.0) | |
Valuation allowances | (108.8) | | | (4.7) | | | 6.2 | |
Other | 1.7 | | | (0.3) | | | 1.7 | |
Effective tax rate | (14.3) | % | | (0.7) | % | | 28.6 | % |
__________
(a)Includes a benefit of $2.9 billion to recognize deferred tax assets resulting from changes in our global tax structure in 2021.
During 2020, based on all available evidence, we established U.S. valuation allowances of $1.3 billion, primarily against tax credits as it was deemed more likely than not that these deferred tax assets would not be realized. In assessing the realizability of deferred tax assets, we consider the trade-offs between cash preservation and cash outlays to preserve tax credits. In 2021, we reversed $918 million of the previously established U.S. valuation allowances. The reversal primarily reflected a change in our intent to pursue planning actions involving cash outlays to preserve tax credits. During 2022, we reversed an additional $405 million of U.S. valuation allowances, primarily as a result of planning actions.
At December 31, 2022, $14.8 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the United States, for which deferred taxes have not been provided. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested basis differences is not practicable.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES (Continued)
Components of Deferred Tax Assets and Liabilities
The components of deferred tax assets and liabilities at December 31 were as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Deferred tax assets | | | |
Employee benefit plans | $ | 2,320 | | | $ | 1,960 | |
Net operating loss carryforwards | 4,163 | | | 3,978 | |
Tax credit carryforwards | 10,437 | | | 9,354 | |
Research expenditures | 1,117 | | | 3,240 | |
Dealer and dealers’ customer allowances and claims | 1,944 | | | 2,192 | |
Other foreign deferred tax assets | 2,005 | | | 1,854 | |
All other | 2,353 | | | 2,201 | |
Total gross deferred tax assets | 24,339 | | | 24,779 | |
Less: Valuation allowances | (1,067) | | | (822) | |
Total net deferred tax assets | 23,272 | | | 23,957 | |
Deferred tax liabilities | | | |
Leasing transactions | 2,103 | | | 2,992 | |
Depreciation and amortization (excluding leasing transactions) | 2,881 | | | 3,116 | |
Finance receivables | 756 | | | 792 | |
Carrying value of investments | 2,149 | | | 487 | |
Other foreign deferred tax liabilities | 893 | | | 1,196 | |
All other | 2,275 | | | 1,371 | |
Total deferred tax liabilities | 11,057 | | | 9,954 | |
Net deferred tax assets/(liabilities) | $ | 12,215 | | | $ | 14,003 | |
Deferred tax assets for net operating losses and other temporary differences related to certain non-U.S. operations have not been recorded as a result of elections to tax these operations simultaneously in U.S. tax returns. During 2021, we restructured a significant portion of these operations resulting in recognition of $2.9 billion of net deferred tax assets. Reversal of the remaining elections would result in the recognition of $4.3 billion and $4.2 billion of deferred tax assets, subject to valuation allowance testing, as of December 31, 2021 and 2022, respectively.
Operating loss carryforwards for tax purposes were $11.4 billion at December 31, 2022, resulting in a deferred tax asset of $4.0 billion. There is no expiration date for $3.1 billion of these losses. A substantial portion of the remaining losses will expire beyond 2025. Tax credits available to offset future tax liabilities are $9.4 billion. The majority of these credits have a remaining carryforward period of six years or more. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and available tax planning strategies. In our evaluation, we anticipate making tax elections that change the order of tax credit carryforward utilization on U.S. tax returns.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES (Continued)
Other
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31 were as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Beginning balance | $ | 1,913 | | | $ | 2,910 | |
Increase – tax positions in prior periods | 1,054 | | | 338 | |
Increase – tax positions in current period | 25 | | | 17 | |
Decrease – tax positions in prior periods | (54) | | | (236) | |
Settlements | 1 | | | (2) | |
Lapse of statute of limitations | (7) | | | (1) | |
Foreign currency translation adjustment | (22) | | | (87) | |
Ending balance | $ | 2,910 | | | $ | 2,939 | |
The amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $2.9 billion as of December 31, 2021 and 2022.
Examinations by tax authorities have been completed through 2008 in Germany, 2014 in the United States, 2015 in Mexico, 2017 in Canada and China, 2018 in Spain and India, and 2019 in the United Kingdom.
Net interest on income taxes was $2 million of expense, $7 million of income, and $23 million of expense for the years ended December 31, 2020, 2021, and 2022, respectively. These were reported in Other income/(loss), net on our consolidated income statements. Net payables for tax related interest were $32 million and $17 million as of December 31, 2021 and 2022, respectively.
Cash paid for income taxes was $421 million, $568 million, and $801 million in 2020, 2021, and 2022, respectively.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. CAPITAL STOCK AND EARNINGS/(LOSS) PER SHARE
All general voting power is vested in the holders of Common Stock and Class B Stock. Holders of our Common Stock have 60% of the general voting power, and holders of our Class B Stock are entitled to such number of votes per share as will give them the remaining 40%. Shares of Common Stock and Class B Stock share equally in dividends when and as paid, with stock dividends payable in shares of stock of the class held.
If liquidated, each share of Common Stock is entitled to the first $0.50 available for distribution to holders of Common Stock and Class B Stock, each share of Class B Stock is entitled to the next $1.00 so available, each share of Common Stock is entitled to the next $0.50 so available, and each share of Common and Class B Stock is entitled to an equal amount thereafter.
We present both basic and diluted earnings/(loss) per share (“EPS”) amounts in our financial reporting. Basic EPS excludes dilution and is computed by dividing Net income/(loss) attributable to Ford Motor Company by the weighted-average number of shares of Common and Class B Stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our share-based compensation (“in-the-money” stock options, unvested RSUs, and unvested RSSs) and convertible debt. Potentially dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.
Earnings/(Loss) Per Share Attributable to Ford Motor Company Common and Class B Stock
Basic and diluted income/(loss) per share were calculated using the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Net income/(loss) attributable to Ford Motor Company | $ | (1,279) | | | $ | 17,937 | | | $ | (1,981) | |
| | | | | |
Basic and Diluted Shares | | | | | |
Basic shares (average shares outstanding) | 3,973 | | | 3,991 | | | 4,014 | |
Net dilutive options, unvested restricted stock units, unvested restricted stock shares, and convertible debt (a) | — | | | 43 | | | — | |
Diluted shares | 3,973 | | | 4,034 | | | 4,014 | |
__________
(a) In 2020 and 2022, there were 29 million and 42 million shares, respectively, excluded from the calculation of diluted earnings/(loss) per share, due to their anti-dilutive effect.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| Fair Value Level | | Company excluding Ford Credit | | Ford Credit | | Consolidated |
Cash and cash equivalents | | | | | | | |
U.S. government | 1 | | $ | 2,877 | | | $ | 711 | | | $ | 3,588 | |
U.S. government agencies | 2 | | 355 | | | 240 | | | 595 | |
Non-U.S. government and agencies | 2 | | 55 | | | 152 | | | 207 | |
Corporate debt | 2 | | 105 | | | 940 | | | 1,045 | |
Total marketable securities classified as cash equivalents | | | 3,392 | | | 2,043 | | | 5,435 | |
Cash, time deposits, and money market funds | | | 6,185 | | | 8,920 | | | 15,105 | |
Total cash and cash equivalents | | | $ | 9,577 | | | $ | 10,963 | | | $ | 20,540 | |
| | | | | | | |
Marketable securities | | | | | | | |
U.S. government | 1 | | $ | 4,018 | | | $ | 864 | | | $ | 4,882 | |
U.S. government agencies | 2 | | 2,270 | | | 75 | | | 2,345 | |
Non-U.S. government and agencies | 2 | | 3,373 | | | 697 | | | 4,070 | |
Corporate debt | 2 | | 6,299 | | | 304 | | | 6,603 | |
Equities (a) | 1 | | 10,673 | | | — | | | 10,673 | |
Other marketable securities | 2 | | 247 | | | 233 | | | 480 | |
Total marketable securities | | | $ | 26,880 | | | $ | 2,173 | | | $ | 29,053 | |
| | | | | | | |
Restricted cash | | | $ | 69 | | | $ | 128 | | | $ | 197 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | December 31, 2022 |
| Fair Value Level | | Company excluding Ford Credit | | Ford Credit | | Consolidated |
Cash and cash equivalents | | | | | | | |
U.S. government | 1 | | $ | 3,295 | | | $ | 1,045 | | | $ | 4,340 | |
U.S. government agencies | 2 | | 2,245 | | | 150 | | | 2,395 | |
Non-U.S. government and agencies | 2 | | 1,048 | | | 199 | | | 1,247 | |
Other cash equivalents | 2 | | 10 | | | — | | | 10 | |
Corporate debt | 2 | | 593 | | | 792 | | | 1,385 | |
Total marketable securities classified as cash equivalents | | | 7,191 | | | 2,186 | | | 9,377 | |
Cash, time deposits, and money market funds | | | 7,550 | | | 8,207 | | | 15,757 | |
Total cash and cash equivalents | | | $ | 14,741 | | | $ | 10,393 | | | $ | 25,134 | |
| | | | | | | |
Marketable securities | | | | | | | |
U.S. government | 1 | | $ | 4,947 | | | $ | 187 | | | $ | 5,134 | |
U.S. government agencies | 2 | | 2,641 | | | 221 | | | 2,862 | |
Non-U.S. government and agencies | 2 | | 2,625 | | | 658 | | | 3,283 | |
Corporate debt | 2 | | 6,755 | | | 266 | | | 7,021 | |
Equities (a) | 1 | | 223 | | | — | | | 223 | |
Other marketable securities | 2 | | 252 | | | 161 | | | 413 | |
Total marketable securities | | | $ | 17,443 | | | $ | 1,493 | | | $ | 18,936 | |
| | | | | | | |
Restricted cash | | | $ | 79 | | | $ | 127 | | | $ | 206 | |
| | | | | | | |
| | | | | | | |
__________ (a) Includes $10.6 billion and $194 million of Rivian common shares valued at $103.69 and $18.43 per share as of December 31, 2021 and 2022, respectively. In 2022, we sold 91 million of our Rivian common shares for about $3 billion in total proceeds. Net unrealized gains/losses recognized during 2021 and 2022 on all equity securities held at December 31, 2021 and 2022 were an $8.3 billion gain and a $968 million loss, respectively.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES (Continued)
The cash equivalents and marketable securities accounted for as available-for-sale (“AFS”) securities were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | |
| | | | | | | | | Fair Value of Securities with Contractual Maturities |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Within 1 Year | | After 1 Year through 5 Years | | After 5 Years |
Company excluding Ford Credit | | | | | | | | | | | | | |
U.S. government | $ | 3,821 | | | $ | 12 | | | $ | (14) | | | $ | 3,819 | | | $ | 1,360 | | | $ | 2,435 | | | $ | 24 | |
U.S. government agencies | 2,249 | | | 2 | | | (21) | | | 2,230 | | | 316 | | | 1,802 | | | 112 | |
Non-U.S. government and agencies | 2,599 | | | 6 | | | (21) | | | 2,584 | | | 854 | | | 1,708 | | | 22 | |
Corporate debt | 6,373 | | | 21 | | | (23) | | | 6,371 | | | 2,645 | | | 3,726 | | | — | |
Other marketable securities | 228 | | | 1 | | | (1) | | | 228 | | | — | | | 150 | | | 78 | |
Total | $ | 15,270 | | | $ | 42 | | | $ | (80) | | | $ | 15,232 | | | $ | 5,175 | | | $ | 9,821 | | | $ | 236 | |
| | | | | | | | | | | | | |
| December 31, 2022 | | |
| | | | | | | | | Fair Value of Securities with Contractual Maturities |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Within 1 Year | | After 1 Year through 5 Years | | After 5 Years |
Company excluding Ford Credit | | | | | | | | | | | | | |
U.S. government | $ | 4,797 | | | $ | 1 | | | $ | (145) | | | $ | 4,653 | | | $ | 1,008 | | | $ | 3,645 | | | $ | — | |
U.S. government agencies | 2,508 | | | — | | | (119) | | | 2,389 | | | 1,244 | | | 1,109 | | | 36 | |
Non-U.S. government and agencies | 2,248 | | | — | | | (132) | | | 2,116 | | | 294 | | | 1,810 | | | 12 | |
Corporate debt | 7,511 | | | 6 | | | (197) | | | 7,320 | | | 3,117 | | | 4,195 | | | 8 | |
Other marketable securities | 246 | | | — | | | (9) | | | 237 | | | — | | | 181 | | | 56 | |
Total | $ | 17,310 | | | $ | 7 | | | $ | (602) | | | $ | 16,715 | | | $ | 5,663 | | | $ | 10,940 | | | $ | 112 | |
Sales proceeds and gross realized gains/losses from the sale of AFS securities for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Company excluding Ford Credit | | | | | |
Sales proceeds | $ | 8,574 | | | $ | 5,943 | | | $ | 6,207 | |
Gross realized gains | 56 | | | 26 | | | 7 | |
Gross realized losses | 11 | | | 3 | | | 26 | |
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES (Continued)
The present fair values and gross unrealized losses for cash equivalents and marketable securities accounted for as AFS securities that were in an unrealized loss position, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 1 Year | | 1 Year or Greater | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Company excluding Ford Credit | | | | | | | | | | | |
U.S. government | $ | 2,598 | | | $ | (14) | | | $ | — | | | $ | — | | | $ | 2,598 | | | $ | (14) | |
U.S. government agencies | 1,809 | | | (19) | | | 73 | | | (2) | | | 1,882 | | | (21) | |
Non-U.S. government and agencies | 1,614 | | | (20) | | | 38 | | | (1) | | | 1,652 | | | (21) | |
Corporate debt | 3,637 | | | (21) | | | 71 | | | (2) | | | 3,708 | | | (23) | |
Other marketable securities | 178 | | | (1) | | | 15 | | | — | | | 193 | | | (1) | |
Total | $ | 9,836 | | | $ | (75) | | | $ | 197 | | | $ | (5) | | | $ | 10,033 | | | $ | (80) | |
| | | | | | | | | | | |
| December 31, 2022 |
| Less than 1 Year | | 1 Year or Greater | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Company excluding Ford Credit | | | | | | | | | | | |
U.S. government | $ | 2,860 | | | $ | (52) | | | $ | 1,570 | | | $ | (93) | | | $ | 4,430 | | | $ | (145) | |
U.S. government agencies | 707 | | | (14) | | | 1,658 | | | (105) | | | 2,365 | | | (119) | |
Non-U.S. government and agencies | 751 | | | (23) | | | 1,271 | | | (109) | | | 2,022 | | | (132) | |
Corporate debt | 4,571 | | | (79) | | | 1,737 | | | (118) | | | 6,308 | | | (197) | |
Other marketable securities | 123 | | | (4) | | | 108 | | | (5) | | | 231 | | | (9) | |
Total | $ | 9,012 | | | $ | (172) | | | $ | 6,344 | | | $ | (430) | | | $ | 15,356 | | | $ | (602) | |
We determine credit losses on AFS debt securities using the specific identification method. During the years ended December 31, 2020, 2021, and 2022, we did not recognize any credit loss. The unrealized losses on securities are due to changes in interest rates and market liquidity.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows were as follows (in millions): | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2022 |
Cash and cash equivalents | $ | 20,540 | | | $ | 25,134 | |
Restricted cash (a) | 197 | | | 206 | |
Total cash, cash equivalents, and restricted cash | $ | 20,737 | | | $ | 25,340 | |
__________
(a)Included in Other assets in the non-current assets section of our consolidated balance sheets.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
Ford Credit manages finance receivables as “consumer” and “non-consumer” portfolios. The receivables are generally secured by the vehicles, inventory, or other property being financed.
Consumer Portfolio. Receivables in this portfolio include products offered to individuals and businesses that finance the acquisition of Ford and Lincoln vehicles from dealers for personal or commercial use. Retail financing includes retail installment contracts for new and used vehicles and finance leases with retail customers, government entities, daily rental companies, and fleet customers.
Non-Consumer Portfolio. Receivables in this portfolio include products offered to automotive dealers. Dealer financing includes wholesale loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital and improvements to dealership facilities, finance the purchase of dealership real estate, and finance other dealer programs. Wholesale financing is approximately 94% of dealer financing.
Finance receivables are recorded at the time of origination or purchase at fair value and are subsequently reported at amortized cost, net of any allowance for credit losses.
For all finance receivables, Ford Credit defines “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date.
Finance Receivables Classification
Finance receivables are accounted for as held for investment (“HFI”) if Ford Credit has the intent and ability to hold the receivables for the foreseeable future or until maturity or payoff. The determination of intent and ability to hold for the foreseeable future is highly judgmental and requires Ford Credit to make good faith estimates based on all information available at the time of origination or purchase. If Ford Credit does not have the intent and ability to hold the receivables, then the receivables are classified as HFS.
Each quarter, Ford Credit makes a determination of whether it is probable that finance receivables originated or purchased during the quarter will be held for the foreseeable future based on historical receivables sale experience, internal forecasts and budgets, as well as other relevant, reliable information available through the date of evaluation. For purposes of this determination, probable means at least 70% likely and, consistent with the budgeting and forecasting period, the foreseeable future means twelve months. Ford Credit classifies receivables as HFI or HFS on a receivable-by-receivable basis. Specific receivables included in off-balance sheet sale transactions are generally not identified until the month in which the sale occurs.
Held-for-Investment. Finance receivables classified as HFI are recorded at the time of origination or purchase at fair value and are subsequently reported at amortized cost, net of any allowance for credit losses. Cash flows from finance receivables, excluding wholesale and other receivables, that were originally classified as HFI are recorded as an investing activity since GAAP requires the statement of cash flows presentation to be based on the original classification of the receivables. Cash flows from wholesale and other receivables are recorded as an operating activity.
Held-for-Sale. Finance receivables classified as HFS are carried at the lower of cost or fair value. Cash flows resulting from the origination or purchase and sale of HFS receivables are recorded as an operating activity in Decrease/(Increase) in finance receivables (wholesale and other). Once a decision has been made to sell receivables that were originally classified as HFI, the receivables are reclassified as HFS and carried at the lower of cost or fair value. The valuation adjustment, if applicable, is recorded in Other income/(loss), net to recognize the receivables at the lower of cost or fair value.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Ford Credit finance receivables, net at December 31 were as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Consumer | | | |
Retail installment contracts, gross | $ | 69,148 | | | $ | 66,954 | |
Finance leases, gross | 7,318 | | | 6,765 | |
Retail financing, gross | 76,466 | | | 73,719 | |
Unearned interest supplements | (3,020) | | | (2,305) | |
Consumer finance receivables | 73,446 | | | 71,414 | |
Non-Consumer | | | |
Dealer financing | 11,278 | | | 18,054 | |
Non-Consumer finance receivables | 11,278 | | | 18,054 | |
Total recorded investment | $ | 84,724 | | | $ | 89,468 | |
| | | |
Recorded investment in finance receivables | $ | 84,724 | | | $ | 89,468 | |
Allowance for credit losses | (925) | | | (845) | |
Total finance receivables, net | $ | 83,799 | | | $ | 88,623 | |
| | | |
Current portion | $ | 32,543 | | | $ | 38,720 | |
Non-current portion | 51,256 | | | 49,903 | |
Total finance receivables, net | $ | 83,799 | | | $ | 88,623 | |
| | | |
Net finance receivables subject to fair value (a) | $ | 76,796 | | | $ | 82,200 | |
Fair value (b) | 77,648 | | | 79,521 | |
__________ (a)Net finance receivables subject to fair value exclude finance leases.
(b)The fair value of finance receivables is categorized within Level 3 of the fair value hierarchy.
Ford Credit’s finance leases are comprised of sales-type and direct financing leases. These financings include primarily lease plans for terms of 24 to 60 months. Financing revenue from finance leases for the years ended December 31, 2020, 2021, and 2022, was $357 million, $345 million, and $303 million, respectively, and is included in Ford Credit revenues on our consolidated income statements.
The amounts contractually due on Ford Credit’s finance leases at December 31 were as follows (in millions): | | | | | | | | |
| | 2022 |
2023 | | $ | 1,448 | |
2024 | | 1,317 | |
2025 | | 1,136 | |
2026 | | 563 | |
2027 | | 66 | |
Thereafter | | 1 | |
Total future cash payments | | 4,531 | |
Less: Present value discount | | 234 | |
Finance lease receivables | | $ | 4,297 | |
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The reconciliation from finance lease receivables to finance leases, gross and finance leases, net at December 31 is as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Finance lease receivables | $ | 4,631 | | | $ | 4,297 | |
Unguaranteed residual assets | 2,605 | | | 2,389 | |
Initial direct costs | 82 | | | 79 | |
Finance leases, gross | 7,318 | | | 6,765 | |
Unearned interest supplements from Ford and affiliated companies | (274) | | | (307) | |
Allowance for credit losses | (41) | | | (35) | |
Finance leases, net | $ | 7,003 | | | $ | 6,423 | |
At December 31, 2021 and 2022, accrued interest was $125 million and $187 million, respectively, which we report in Other assets in the current assets section of our consolidated balance sheets.
Included in the recorded investment in finance receivables at December 31, 2021 and 2022 were consumer receivables of $39 billion and $43.9 billion, respectively, and non-consumer receivables of $12 billion and $18.2 billion, respectively, (including Automotive receivables sold to Ford Credit, which we report in Trade and other receivables) that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 24).
Credit Quality
Consumer Portfolio
When originating consumer receivables, Ford Credit uses a proprietary scoring system that measures credit quality using information in the credit application, proposed contract terms, credit bureau data, and other information. After a proprietary risk score is generated, Ford Credit decides whether to originate a contract using a decision process based on a judgmental evaluation of the applicant, the credit application, the proposed contract terms, credit bureau information (e.g., FICO score), proprietary risk score, and other information. The evaluation emphasizes the applicant’s ability to pay and creditworthiness focusing on payment, affordability, applicant credit history, and stability as key considerations.
After origination, Ford Credit reviews the credit quality of retail financing based on customer payment activity. As each customer develops a payment history, an internally developed behavioral scoring model is used to assist in determining the best collection strategies, which allows Ford Credit to focus collection activity on higher-risk accounts. These models are used to refine Ford Credit’s risk-based staffing model to ensure collection resources are aligned with portfolio risk. Based on data from this scoring model, contracts are categorized by collection risk. Ford Credit’s collection models evaluate several factors, including origination characteristics, updated credit bureau data, and payment patterns.
Credit quality ratings for consumer receivables are based on aging. Consumer receivables credit quality ratings are as follows:
•Pass – current to 60 days past due;
•Special Mention – 61 to 120 days past due and in intensified collection status; and
•Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral less costs to sell.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The credit quality analysis of consumer receivables at December 31, 2021 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | | | |
| Prior to 2017 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Total | | Percent |
Consumer | | | | | | | | | | | | | | | |
31 - 60 days past due | $ | 39 | | | $ | 52 | | | $ | 98 | | | $ | 120 | | | $ | 186 | | | $ | 91 | | | $ | 586 | | | 0.8 | % |
61 - 120 days past due | 7 | | | 10 | | | 20 | | | 29 | | | 40 | | | 21 | | | 127 | | | 0.2 | |
Greater than 120 days past due | 10 | | | 6 | | | 6 | | | 9 | | | 11 | | | 1 | | | 43 | | | — | |
Total past due | 56 | | | 68 | | | 124 | | | 158 | | | 237 | | | 113 | | | 756 | | | 1.0 | |
Current | 812 | | | 2,607 | | | 6,559 | | | 12,689 | | | 22,701 | | | 27,322 | | | 72,690 | | | 99.0 | |
Total | $ | 868 | | | $ | 2,675 | | | $ | 6,683 | | | $ | 12,847 | | | $ | 22,938 | | | $ | 27,435 | | | $ | 73,446 | | | 100.0 | % |
The credit quality analysis of consumer receivables at December 31, 2022 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | | | |
| Prior to 2018 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Total | | Percent |
Consumer | | | | | | | | | | | | | | | |
31 - 60 days past due | $ | 41 | | | $ | 60 | | | $ | 91 | | | $ | 181 | | | $ | 150 | | | $ | 126 | | | $ | 649 | | | 0.9 | % |
61 - 120 days past due | 9 | | | 12 | | | 20 | | | 39 | | | 40 | | | 29 | | | 149 | | | 0.2 | |
Greater than 120 days past due | 9 | | | 4 | | | 5 | | | 7 | | | 7 | | | 6 | | | 38 | | | 0.1 | |
Total past due | 59 | | | 76 | | | 116 | | | 227 | | | 197 | | | 161 | | | 836 | | | 1.2 | |
Current | 883 | | | 2,563 | | | 6,137 | | | 13,844 | | | 18,357 | | | 28,794 | | | 70,578 | | | 98.8 | |
Total | $ | 942 | | | $ | 2,639 | | | $ | 6,253 | | | $ | 14,071 | | | $ | 18,554 | | | $ | 28,955 | | | $ | 71,414 | | | 100.0 | % |
Non-Consumer Portfolio
Ford Credit extends credit to dealers primarily in the form of lines of credit to purchase new Ford and Lincoln vehicles as well as used vehicles. Payment is required when the dealer has sold the vehicle. Each non-consumer lending request is evaluated by considering the borrower’s financial condition and the underlying collateral securing the loan. Ford Credit uses a proprietary model to assign each dealer a risk rating. This model uses historical dealer performance data to identify key factors about a dealer that are considered most significant in predicting a dealer’s ability to meet its financial obligations. Ford Credit also considers numerous other financial and qualitative factors of the dealer’s operations, including capitalization and leverage, liquidity and cash flow, profitability, and credit history with Ford Credit and other creditors.
Dealers are assigned to one of four groups according to risk ratings as follows:
•Group I – strong to superior financial metrics;
•Group II – fair to favorable financial metrics;
•Group III – marginal to weak financial metrics; and
•Group IV – poor financial metrics, including dealers classified as uncollectible.
Ford Credit generally suspends credit lines and extends no further funding to dealers classified in Group IV.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Ford Credit regularly reviews the model to confirm the continued business significance and statistical predictability of the model and may make updates to improve the performance of the model. In addition, Ford Credit regularly audits dealer inventory and dealer sales records to verify that the dealer is in possession of the financed vehicles and is promptly paying each receivable following the sale of the financed vehicle. The frequency of on-site vehicle inventory audits depends primarily on the dealer’s risk rating. Under Ford Credit’s policies, on-site vehicle inventory audits of low-risk dealers are conducted only as circumstances warrant. On-site vehicle inventory audits of higher-risk dealers are conducted with increased frequency based primarily on the dealer’s risk rating, but also considering the results of electronic monitoring of the dealer’s performance, including daily payment verifications and monthly analyses of the dealer’s financial statements, payoffs, aged inventory, over credit line, and delinquency reports. Ford Credit typically performs a credit review of each dealer annually and more frequently reviews certain dealers based on the dealer’s risk rating and total exposure. Ford Credit adjusts the dealer’s risk rating, if necessary. The credit quality of dealer financing receivables is evaluated based on Ford Credit’s internal dealer risk rating analysis. A dealer has the same risk rating for its entire dealer financing regardless of the type of financing.
The credit quality analysis of dealer financing receivables at December 31, 2021 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis by Origination Year | | Wholesale Loans | | | | |
| | Dealer Loans | | | | | |
| | Prior to 2017 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Total | | | Total | | Percent |
Group I | | $ | 391 | | | $ | 68 | | | $ | 151 | | | $ | 45 | | | $ | 109 | | | $ | 345 | | | $ | 1,109 | | | $ | 6,751 | | | $ | 7,860 | | | 69.7 | % |
Group II | | 11 | | | 7 | | | 26 | | | 2 | | | 4 | | | 54 | | | 104 | | | 2,689 | | | 2,793 | | | 24.8 | |
Group III | | 8 | | | — | | | 1 | | | — | | | 1 | | | 20 | | | 30 | | | 529 | | | 559 | | | 4.9 | |
Group IV | | — | | | — | | | 4 | | | — | | | — | | | 6 | | | 10 | | | 56 | | | 66 | | | 0.6 | |
Total (a) | | $ | 410 | | | $ | 75 | | | $ | 182 | | | $ | 47 | | | $ | 114 | | | $ | 425 | | | $ | 1,253 | | | $ | 10,025 | | | $ | 11,278 | | | 100.0 | % |
__________ (a)Total past due dealer financing receivables at December 31, 2021 were $62 million.
The credit quality analysis of dealer financing receivables at December 31, 2022 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | Wholesale Loans | | | | |
| Dealer Loans | | | | | |
| Prior to 2018 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Total | | | Total | | Percent |
Group I | $ | 402 | | | $ | 148 | | | $ | 35 | | | $ | 67 | | | $ | 185 | | | $ | 224 | | | $ | 1,061 | | | $ | 13,888 | | | $ | 14,949 | | | 82.8 | % |
Group II | 2 | | | 21 | | | — | | | 5 | | | 2 | | | 42 | | | 72 | | | 2,751 | | | 2,823 | | | 15.6 | |
Group III | — | | | — | | | — | | | — | | | — | | | 10 | | | 10 | | | 233 | | | 243 | | | 1.4 | |
Group IV | — | | | — | | | 1 | | | — | | | — | | | 3 | | | 4 | | | 35 | | | 39 | | | 0.2 | |
Total (a) | $ | 404 | | | $ | 169 | | | $ | 36 | | | $ | 72 | | | $ | 187 | | | $ | 279 | | | $ | 1,147 | | | $ | 16,907 | | | $ | 18,054 | | | 100.0 | % |
__________ (a)Total past due dealer financing receivables at December 31, 2022 were $9 million.
Non-Accrual of Revenue. The accrual of financing revenue is discontinued at the time a receivable is determined to be uncollectible or when it is 90 days past due. Accounts may be restored to accrual status only when a customer settles all past-due deficiency balances and future payments are reasonably assured. For receivables in non-accrual status, subsequent financing revenue is recognized only to the extent a payment is received. Payments are generally applied first to outstanding interest and fees and then to the unpaid principal balance.
Troubled Debt Restructuring (“TDR”). A restructuring of debt constitutes a TDR if a concession is granted to a debtor for economic or legal reasons related to the debtor’s financial difficulties that Ford Credit otherwise would not consider. Consumer and non-consumer receivables that have a modified interest rate below market rate or that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code, except non-consumer receivables that are current with minimal risk of loss, are considered to be TDRs. Ford Credit does not grant concessions on the principal balance of the receivables. If a receivable is modified in a reorganization proceeding, all payment requirements of the reorganization plan need to be met before remaining balances are forgiven.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Allowance for Credit Losses
The allowance for credit losses represents an estimate of the lifetime expected credit losses inherent in finance receivables as of the balance sheet date. The adequacy of the allowance for credit losses is assessed quarterly.
Adjustments to the allowance for credit losses are made by recording charges to Ford Credit interest, operating, and other expenses on our consolidated income statements. The uncollectible portion of a finance receivable is charged to the allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is 120 days delinquent, taking into consideration the financial condition of the customer or borrower, the value of the collateral, recourse to guarantors, and other factors.
Charge-offs on finance receivables include uncollected amounts related to principal, interest, late fees, and other allowable charges. Recoveries on finance receivables previously charged off as uncollectible are credited to the allowance for credit losses. In the event Ford Credit repossesses the collateral, the receivable is charged off and the collateral is recorded at its estimated fair value less costs to sell and reported in Other assets on our consolidated balance sheets.
Consumer Portfolio
For consumer receivables that share similar risk characteristics such as product type, initial credit risk, term, vintage, geography, and other relevant factors, Ford Credit estimates the lifetime expected credit loss allowance based on a collective assessment using measurement models and management judgment. The lifetime expected credit losses for the receivables is determined by applying probability of default and loss given default assumption to monthly expected exposures, then discounting these cash flows to present value using the receivable’s original effective interest rate or the current effective interest rate for a variable rate receivable. Probability of default models are developed from internal risk scoring models taking into account the expected probability of payment and time to default, adjusted for macroeconomic outlook and recent performance. The models consider factors such as risk evaluation at the time of origination, historical trends in credit losses (which include the impact of TDRs), and the composition and recent performance of the present portfolio (including vehicle brand, term, risk evaluation, and new/used vehicles). The loss given default is the percentage of the expected balance due at default that is not recoverable, taking into account the expected collateral value and trends in recoveries (including key metrics such as delinquencies, repossessions, and bankruptcies). Monthly exposures are equal to the receivables’ expected outstanding principal and interest balance.
The allowance for credit losses incorporates forward-looking macroeconomic conditions for baseline, upturn, and downturn scenarios. Three separate credit loss allowances are calculated from these scenarios. They are then probability-weighted to determine the quantitative estimate of the credit loss allowance recognized in the financial statements. Ford Credit uses forecasts from a third party that revert to a long-term historical average after a reasonable and supportable forecasting period, which is specific to the particular macroeconomic variable and which varies by market. Ford Credit updates the forward-looking macroeconomic forecasts quarterly.
If management does not believe 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.
On an ongoing basis, Ford Credit reviews its models, including macroeconomic factors, the selection of macroeconomic scenarios, and their weighting, to ensure they reflect the risk of the portfolio.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Non-Consumer Portfolio
Dealer financing is evaluated on an individual dealer basis by segmenting dealers by risk characteristics (such as the amount of the loans, the nature of the collateral, the financial status of the dealer, and any TDR modifications) to determine if an individual dealer requires a specific allowance for credit loss. If required, the allowance is based on the present value of the expected future cash flows of the dealer’s receivables discounted at the loans’ original effective interest rate or the fair value of the collateral adjusted for estimated costs to sell.
For the remaining dealer financing, Ford Credit estimates an allowance for credit losses on a collective basis.
Wholesale Loans. Ford Credit estimates the allowance for credit losses for wholesale loans based on historical loss-to-receivable (“LTR”) ratios, expected future cash flows, and the fair value of collateral. For wholesale loans with similar risk characteristics, the allowance for credit losses is estimated on a collective basis using the LTR model and management judgment. The LTR model is based on the most recent years of history. An LTR ratio 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 ratio is multiplied by the end-of-period balances, representing the lifetime expected credit loss reserve.
Dealer Loans. Ford Credit uses a weighted-average remaining maturity method to estimate the lifetime expected credit loss reserve for dealer loans. The loss model is based on the industry-wide commercial real estate credit losses, adjusted to factor in the historical credit losses for the dealer loans portfolio. The expected credit loss is calculated under different macroeconomic scenarios that are weighted to provide the total lifetime expected credit loss.
After establishing the collective and specific allowance for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant forward-looking economic factors, an adjustment is made based on management judgment.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
An analysis of the allowance for credit losses related to finance receivables for the years ended December 31 was as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2021 |
| Consumer | | Non-Consumer | | Total |
Allowance for credit losses | | | | | |
Beginning balance | $ | 1,245 | | | $ | 60 | | | $ | 1,305 | |
Charge-offs | (272) | | | (3) | | | (275) | |
Recoveries | 202 | | | 8 | | | 210 | |
Provision for/(Benefit from) credit losses | (270) | | | (40) | | | (310) | |
Other (a) | (2) | | | (3) | | | (5) | |
Ending balance | $ | 903 | | | $ | 22 | | | $ | 925 | |
| | | | | | | | | | | | | | | | | |
| 2022 |
| Consumer | | Non-Consumer | | Total |
Allowance for credit losses | | | | | |
Beginning balance | $ | 903 | | | $ | 22 | | | $ | 925 | |
Charge-offs | (278) | | | (1) | | | (279) | |
Recoveries | 165 | | | 5 | | | 170 | |
Provision for/(Benefit from) credit losses | 56 | | | (17) | | | 39 | |
Other (a) | (8) | | | (2) | | | (10) | |
Ending balance | $ | 838 | | | $ | 7 | | | $ | 845 | |
__________
(a)Primarily represents amounts related to translation adjustments.
Note: On January 1, 2020, we adopted ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments, which had an impact on the 2020 opening balance of Retained earnings of $202 million.
For the year ended December 31, 2022, the allowance for credit losses decreased $80 million primarily due to Ford Credit’s current expectation that COVID-related losses have been largely avoided, offset partially by deterioration in the macroeconomic outlook that was reflected in the reserve balance in the fourth quarter of 2022. Although net charge-offs for the year ended December 31, 2022 remained low due, in part, to high vehicle auction values, the impact of higher inflation and higher interest rates on future credit losses remains uncertain. Ford Credit will continue to monitor economic trends and conditions and portfolio performance and will adjust the reserve accordingly.
NOTE 11. INVENTORIES
All inventories are stated at the lower of cost or net realizable value. Cost of our inventories is determined by costing methods that approximate a first-in, first-out (“FIFO”) basis. Inventories at December 31 were as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Raw materials, work-in-process, and supplies | $ | 5,785 | | | $ | 5,997 | |
Finished products | 6,280 | | | 8,083 | |
Total inventories | $ | 12,065 | | | $ | 14,080 | |
Our finished product inventory at December 31, 2022 was higher year over year due to production and release scheduling, which resulted in higher sales inventory, in-transit inventory, and units awaiting upfit.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12. NET INVESTMENT IN OPERATING LEASES
Net investment in operating leases consists primarily of lease contracts for vehicles with individuals, daily rental companies, government entities, and fleet customers. Assets subject to operating leases are depreciated using the straight-line method over the term of the lease to reduce the asset to its estimated residual value. Estimated residual values are based on assumptions for used vehicle prices at lease termination and the number of vehicles that are expected to be returned. Adjustments to depreciation expense reflecting revised estimates of expected residual values at the end of the lease terms are recorded prospectively on a straight-line basis.
The net investment in operating leases at December 31 was as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Company excluding Ford Credit | | | |
Vehicles, net of depreciation | $ | 1,194 | | | $ | 951 | |
Ford Credit Segment | | | |
Vehicles, at cost (a) | 29,982 | | | 26,055 | |
Accumulated depreciation | (4,815) | | | (4,234) | |
Total Ford Credit Segment | 25,167 | | | 21,821 | |
Total | $ | 26,361 | | | $ | 22,772 | |
__________ (a)Includes Ford Credit’s operating lease assets of $7.5 billion and $12.5 billion at December 31, 2021 and 2022, respectively, that have been included in securitization transactions. These net investments in operating leases are available only for payment of the debt or other obligations issued or arising in the securitization transactions; they are not available to pay other obligations or the claims of other creditors.
Ford Credit Segment
Included in Ford Credit interest, operating, and other expense is operating lease depreciation expense, which includes gains and losses on disposal of assets along with fees assessed to a customer at lease termination such as excess wear and use and excess mileage that are considered variable lease payments. Operating lease depreciation expense for the years ended December 31 was as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Operating lease depreciation expense | $ | 3,235 | | | $ | 1,626 | | | $ | 2,240 | |
The amounts contractually due on operating leases at December 31, 2022 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
Operating lease payments | $ | 3,324 | | | $ | 1,944 | | | $ | 803 | | | $ | 164 | | | $ | 11 | | | $ | 6,246 | |
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13. NET PROPERTY
Net property is reported at cost, net of accumulated depreciation, which includes impairments. We capitalize new assets when we expect to use the asset for more than one year. Routine maintenance and repair costs are expensed when incurred.
Property and equipment are depreciated primarily using the straight-line method over the estimated useful life of the asset. Useful lives range from 3 years to 40 years. The estimated useful lives generally are 14.5 years for machinery and equipment, 8 years for software, 30 years for land improvements, and 40 years for buildings. Tooling generally is amortized over the expected life of a product program using a straight-line method.
Net property at December 31 was as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Land | $ | 450 | | | $ | 371 | |
Buildings and land improvements | 12,438 | | | 11,946 | |
Machinery, equipment, and other | 39,636 | | | 38,964 | |
Software | 4,598 | | | 5,042 | |
Construction in progress | 2,152 | | | 3,203 | |
Total land, plant and equipment, and other | 59,274 | | | 59,526 | |
Accumulated depreciation | (32,342) | | | (31,781) | |
Net land, plant and equipment, and other | 26,932 | | | 27,745 | |
Tooling, net of amortization | 10,207 | | | 9,520 | |
Total | $ | 37,139 | | | $ | 37,265 | |
Property-related expenses, excluding net investment in operating leases, for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Depreciation and other amortization | $ | 2,792 | | | $ | 2,986 | | | $ | 2,878 | |
Tooling amortization | 2,747 | | | 2,706 | | | 2,556 | |
Total (a) | $ | 5,539 | | | $ | 5,692 | | | $ | 5,434 | |
| | | | | |
Maintenance and rearrangement | $ | 1,670 | | | $ | 1,940 | | | $ | 2,083 | |
__________ (a) Includes impairment of held-for-sale long-lived assets. See Note 22 for additional information.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14. EQUITY IN NET ASSETS OF AFFILIATED COMPANIES
We use the equity method of accounting for our investments in entities over which we do not have control, but over whose operating and financial policies we are able to exercise significant influence.
Our carrying value and ownership percentages of our equity method investments at December 31 were as follows (in millions, except percentages): | | | | | | | | | | | | | | | | | |
| Investment Balance | | Ownership Percentage |
| 2021 | | 2022 | | 2022 |
BlueOval SK, LLC | $ | — | | | $ | 690 | | | 50 | % |
Ford Otomotiv Sanayi Anonim Sirketi | 278 | | | 479 | | | 41 | |
Jiangling Motors Corporation, Limited (a) | 468 | | | 471 | | | 32 | |
Changan Ford Automobile Corporation, Limited (b) | 860 | | | 409 | | | 50 | |
AutoAlliance (Thailand) Co., Ltd. | 391 | | | 346 | | | 50 | |
FFS Finance South Africa (Pty) Limited | 70 | | | 70 | | | 50 | |
Ionity Holding GmbH & Co. KG | 41 | | | 67 | | | 15 | |
Argo AI, LLC (c) | 2,042 | | | — | | | 44 | |
Ford Sollers Netherlands B.V. (d) | 108 | | | — | | | — | |
Other | 287 | | | 266 | | | Various |
Total | $ | 4,545 | | | $ | 2,798 | | | |
__________ (a)In 2021 and 2022, Jiangling Motors Corporation, Limited recorded restructuring charges, our share of which was $10 million and $13 million, respectively. These charges are included in Equity in net income/(loss) of affiliated companies.
(b)In 2022, Changan Ford Automobile Corporation, Limited recorded long-lived asset and other asset impairment charges as well as restructuring charges, our share of which was $368 million. These charges are included in Equity in net income/(loss) of affiliated companies.
(c)See below for information on our investment in Argo AI, LLC.
(d)In 2022, we fully impaired our $93 million investment in Ford Sollers Netherlands B.V., and also sold our interest to the joint venture (with an option to repurchase within five years) for a nominal value resulting in the release of the $25 million carrying amount of our associated foreign currency translation adjustment. These charges are included in Equity in net income/(loss) of affiliated companies and Other income/(loss), respectively.
We recorded $180 million, $452 million, and $452 million of dividends from these affiliated companies for the years ended December 31, 2020, 2021, and 2022, respectively.
An aggregate summary of the balance sheets and income statements of our equity method investees, on a stand alone basis, as reported by those investees at December 31 is below (in millions). Our investment in each equity method investee is reported in Equity in net assets of affiliated companies, and our proportionate share of each of the entities’ income/(loss) is reported in Equity in net income/(loss) of affiliated companies.
| | | | | | | | | | | |
Summarized Balance Sheet | 2021 | | 2022 |
Current assets | $ | 9,342 | | | $ | 10,361 | |
Non-current assets | 12,009 | | | 11,142 | |
Total assets | $ | 21,351 | | | $ | 21,503 | |
| | | |
Current liabilities | $ | 9,461 | | | $ | 10,371 | |
Non-current liabilities | 4,069 | | | 4,498 | |
Total liabilities | $ | 13,530 | | | $ | 14,869 | |
| | | |
Equity attributable to noncontrolling interests | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
Summarized Income Statement | 2020 | | 2021 | | 2022 |
Total revenue | $ | 24,033 | | | $ | 27,760 | | | $ | 27,153 | |
Income/(Loss) before income taxes (a) | 282 | | | 1,002 | | | (1,806) | |
Net income/(loss) (a) | 305 | | | 1,029 | | | (1,769) | |
__________
(a) The 2022 results reflects Argo AI’s impairment, partially offset by the net income/(loss) of our other equity method investees.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14. EQUITY IN NET ASSETS OF AFFILIATED COMPANIES (Continued)
In the ordinary course of business, we buy/sell various products and services including vehicles, parts, and components to/from our equity method investees. In addition, we receive royalty income.
Transactions with equity method investees reported for the years ended or at December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
Income Statement | 2020 | | 2021 | | 2022 |
Sales | $ | 4,126 | | | $ | 4,777 | | | $ | 4,369 | |
Purchases | 8,439 | | | 9,245 | | | 9,670 | |
Royalty income | 381 | | | 458 | | | 483 | |
| | | | | | | | | | | |
Balance Sheet | 2021 | | 2022 |
Receivables | $ | 724 | | | $ | 1,007 | |
Payables | 1,035 | | | 1,676 | |
Argo AI
In 2017, we began investing in Argo AI, an artificial intelligence company that became a consolidated subsidiary, with a commitment to fund $1 billion over five years to develop autonomous vehicle technology. In 2020, we completed a transaction with Volkswagen AG (“VW”) that resulted in Ford and VW holding equal interests in Argo AI, which together comprised a majority ownership of the entity. As a result of this transaction, which included $500 million of proceeds from the sale to VW of a portion of our interest in Argo AI, we deconsolidated Argo AI, remeasured our retained investment in the entity at fair value, and, net of our carrying value in Argo AI’s net assets, recognized a $3.5 billion pre-tax gain in Other income/(loss), net. Immediately following this transaction, our retained investment consisted of a $2.4 billion equity method investment and a $400 million preferred equity security investment, which were reflected on our consolidated balance sheets in Equity in net assets of affiliated companies and Other assets, respectively.
Although Argo AI made progress on developing highly automated driving technology (L4), to achieve commercially viable scale, Argo AI’s technology requires significant additional capital investment and time. In the near term, we see more potential for partial or conditional automated driving technology (L2/L3) to be transformative for customers and our business. Therefore, in the third quarter of 2022, we made the strategic decision to shift our capital spending from L4 technology being developed by Argo AI to advanced L2/L3 systems, which we believe will ultimately be essential to achieve profitable commercialization of L4 autonomy at scale in the future. Additionally, because of the significant additional capital and time required to achieve commercialization of L4, as well as other macroeconomic factors, Argo AI has been unable to attract new investors. After performing external outreach in the third quarter of 2022 to assess market interest in acquiring either Argo AI or its technology components and conducting internal reviews to evaluate opportunities to leverage Argo AI’s technology, Ford determined that Argo AI no longer has value as a going concern. As a result, we reassessed the carrying value of our investment in Argo AI starting from September 30, 2022, and in October 2022, Ford and VW initiated the process of exiting the joint development of L4 technology through Argo AI. On October 26, 2022, we announced that Argo AI plans to wind down operations, which is in progress.
Our valuation assumed an orderly conclusion of operations at Argo AI, in which the cash required to satisfy the remaining obligations would consume all of Argo AI’s remaining capital. In addition, we assessed whether Argo AI’s technology components have value in isolation, and we concluded that the cost to integrate into currently anticipated technology ecosystems would be prohibitive.
Accordingly, we recorded a $2.7 billion pre-tax impairment in the second half of 2022. The non-cash charge was reported in Equity in net income/(loss) of affiliated companies. The carrying value of our investment in Argo AI is $0 as of December 31, 2022; in addition, we have $65 million in Other liabilities and deferred revenue related to our funding commitment in 2023 for our share of Argo AI’s expenses incurred in 2022. The carrying value immediately prior to the impairment was higher than our net cash investment of approximately $500 million (i.e., our $1 billion investment less proceeds we received from VW) due to the non-cash gain recognized when we deconsolidated Argo AI in 2020 as described above.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 15. OTHER INVESTMENTS
We have investments in entities not accounted for under the equity method for which fair values are not readily available. We record these investments at cost (less impairment, if any), adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We report the carrying value of these investments in Other assets in the non-current assets section of our consolidated balance sheets. These investments were $0.9 billion and $0.4 billion at December 31, 2021 and 2022, respectively. See Note 14 for additional information about the decrease from December 31, 2021. The cumulative net unrealized gain from adjustments related to Other Investments held at December 31, 2022 is $136 million.
NOTE 16. OTHER LIABILITIES AND DEFERRED REVENUE
Other liabilities and deferred revenue at December 31 were as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Current | | | |
Dealer and dealers’ customer allowances and claims | $ | 8,300 | | | $ | 9,219 | |
Deferred revenue | 2,349 | | | 2,404 | |
Employee benefit plans | 1,687 | | | 2,020 | |
Accrued interest | 888 | | | 935 | |
Operating lease liabilities | 345 | | | 404 | |
OPEB | 332 | | | 329 | |
Pension | 202 | | | 196 | |
Other (a) | 4,583 | | | 5,590 | |
Total current other liabilities and deferred revenue | $ | 18,686 | | | $ | 21,097 | |
| | | |
Non-current | | | |
Dealer and dealers’ customer allowances and claims | $ | 4,909 | | | $ | 6,095 | |
Pension | 8,658 | | | 5,673 | |
OPEB | 5,708 | | | 4,130 | |
Deferred revenue | 4,683 | | | 4,883 | |
Operating lease liabilities | 1,048 | | | 1,101 | |
Employee benefit plans | 1,007 | | | 834 | |
Other (a) | 1,692 | | | 2,781 | |
Total non-current other liabilities and deferred revenue | $ | 27,705 | | | $ | 25,497 | |
__________
(a) Includes current derivative liabilities of $97 million and $1.3 billion at December 31, 2021 and 2022, respectively. Includes non-current derivative liabilities of $535 million and $1.7 billion at December 31, 2021 and 2022, respectively (see Note 20).
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS
Defined benefit pension and OPEB plan obligations are remeasured at least annually as of December 31 based on the present value of projected future benefit payments for all participants for services rendered to date. The measurement of projected future benefits is dependent on the provisions of each specific plan, demographics of the group covered by the plan, and other key measurement assumptions. For plans that provide benefits dependent on salary assumptions, we include a projection of salary growth in our measurements. 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).
Net periodic benefit costs, including service cost, interest cost, and expected return on assets, are determined using assumptions regarding the benefit obligation and the fair value of plan assets (where applicable) as of the beginning of each year. We have elected to use a fair value of plan assets to calculate the expected return on assets in net periodic benefit cost. The funded status of the benefit plans, which represents the difference between the benefit obligation and fair value of plan assets, is calculated on a plan-by-plan basis. The benefit obligation and related funded status are determined using assumptions as of the end of each year. Actuarial gains and losses resulting from plan remeasurement are recognized in net periodic benefit cost in the period of the remeasurement. The impact of a retroactive plan amendment is recorded in Accumulated other comprehensive income/(loss), and is amortized as a component of net periodic cost, generally over the remaining service period of the active employees. The service cost component is included in Cost of sales and Selling, administrative and other expenses. Other components of net periodic benefit cost/(income) are included in Other income/(loss), net on our consolidated income statements.
A curtailment results from an event that significantly reduces the expected years of future service or eliminates the accrual of defined benefits for the future services of a significant number of employees. A curtailment gain is recorded when the employees who are entitled to a benefit terminate their employment, or when a plan suspension or amendment that results in a curtailment gain is adopted. A curtailment loss is recorded when it becomes probable a curtailment loss will occur. We recognize settlement expense when the costs associated with all settlements during the year exceed the interest component of net periodic cost for the affected plan. Expense from curtailments and settlements is recorded in Other income/(loss), net.
Defined Benefit Pension Plans. We have defined benefit pension plans covering hourly and salaried employees in the United States, Canada, United Kingdom, Germany, and other locations. The largest portion of our worldwide obligation is associated with our U.S. plans. Virtually all of our worldwide defined benefit plans are closed to new participants.
In general, our defined benefit pension plans are funded (i.e., have restricted assets from which benefits are paid). Our unfunded defined benefit pension plans are treated on a “pay as you go” basis with benefit payments from general Company cash. These unfunded plans primarily include certain plans in Germany and the U.S. defined benefit plans for senior management.
OPEB. We have defined benefit OPEB plans, primarily certain health care and life insurance benefits, covering hourly and salaried employees in the United States, Canada, and other locations. The largest portion of our worldwide obligation is associated with our U.S. plans. Our OPEB plans are unfunded and the benefits are paid from general Company cash.
Defined Contribution and Savings Plans. We also have defined contribution and savings plans for hourly and salaried employees in the United States and other locations. Company contributions to these plans, if any, are made from general Company cash and are expensed as incurred. The expense for our worldwide defined contribution and savings plans was $398 million, $432 million, and $478 million for the years ended December 31, 2020, 2021, and 2022, respectively. This includes the expense for Company-matching contributions to our primary employee savings plan in the United States of $146 million, $152 million, and $152 million for the years ended December 31, 2020, 2021, and 2022, respectively.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS (Continued)
Defined Benefit Plans – Expense and Status
The assumptions used to determine benefit obligation and net periodic benefit cost/(income) were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | | | |
| U.S. Plans | | Non-U.S. Plans | | Worldwide OPEB |
| 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 |
Weighted Average Assumptions at December 31 | | | | | | | | | | | |
Discount rate | 2.91 | % | | 5.51 | % | | 1.75 | % | | 4.42 | % | | 2.97 | % | | 5.48 | % |
Average rate of increase in compensation | 3.50 | | | 3.70 | | | 3.19 | | | 3.42 | | | 3.46 | | | 3.65 | |
Weighted Average Assumptions Used to Determine Net Benefit Cost for the Year Ended December 31 | | | | | | | | | | | |
Discount rate - Service cost | 3.02 | % | | 3.12 | % | | 1.44 | % | | 1.78 | % | | 3.14 | % | | 3.27 | % |
Effective interest rate on benefit obligation | 2.00 | | | 2.40 | | | 1.06 | | | 1.54 | | | 1.96 | | | 2.49 | |
Expected long-term rate of return on assets | 6.00 | | | 5.75 | | | 3.42 | | | 3.29 | | | — | | | — | |
Average rate of increase in compensation | 3.50 | | | 3.50 | | | 3.34 | | | 3.19 | | | 3.44 | | | 3.46 | |
The pre-tax net periodic benefit cost/(income) for our defined benefit pension and OPEB plans for the years ended December 31 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | | | | | |
| U.S. Plans | | Non-U.S. Plans | | Worldwide OPEB |
| 2020 | | 2021 | | 2022 | | 2020 | | 2021 | | 2022 | | 2020 | | 2021 | | 2022 |
Service cost | $ | 520 | | | $ | 526 | | | $ | 500 | | | $ | 529 | | | $ | 557 | | | $ | 416 | | | $ | 47 | | | $ | 49 | | | $ | 42 | |
Interest cost | 1,291 | | | 928 | | | 1,054 | | | 514 | | | 420 | | | 504 | | | 169 | | | 127 | | | 146 | |
Expected return on assets | (2,795) | | | (2,728) | | | (2,569) | | | (1,067) | | | (1,130) | | | (1,006) | | | — | | | — | | | — | |
Amortization of prior service costs/(credits) | 4 | | | 2 | | | 2 | | | 32 | | | 24 | | | 22 | | | (16) | | | (12) | | | (3) | |
Net remeasurement (gain)/loss | 377 | | | (254) | | | 1,720 | | | 499 | | | (3,241) | | | (436) | | | 556 | | | (376) | | | (1,314) | |
Separation programs/other | 35 | | | 19 | | | 46 | | | 226 | | | 156 | | | 63 | | | — | | | — | | | — | |
Settlements and curtailments | 5 | | | 70 | | | 438 | | | 103 | | | (2) | | | (2) | | | (2) | | | — | | | (1) | |
Net periodic benefit cost/(income) | $ | (563) | | | $ | (1,437) | | | $ | 1,191 | | | $ | 836 | | | $ | (3,216) | | | $ | (439) | | | $ | 754 | | | $ | (212) | | | $ | (1,130) | |
In 2020, we recognized an expense of $367 million related to separation programs, settlements, and curtailments, which included a $61 million settlement loss related to a non-U.S. pension plan and $268 million related to ongoing redesign programs.
In 2021, we recognized an expense of $244 million related to separation programs, settlements, and curtailments, which included $70 million of settlement losses related to a U.S. pension plan and separation expenses of $156 million for non-U.S. pension plans related to ongoing redesign programs.
In 2022, we recognized an expense of $544 million related to separation programs, settlements, and curtailments, which included $438 million of settlement losses related to a U.S. pension plan and separation and curtailment expenses of $57 million for non-U.S. pension plans related to ongoing redesign programs. Until our Global Redesign programs are completed, we anticipate further adjustments to our plans in subsequent periods.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS (Continued)
The year-end status of these plans was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | | |
| | U.S. Plans | | Non-U.S. Plans | | Worldwide OPEB |
| | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 |
Change in Benefit Obligation | | | | | | | | | | | | |
Benefit obligation at January 1 | | $ | 49,020 | | | $ | 44,888 | | | $ | 39,835 | | | $ | 34,432 | | | $ | 6,575 | | | $ | 6,040 | |
Service cost | | 526 | | | 500 | | | 557 | | | 416 | | | 49 | | | 42 | |
Interest cost | | 928 | | | 1,054 | | | 420 | | | 504 | | | 127 | | | 146 | |
Amendments | | — | | | — | | | 4 | | | — | | | — | | | — | |
Separation programs/other | | (25) | | | 4 | | | 185 | | | 56 | | | — | | | — | |
Curtailments | | — | | | — | | | (4) | | | (2) | | | — | | | — | |
Settlements (a) | | (1,297) | | | (1,172) | | | — | | | (674) | | | — | | | — | |
Plan participant contributions | | 20 | | | 18 | | | 13 | | | 12 | | | 21 | | | 1 | |
Benefits paid | | (2,522) | | | (2,466) | | | (1,565) | | | (1,302) | | | (356) | | | (363) | |
Foreign exchange translation | | — | | | — | | | (1,432) | | | (2,877) | | | — | | | (92) | |
Actuarial (gain)/loss | | (1,762) | | | (9,959) | | | (3,581) | | | (8,960) | | | (376) | | | (1,315) | |
Benefit obligation at December 31 | | 44,888 | | | 32,867 | | | 34,432 | | | 21,605 | | | 6,040 | | | 4,459 | |
Change in Plan Assets | | | | | | | | | | | | |
Fair value of plan assets at January 1 | | 48,355 | | | 45,909 | | | 33,820 | | | 33,085 | | | — | | | — | |
Actual return on plan assets | | 1,150 | | | (9,548) | | | 788 | | | (7,516) | | | — | | | — | |
Company contributions | | 247 | | | 223 | | | 912 | | | 722 | | | — | | | — | |
Plan participant contributions | | 20 | | | 18 | | | 13 | | | 12 | | | — | | | — | |
Benefits paid | | (2,522) | | | (2,466) | | | (1,565) | | | (1,302) | | | — | | | — | |
Settlements (a) | | (1,297) | | | (1,172) | | | — | | | (674) | | | — | | | — | |
Foreign exchange translation | | — | | | — | | | (855) | | | (2,973) | | | — | | | — | |
Other | | (44) | | | (42) | | | (28) | | | (10) | | | — | | | — | |
Fair value of plan assets at December 31 | | 45,909 | | | 32,922 | | | 33,085 | | | 21,344 | | | — | | | — | |
Funded status at December 31 | | $ | 1,021 | | | $ | 55 | | | $ | (1,347) | | | $ | (261) | | | $ | (6,040) | | | $ | (4,459) | |
| | | | | | | | | | | | |
Amounts Recognized on the Balance Sheets | | | | | | | | | | | | |
Prepaid assets | | $ | 3,130 | | | $ | 2,064 | | | $ | 5,404 | | | $ | 3,599 | | | $ | — | | | $ | — | |
Other liabilities | | (2,109) | | | (2,009) | | | (6,751) | | | (3,860) | | | (6,040) | | | (4,459) | |
Total | | $ | 1,021 | | | $ | 55 | | | $ | (1,347) | | | $ | (261) | | | $ | (6,040) | | | $ | (4,459) | |
Amounts Recognized in Accumulated Other Comprehensive Loss (pre-tax) | | | | | | | | | | | | |
Unamortized prior service costs/(credits) | | $ | 2 | | | $ | — | | | $ | 170 | | | $ | 130 | | | $ | 22 | | | $ | 25 | |
| | | | | | | | | | | | |
Pension Plans in which Accumulated Benefit Obligation Exceeds Plan Assets at December 31 | | | | | | | | | | | | |
Accumulated benefit obligation | | $ | 2,192 | | | $ | 15,055 | | | $ | 12,586 | | | $ | 8,346 | | | | | |
Fair value of plan assets | | 140 | | | 13,576 | | | 6,835 | | | 5,068 | | | | | |
| | | | | | | | | | | | |
Accumulated Benefit Obligation at December 31 | | $ | 43,879 | | | $ | 32,336 | | | $ | 31,850 | | | $ | 20,304 | | | | | |
| | | | | | | | | | | | |
Pension Plans in which Projected Benefit Obligation Exceeds Plan Assets at December 31 | | | | | | | | | | | | |
Projected benefit obligation | | $ | 2,249 | | | $ | 15,585 | | | $ | 13,651 | | | $ | 8,932 | | | | | |
Fair value of plan assets | | 140 | | | 13,576 | | | 6,900 | | | 5,068 | | | | | |
| | | | | | | | | | | | |
Projected Benefit Obligation at December 31 | | $ | 44,888 | | | $ | 32,867 | | | $ | 34,432 | | | $ | 21,605 | | | | | |
__________
(a) In the fourth quarter of 2022, we transferred a non-U.S. pension obligation and related plan assets to an insurance company. There were no gains or losses recognized upon settlement.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS (Continued)
The actuarial (gain)/loss for our pension benefit obligations in 2021 and 2022 was primarily related to changes in discount rates.
Pension Plan Contributions
Our policy for funded pension plans is to contribute annually, at a minimum, amounts required by applicable laws and regulations. We may make contributions beyond those legally required.
In 2022, we contributed $567 million to our global funded pension plans and made $379 million of benefit payments to participants in unfunded plans. During 2023, we expect to contribute between $500 million and $600 million of cash to our global funded pension plans. We also expect to make about $400 million of benefit payments to participants in unfunded plans. Based on current assumptions and regulations, we do not expect to have a legal requirement to fund our major U.S. pension plans in 2023.
Expected Future Benefit Payments
The expected future benefit payments at December 31, 2022 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | Benefit Payments |
| | Pension | | |
| | U.S. Plans | | Non-U.S. Plans | | Worldwide OPEB |
2023 | | $ | 3,805 | | | $ | 1,300 | | | $ | 335 | |
2024 | | 2,595 | | | 1,225 | | | 335 | |
2025 | | 2,605 | | | 1,245 | | | 335 | |
2026 | | 2,570 | | | 1,255 | | | 330 | |
2027 | | 2,530 | | | 1,275 | | | 330 | |
2028-2032 | | 12,445 | | | 6,485 | | | 1,595 | |
Pension Plan Asset Information
Investment Objectives and Strategies. Our investment objectives for the U.S. plans are to minimize the volatility of the value of our U.S. pension assets relative to U.S. pension obligations and to ensure assets are sufficient to pay plan benefits. Our largest non-U.S. plans (e.g., United Kingdom and Canada) have similar investment objectives to the U.S. plans.
Investment strategies and policies for the U.S. plans and the largest non-U.S. plans reflect a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative to obligations is addressed primarily through asset-liability matching, asset diversification, and hedging. The fixed income asset allocation matches the bond-like and long-dated nature of the pension obligations. Assets are broadly diversified within asset classes to achieve risk-adjusted returns that, in total, lower asset volatility relative to the obligations. Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes, and strategies within asset classes that provide adequate returns, diversification, and liquidity.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS (Continued)
Derivatives are permitted for fixed income investment and public equity managers to use as efficient substitutes for traditional securities and to manage exposure to interest rate and foreign exchange risks. Interest rate and foreign currency derivative instruments are used for the purpose of hedging changes in the fair value of assets that result from interest rate changes and currency fluctuations. Interest rate derivatives are also used to adjust portfolio duration. Derivatives may not be used to leverage or to alter the economic exposure to an asset class outside the scope of the mandate an investment manager has been given. Alternative investment managers are permitted to employ leverage (including through the use of derivatives or other tools) that may alter economic exposure.
Alternative investments execute diverse strategies that provide exposure to a broad range of hedge fund strategies, equity investments in private companies, and investments in private property funds.
Significant Concentrations of Risk. Significant concentrations of risk in our plan assets relate to interest rates, growth assets, and operating risks. In order to minimize asset volatility relative to the obligations, the majority of plan assets are allocated to fixed income investments which are exposed to interest rate risk. Rate increases generally will result in a decline in the value of fixed income assets, while reducing the present value of the obligations. Conversely, rate decreases generally will increase the value of fixed income assets, offsetting the related increase in the obligations.
In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to growth assets (primarily hedge funds, real estate, private equity, and public equity) that are expected over time to earn higher returns with more volatility than fixed income investments, which more closely match pension obligations. Within growth assets, risk is mitigated by constructing a portfolio that is broadly diversified by asset class, investment strategy, manager, style, and process.
Operating risks include the risks of inadequate diversification and weak controls. To mitigate these risks, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing manager oversight (e.g., style adherence, team strength, firm health, and internal risk controls), plan and asset class investment guidelines and instructions that are communicated to managers, and periodic compliance reviews to ensure adherence.
At year-end 2022, Ford securities comprised less than 1% of our plan assets.
Expected Long-Term Rate of Return on Assets. The long-term return assumption at year-end 2022, which will be used to determine the 2023 expected return on assets, is 6.25% for the U.S. plans, 3.75% for the U.K. plans, and 5.03% for the Canadian plans, and averages 4.13% for all non-U.S. plans. A generally consistent approach is used worldwide to develop this assumption. This approach considers primarily inputs from a range of advisors for long-term 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.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS (Continued)
The fair value of our defined benefit pension plan assets (including dividends and interest receivables of $310 million and $96 million for U.S. and non-U.S. plans, respectively) by asset category at December 31 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| U.S. Plans | | Non-U.S. Plans |
| Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV (a) | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV (a) | | Total |
Asset Category | | | | | | | | | | | | | | | | | | | |
Equity | | | | | | | | | | | | | | | | | | | |
U.S. companies | $ | 1,396 | | | $ | 20 | | | $ | — | | | $ | — | | | $ | 1,416 | | | $ | 1,862 | | | $ | 48 | | | $ | — | | | $ | — | | | $ | 1,910 | |
International companies | 740 | | | 8 | | | 8 | | | — | | | 756 | | | 1,254 | | | 59 | | | — | | | — | | | 1,313 | |
Total equity | 2,136 | | | 28 | | | 8 | | | — | | | 2,172 | | | 3,116 | | | 107 | | | — | | | — | | | 3,223 | |
Fixed Income | | | | | | | | | | | | | | | | | | | |
U.S. government and agencies | 9,660 | | | 1,687 | | | — | | | — | | | 11,347 | | | 47 | | | 13 | | | — | | | — | | | 60 | |
Non-U.S. government | — | | | 1,230 | | | 12 | | | — | | | 1,242 | | | — | | | 20,338 | | | 123 | | | — | | | 20,461 | |
Corporate bonds | — | | | 25,842 | | | — | | | — | | | 25,842 | | | — | | | 2,901 | | | 70 | | | — | | | 2,971 | |
Mortgage/other asset-backed | — | | | 464 | | | — | | | — | | | 464 | | | — | | | 338 | | | 15 | | | — | | | 353 | |
Commingled funds | — | | | 164 | | | — | | | — | | | 164 | | | — | | | 185 | | | — | | | — | | | 185 | |
Derivative financial instruments, net | 1 | | | (19) | | | — | | | — | | | (18) | | | (1) | | | 23 | | | 28 | | | — | | | 50 | |
Total fixed income | 9,661 | | | 29,368 | | | 12 | | | — | | | 39,041 | | | 46 | | | 23,798 | | | 236 | | | — | | | 24,080 | |
Alternatives | | | | | | | | | | | | | | | | | | | |
Hedge funds | — | | | — | | | — | | | 3,390 | | | 3,390 | | | — | | | — | | | — | | | 1,221 | | | 1,221 | |
Private equity | 1 | | | — | | | — | | | 1,976 | | | 1,977 | | | — | | | — | | | — | | | 756 | | | 756 | |
Real estate | — | | | — | | | — | | | 1,323 | | | 1,323 | | | — | | | — | | | — | | | 386 | | | 386 | |
Total alternatives | 1 | | | — | | | — | | | 6,689 | | | 6,690 | | | — | | | — | | | — | | | 2,363 | | | 2,363 | |
Cash, cash equivalents, and repurchase agreements (b) | (1,220) | | | — | | | — | | | — | | | (1,220) | | | (1,899) | | | — | | | — | | | — | | | (1,899) | |
Other (c) | (774) | | | — | | | — | | | — | | | (774) | | | (466) | | | — | | | 5,784 | | | — | | | 5,318 | |
Total assets at fair value | $ | 9,804 | | | $ | 29,396 | | | $ | 20 | | | $ | 6,689 | | | $ | 45,909 | | | $ | 797 | | | $ | 23,905 | | | $ | 6,020 | | | $ | 2,363 | | | $ | 33,085 | |
__________
(a)Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)Primarily short-term investment funds to provide liquidity to plan investment managers, cash held to pay benefits, and repurchase agreements valued at $2.9 billion in U.S. plans and $2.6 billion in non-U.S. plans.
(c)For U.S. plans, amounts related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales). For non-U.S plans, $4.7 billion of insurance contracts, primarily Ford-Werke, and amounts related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales).
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS (Continued)
The fair value of our defined benefit pension plan assets (including dividends and interest receivables of $268 million and $74 million for U.S. and non-U.S. plans, respectively) by asset category at December 31 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| U.S. Plans | | Non-U.S. Plans |
| Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV (a) | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV (a) | | Total |
Asset Category | | | | | | | | | | | | | | | | | | | |
Equity | | | | | | | | | | | | | | | | | | | |
U.S. companies | $ | 412 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 414 | | | $ | 1,426 | | | $ | 33 | | | $ | — | | | $ | — | | | $ | 1,459 | |
International companies | 269 | | | 6 | | | 8 | | | — | | | 283 | | | 989 | | | 13 | | | — | | | — | | | 1,002 | |
Total equity | 681 | | | 8 | | | 8 | | | — | | | 697 | | | 2,415 | | | 46 | | | — | | | — | | | 2,461 | |
Fixed Income | | | | | | | | | | | | | | | | | | | |
U.S. government and agencies | 7,380 | | | 1,509 | | | — | | | — | | | 8,889 | | | 36 | | | 35 | | | — | | | — | | | 71 | |
Non-U.S. government | — | | | 640 | | | — | | | — | | | 640 | | | — | | | 12,256 | | | 231 | | | — | | | 12,487 | |
Corporate bonds | — | | | 17,774 | | | 1 | | | — | | | 17,775 | | | — | | | 2,059 | | | 124 | | | — | | | 2,183 | |
Mortgage/other asset-backed | — | | | 422 | | | — | | | — | | | 422 | | | — | | | 265 | | | 10 | | | — | | | 275 | |
Commingled funds | — | | | 104 | | | — | | | — | | | 104 | | | — | | | 170 | | | — | | | — | | | 170 | |
Derivative financial instruments, net | (2) | | | 19 | | | — | | | — | | | 17 | | | 2 | | | (74) | | | 77 | | | — | | | 5 | |
Total fixed income | 7,378 | | | 20,468 | | | 1 | | | — | | | 27,847 | | | 38 | | | 14,711 | | | 442 | | | — | | | 15,191 | |
Alternatives | | | | | | | | | | | | | | | | | | | |
Hedge funds | — | | | — | | | — | | | 3,342 | | | 3,342 | | | — | | | — | | | — | | | 1,009 | | | 1,009 | |
Private equity | — | | | — | | | — | | | 1,411 | | | 1,411 | | | — | | | — | | | — | | | 584 | | | 584 | |
Real estate | — | | | — | | | — | | | 1,553 | | | 1,553 | | | — | | | — | | | — | | | 405 | | | 405 | |
Total alternatives | — | | | — | | | — | | | 6,306 | | | 6,306 | | | — | | | — | | | — | | | 1,998 | | | 1,998 | |
Cash, cash equivalents, and repurchase agreements (b) | (1,135) | | | — | | | — | | | — | | | (1,135) | | | (1,363) | | | — | | | — | | | — | | | (1,363) | |
Other (c) | (793) | | | — | | | — | | | — | | | (793) | | | (310) | | | — | | | 3,367 | | | — | | | 3,057 | |
Total assets at fair value | $ | 6,131 | | | $ | 20,476 | | | $ | 9 | | | $ | 6,306 | | | $ | 32,922 | | | $ | 780 | | | $ | 14,757 | | | $ | 3,809 | | | $ | 1,998 | | | $ | 21,344 | |
__________
(a)Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)Primarily short-term investment funds to provide liquidity to plan investment managers, cash held to pay benefits, and repurchase agreements valued at $2.6 billion in U.S. plans and $2.1 billion in non-U.S. plans.
(c)For U.S. plans, amounts related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales). For non-U.S plans, $2.5 billion of insurance contracts, primarily Ford-Werke, and amounts related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales).
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17. RETIREMENT BENEFITS (Continued)
The following table summarizes the changes in Level 3 defined benefit pension plan assets measured at fair value on a recurring basis for the years ended December 31 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| | Return on plan assets | | | | | | |
| Fair Value at January 1 | | Attributable to Assets Held at December 31 | | Attributable to Assets Sold | | Net Purchases/ (Settlements) | | Transfers Into/ (Out of) Level 3 | | Fair Value at December 31 |
U.S. Plans | $ | 16 | | | $ | (2) | | | $ | — | | | $ | 5 | | | $ | 1 | | | $ | 20 | |
Non-U.S. Plans (a) | 6,006 | | | (943) | | | 153 | | | 687 | | | 117 | | | 6,020 | |
| | | | | | | | | | | |
| 2022 |
| | Return on plan assets | | | | | | |
| Fair Value at January 1 | | Attributable to Assets Held at December 31 | | Attributable to Assets Sold | | Net Purchases/ (Settlements) | | Transfers Into/ (Out of) Level 3 | | Fair Value at December 31 |
U.S. Plans | $ | 20 | | | $ | — | | | $ | (4) | | | $ | (8) | | | $ | 1 | | | $ | 9 | |
Non-U.S. Plans (a) | 6,020 | | | (1,732) | | | 26 | | | (722) | | | 217 | | | 3,809 | |
__________
(a)Includes insurance contracts, primarily the Ford-Werke plan, valued at $4.7 billion and $2.5 billion at year-end 2021 and 2022, respectively. In the fourth quarter of 2022, we transferred a non-U.S. pension obligation and related plan assets to an insurance company. There were no gains or losses recognized upon settlement.
NOTE 18. LEASE COMMITMENTS
We lease land, dealership facilities, offices, distribution centers, warehouses, and equipment under agreements with contractual periods ranging from less than one year to 40 years. Many of our leases contain one or more options to extend. In certain dealership lease agreements, we are the tenant and we sublease the site to a dealer. In the event the sublease is terminated, we have the option to terminate the head lease. We include options that we are reasonably certain to exercise in our evaluation of the lease term after considering all relevant economic and financial factors.
Leases that are economically similar to the purchase of an asset are classified as finance leases. The leased (“right-of-use”) assets in finance lease arrangements are reported in Net property on our consolidated balance sheets. Otherwise, the leases are classified as operating leases and reported in Other assets in the non-current assets section of our consolidated balance sheets. We have also entered into manufacturing contracts commencing in a future period where Ford’s portion of the output is expected to be significant. As a result, there may be embedded leases, and related liabilities, that will be reported as part of our financial statements, typically upon commencement of production.
For the majority of our leases, we do not separate the non-lease components (e.g., maintenance and operating services) from the lease components to which they relate. Instead, non-lease components are included in the measurement of the lease liabilities. However, we do separate lease and non-lease components for contracts containing a significant service component (e.g., energy performance contracts). We calculate the initial lease liability as the present value of fixed payments not yet paid and variable payments that are based on a market rate or an index (e.g., CPI), measured at commencement. The majority of our leases are discounted using our incremental borrowing rate because the rate implicit in the lease is not readily determinable. All other variable payments are expensed as incurred.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18. LEASE COMMITMENTS (Continued)
Lease right-of-use assets and liabilities at December 31 were as follows (in millions): | | | | | | | | | | | | | | |
| | 2021 | | 2022 |
Operating leases | | | | |
Other assets, non-current | | $ | 1,337 | | | $ | 1,447 | |
| | | | |
Other liabilities and deferred revenue, current | | $ | 345 | | | $ | 404 | |
Other liabilities and deferred revenue, non-current | | 1,048 | | | 1,101 | |
Total operating lease liabilities | | $ | 1,393 | | | $ | 1,505 | |
| | | | |
Finance leases | | | | |
Property and equipment, gross | | $ | 715 | | | $ | 791 | |
Accumulated depreciation | | (68) | | | (109) | |
Property and equipment, net | | $ | 647 | | | $ | 682 | |
| | | | |
Company excluding Ford Credit debt payable within one year | | $ | 76 | | | $ | 86 | |
Company excluding Ford Credit long-term debt | | 489 | | | 488 | |
Total finance lease liabilities | | $ | 565 | | | $ | 574 | |
The amounts contractually due on our lease liabilities as of December 31, 2022 were as follows (in millions): | | | | | | | | | | | | | | |
| | Operating Leases (a) | | Finance Leases |
2023 | | $ | 452 | | | $ | 107 | |
2024 | | 350 | | | 91 | |
2025 | | 253 | | | 68 | |
2026 | | 176 | | | 62 | |
2027 | | 134 | | | 37 | |
Thereafter | | 309 | | | 348 | |
Total | | 1,674 | | | 713 | |
Less: Present value discount | | 169 | | | 139 | |
Total lease liabilities | | $ | 1,505 | | | $ | 574 | |
__________
(a) Excludes approximately $300 million in future lease payments for various leases commencing in a future period.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18. LEASE COMMITMENTS (Continued)
Supplemental cash flow information related to leases for the years ended December 31 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
Operating cash flows from operating leases | | $ | 434 | | | $ | 424 | | | $ | 459 | |
Operating cash flows from finance leases | | 15 | | | 14 | | | 22 | |
Financing cash flows from finance leases | | 105 | | | 52 | | | 83 | |
Right-of-use assets obtained in exchange for lease liabilities | | | | | | |
Operating leases | | $ | 304 | | | $ | 441 | | | $ | 528 | |
Finance leases | | 306 | | | 192 | | | 95 | |
The components of lease expense for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Operating lease expense | | $ | 463 | | | $ | 444 | | | $ | 463 | |
Variable lease expense | | 57 | | | 49 | | | 62 | |
Sublease income | | (14) | | | (16) | | | (15) | |
Finance lease expense | | | | | | |
Amortization of right-of-use assets | | 27 | | | 34 | | | 60 | |
Interest on lease liabilities | | 15 | | | 14 | | | 22 | |
Total lease expense | | $ | 548 | | | $ | 525 | | | $ | 592 | |
The weighted-average remaining lease term and weighted-average discount rate at December 31 were as follows: | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Weighted-average remaining lease term (in years) | | | | | | |
Operating leases | | 6.3 | | 6.0 | | 5.5 |
Finance leases | | 14.8 | | 12.1 | | 12.2 |
Weighted-average discount rate | | | | | | |
Operating leases | | 3.8 | % | | 3.3 | % | | 3.7 | % |
Finance leases | | 3.5 | | | 3.3 | | | 3.9 | |
NOTE 19. DEBT AND COMMITMENTS
Our debt consists of short-term and long-term secured and unsecured debt securities, and secured and unsecured borrowings from banks and other lenders. Debt issuances are placed directly by us or through securities dealers or underwriters and are held by institutional and retail investors. In addition, Ford Credit sponsors securitization programs that provide short-term and long-term asset-backed financing through institutional investors in the U.S. and international capital markets.
Debt is reported on our consolidated balance sheets at par value adjusted for unamortized discount or premium, unamortized issuance costs, and adjustments related to designated fair value hedging (see Note 20). Discounts, premiums, and costs directly related to the issuance of debt are capitalized and amortized over the life of the debt or to the put date and are recorded in interest expense using the effective interest method. Gains and losses on the extinguishment of debt are recorded in Other income/(loss), net.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. DEBT AND COMMITMENTS (Continued)
The carrying value of Company debt excluding Ford Credit and Ford Credit debt at December 31 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Interest Rates | |
| | | | | Average Contractual | | Average Effective (a) | |
Company excluding Ford Credit | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | |
Debt payable within one year | | | | | | | | | | | | |
Short-term | $ | 286 | | | $ | 359 | | | 0.4 | % | | 2.8 | % | | 0.4 | % | | 2.8 | % | |
Long-term payable within one year | | | | | | | | | | | | |
Public unsecured debt securities | 86 | | | — | | | | | | | | | | |
U.S. Department of Energy Advanced Technology Vehicles Manufacturing (“DOE ATVM”) Incentive Program | 953 | | | — | | | | | | | | | | |
Delayed draw term loan | 1,500 | | | — | | | | | | | | | | |
Other debt | 348 | | | 372 | | | | | | | | | | |
Unamortized (discount)/premium | 2 | | | (1) | | | | | | | | | | |
Total debt payable within one year | 3,175 | | | 730 | | | | | | | | | | |
Long-term debt payable after one year | | | | | | | | | | | | |
Public unsecured debt securities | 13,643 | | | 14,935 | | | | | | | | | | |
Convertible notes | 2,300 | | | 2,300 | | | | | | | | | | |
U.K. Export Finance Program | 843 | | | 1,654 | | | | | | | | | | |
Other debt | 768 | | | 682 | | | | | | | | | | |
Unamortized (discount)/premium | (188) | | | (180) | | | | | | | | | | |
Unamortized issuance costs | (166) | | | (191) | | | | | | | | | | |
Total long-term debt payable after one year | 17,200 | | | 19,200 | | | 4.4 | % | (b) | 4.9 | % | (b) | 4.6 | % | (b) | 5.1 | % | (b) |
Total Company excluding Ford Credit | $ | 20,375 | | | $ | 19,930 | | | | | | | | | | |
| | | | | | | | | | | | |
Fair value of Company debt excluding Ford Credit (c) | $ | 24,044 | | | $ | 18,557 | | | | | | | | | | |
| | | | | | | | | | | | |
Ford Credit | | | | | | | | | | | | |
Debt payable within one year | | | | | | | | | | | | |
Short-term | $ | 14,810 | | | $ | 19,624 | | | 1.2 | % | | 3.8 | % | | 1.3 | % | | 3.8 | % | |
Long-term payable within one year | | | | | | | | | | | | |
Unsecured debt | 13,660 | | | 7,980 | | | | | | | | | | |
Asset-backed debt | 18,049 | | | 21,839 | | | | | | | | | | |
Unamortized (discount)/premium | 1 | | | — | | | | | | | | | | |
Unamortized issuance costs | (13) | | | (13) | | | | | | | | | | |
Fair value adjustments (d) | 10 | | | 4 | | | | | | | | | | |
Total debt payable within one year | 46,517 | | | 49,434 | | | | | | | | | | |
Long-term debt payable after one year | | | | | | | | | | | | |
Unsecured debt | 44,337 | | | 39,620 | | | | | | | | | | |
Asset-backed debt | 26,654 | | | 31,840 | | | | | | | | | | |
Unamortized (discount)/premium | 28 | | | 23 | | | | | | | | | | |
Unamortized issuance costs | (199) | | | (184) | | | | | | | | | | |
Fair value adjustments (d) | 380 | | | (1,694) | | | | | | | | | | |
Total long-term debt payable after one year | 71,200 | | | 69,605 | | | 2.6 | % | (b) | 3.6 | % | (b) | 2.6 | % | (b) | 3.6 | % | (b) |
Total Ford Credit | $ | 117,717 | | | $ | 119,039 | | | | | | | | | | |
| | | | | | | | | | | | |
Fair value of Ford Credit debt (c) | $ | 120,204 | | | $ | 117,214 | | | | | | | | | | |
__________ (a)Average effective rates reflect the average contractual interest rate plus amortization of discounts, premiums, and issuance costs.
(b)Includes interest on long-term debt payable within one year and after one year.
(c)At December 31, 2021 and 2022, the fair value of debt includes $209 million and $359 million of Company excluding Ford Credit short-term debt and $14.1 billion and $16.9 billion of Ford Credit short-term debt, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
(d)These adjustments are related to hedging activity and include discontinued hedging relationship adjustments of $257 million and $31 million at December 31, 2021 and 2022, respectively. The carrying value of hedged debt was $37.5 billion and $33.3 billion at December 31, 2021 and 2022, respectively.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. DEBT AND COMMITMENTS (Continued)
Cash paid for interest was $1.4 billion, $1.9 billion, and $1.2 billion in 2020, 2021, and 2022, respectively, on Company excluding Ford Credit debt. Cash paid for interest was $3.4 billion, $2.8 billion, and $3.2 billion in 2020, 2021, and 2022, respectively, on Ford Credit debt.
Maturities
Debt maturities at December 31, 2022 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Adjustments | | Total Debt Maturities |
Company excluding Ford Credit | | | | | | | | | | | | | | | |
Public unsecured debt securities | $ | — | | | $ | — | | | $ | 176 | | | $ | 3,972 | | | $ | — | | | $ | 13,087 | | | $ | (258) | | | $ | 16,977 | |
Short-term and other debt | 731 | | | 95 | | | 820 | | | 65 | | | 939 | | | 417 | | | (114) | | | 2,953 | |
Total | $ | 731 | | | $ | 95 | | | $ | 996 | | | $ | 4,037 | | | $ | 939 | | | $ | 13,504 | | | $ | (372) | | | $ | 19,930 | |
| | | | | | | | | | | | | | | |
Ford Credit | | | | | | | | | | | | | | | |
Unsecured debt | $ | 24,798 | | | $ | 11,533 | | | $ | 10,888 | | | $ | 5,184 | | | $ | 6,187 | | | $ | 5,828 | | | $ | (1,816) | | | $ | 62,602 | |
Asset-backed debt | 24,645 | | | 15,625 | | | 10,896 | | | 3,509 | | | 1,110 | | | 700 | | | (48) | | | 56,437 | |
Total | $ | 49,443 | | | $ | 27,158 | | | $ | 21,784 | | | $ | 8,693 | | | $ | 7,297 | | | $ | 6,528 | | | $ | (1,864) | | | $ | 119,039 | |
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. DEBT AND COMMITMENTS (Continued)
Company excluding Ford Credit Segment
Public Unsecured Debt Securities
Our public unsecured debt securities outstanding at December 31 were as follows (in millions): | | | | | | | | | | | |
| Aggregate Principal Amount Outstanding |
Title of Security | 2021 | | 2022 |
8 7/8% Debentures due January 15, 2022 | $ | 86 | | | $ | — | |
9.000% Notes due April 22, 2025 | 1,058 | | | — | |
7 1/8% Debentures due November 15, 2025 | 176 | | | 176 | |
0.00% Notes due March 15, 2026 | 2,300 | | | 2,300 | |
7 1/2% Debentures due August 1, 2026 | 172 | | | 172 | |
4.346% Notes due December 8, 2026 | 1,500 | | | 1,500 | |
6 5/8% Debentures due February 15, 2028 | 104 | | | 104 | |
6 5/8% Debentures due October 1, 2028 (a) | 446 | | | 446 | |
6 3/8% Debentures due February 1, 2029 (a) | 202 | | | 202 | |
9.30% Notes due March 1, 2030 | 294 | | | 294 | |
9.625% Notes due April 22, 2030 | 432 | | | 432 | |
7.45% GLOBLS due July 16, 2031 (a) | 1,070 | | | 1,070 | |
8.900% Debentures due January 15, 2032 | 108 | | | 108 | |
3.25% Notes due February 12, 2032 | 2,500 | | | 2,500 | |
9.95% Debentures due February 15, 2032 | 4 | | | 4 | |
6.10% Notes due August 19, 2032 | — | | | 1,750 | |
4.75% Notes due January 15, 2043 | 2,000 | | | 2,000 | |
7.75% Debentures due June 15, 2043 | 73 | | | 73 | |
7.40% Debentures due November 1, 2046 | 398 | | | 398 | |
5.291% Notes due December 8, 2046 | 1,300 | | | 1,300 | |
9.980% Debentures due February 15, 2047 | 114 | | | 114 | |
6.20% Notes due June 1, 2059 | 750 | | | 750 | |
6.00% Notes due December 1, 2059 | 800 | | | 800 | |
6.50% Notes due August 15, 2062 | — | | | 600 | |
7.70% Debentures due May 15, 2097 | 142 | | | 142 | |
Total public unsecured debt securities | $ | 16,029 | | | $ | 17,235 | |
__________
(a) Listed on the Luxembourg Exchange and on the Singapore Exchange.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. DEBT AND COMMITMENTS (Continued)
Debt Extinguishment
Pursuant to our November 2021 cash tender offer and December 2021 redemption, we repurchased or redeemed $7.6 billion principal amount of our public unsecured debt securities for an aggregate cost of $9.3 billion (including transaction costs and accrued and unpaid interest payments for such tendered securities). As a result of these transactions, we recorded a pre-tax loss of $1.7 billion (net of unamortized discounts, premiums, and fees) in Other income/(loss), net in 2021.
In September 2022, we redeemed approximately $1.1 billion principal amount of our public unsecured debt securities for an aggregate cost of approximately $1.2 billion (including redemption costs and accrued and unpaid interest payments for such redeemed securities). As a result of this transaction, we recorded a pre-tax loss of $135 million (net of unamortized discounts, premiums, and fees) in Other income/(loss), net in 2022.
Environmental, Social, Governance (“ESG”) Bonds
In November 2021 and August 2022, we issued $2.5 billion and approximately $1.8 billion aggregate principal amount of green bonds, respectively, under our sustainable financing framework. The interest rates of these green bonds are 3.250% and 6.1%, respectively. We are allocating the net proceeds from this issuance to the design, development, and manufacturing of our electric vehicle portfolio.
Convertible Debt
In March 2021, we issued $2.3 billion aggregate principal amount of unsecured 0% Convertible Senior Notes due 2026, including $300 million aggregate principal amount of such notes pursuant to the exercise in full of the overallotment option granted to the initial purchasers. The notes will not bear regular interest and the principal amount of the notes will not accrete. The total net proceeds from the offering, after deducting debt issuance costs, were approximately $2.267 billion.
Each $1,000 principal amount of the notes will be convertible into 59.3505 shares of our Common Stock, which is equivalent to a conversion price of approximately $16.85 per share, subject to adjustment upon the occurrence of specified events. The notes are convertible, at the option of the noteholders, on or after December 15, 2025. Prior to December 15, 2025, the notes are convertible only under the following circumstances:
•During any fiscal quarter commencing after the fiscal quarter ending on September 30, 2021 (and only during such fiscal quarter), if the last reported sale price of our Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the notes on each applicable trading day;
•During the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the notes for each day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of our Common Stock and the conversion rate of the notes on such trading day;
•If we call any or all of the notes for redemption; or
•Upon the occurrence of specific corporate events such as a change in control or certain beneficial distributions to common stockholders (as set forth in the indenture governing the notes).
Upon conversion, we will pay cash up to the aggregate principal amount of the notes to be converted and cash, shares of our Common Stock, or a combination of cash and shares of our Common Stock, at our election for the remainder of our obligation in excess, if any, of the aggregate principal amount of the notes being converted.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. DEBT AND COMMITMENTS (Continued)
We may not redeem the notes prior to March 20, 2024. On or after March 20, 2024, we may redeem all or any portion of the notes for cash equal to 100% of the principal amount of the notes being redeemed if the last reported sale price of our Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
If we undergo a fundamental change (e.g., change of control), subject to certain conditions, holders of the notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes. In addition, if specific corporate events occur prior to the maturity date or if we issue a notice of redemption, we will increase the conversion rate by pre-defined amounts for holders who elect to convert their notes in connection with such a corporate event. The conditions allowing holders of the notes to convert were not met in 2021 or 2022.
The notes were issued at par and fees associated with the issuance of these notes are amortized to Interest expense on Company debt excluding Ford Credit over the contractual term of the notes. Amortization of issuance costs was $5 million and $7 million in 2021 and 2022, respectively. The effective interest rate of the notes is 0.3%.
The total estimated fair value of the notes as of December 31, 2021 and December 31, 2022 was approximately $3.2 billion and $2.2 billion, respectively. The fair value was determined using commonly employed valuation methodologies applying observable market inputs and is classified within Level 2 of the fair value hierarchy.
The notes did not have an impact on our full year 2021 or 2022 diluted EPS.
DOE ATVM Incentive Program
In September 2009, we entered into a Loan Arrangement and Reimbursement Agreement with the DOE, under which we borrowed through multiple draws $5.9 billion to finance certain costs for fuel-efficient, advanced-technology vehicles. We made our final repayment to the DOE in June 2022.
U.K. Export Finance Program
In 2020 and 2022, Ford Motor Company Limited (“Ford of Britain”), our operating subsidiary in the United Kingdom, entered into, and drew in full, £625 million and £750 million term loan credit facilities, respectively, with a syndicate of banks to support Ford of Britain’s general export activities. Accordingly, U.K. Export Finance (“UKEF”) provided £500 million and £600 million guarantees of the credit facilities, respectively, under its Export Development Guarantee scheme, which supports high value commercial lending to U.K. exporters. We have also guaranteed Ford of Britain’s obligations under the credit facilities to the lenders. As of December 31, 2022, the full £1,375 million under the two credit facilities remained outstanding. These five-year, non-amortizing loans mature on June 30, 2025 and June 30, 2027.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. DEBT AND COMMITMENTS (Continued)
Company Excluding Ford Credit Facilities
Total Company committed credit lines, excluding Ford Credit, at December 31, 2022 were $19.3 billion, consisting of $13.5 billion of our corporate credit facility, $2 billion of our supplemental revolving credit facility, $1.75 billion of our 364-day revolving credit facility, and $2.1 billion of local credit facilities. At December 31, 2022, the utilized portion of the corporate credit facility was $19 million, representing amounts utilized for letters of credit, and the full $1.75 billion of our 364-day revolving credit facility was utilized by Ford Credit, in its capacity as a subsidiary borrower under that facility. In addition, $1.7 billion of committed Company credit lines, excluding Ford Credit, was utilized under local credit facilities for our affiliates as of December 31, 2022. As of January 25, 2023, Ford Credit had repaid the full $1.75 billion outstanding under the 364-day revolving credit facility.
Lenders under our corporate credit facility have $3.4 billion of commitments maturing on June 23, 2025 and $10.1 billion of commitments maturing on June 23, 2027. Lenders under our supplemental revolving credit facility have $0.1 billion of commitments maturing on September 29, 2024 and $1.9 billion of commitments maturing on June 23, 2025. Lenders under our 364-day revolving credit facility have $1.75 billion of commitments maturing on June 22, 2023.
The corporate, supplemental, and 364-day credit agreements include certain sustainability-linked targets, pursuant to which the applicable margin and facility fees may be adjusted if Ford achieves, or fails to achieve, the specified targets related to global manufacturing facility greenhouse gas emissions, renewable electricity consumption, and Ford Europe CO2 tailpipe emissions.
The corporate credit facility is unsecured and free of material adverse change conditions to borrowing, restrictive financial covenants (for example, interest or fixed-charge coverage ratio, debt-to-equity ratio, and minimum net worth requirements), and credit rating triggers that could limit our ability to obtain funding or trigger early repayment. The corporate credit facility contains a liquidity covenant that requires us to maintain a minimum of $4 billion in aggregate of domestic cash, cash equivalents, and loaned and marketable securities and/or availability under the corporate credit facility, supplemental revolving credit facility, and 364-day revolving credit facility. The terms and conditions of the supplemental and 364-day revolving credit facilities are consistent with our corporate credit facility. Ford Credit has been designated as a subsidiary borrower under the corporate credit facility and the 364-day revolving credit facility.
Each of the corporate credit facility, supplemental revolving credit facility, and 364-day revolving credit facility include a covenant that requires us to provide guarantees from certain of our subsidiaries in the event that our senior, unsecured, long-term debt does not maintain at least two investment grade ratings from Fitch, Moody’s, and S&P. The following subsidiaries have provided unsecured guarantees to the lenders under the credit facilities: Ford Component Sales, LLC; Ford European Holdings Inc.; Ford Global Technologies, LLC; Ford Holdings LLC (the parent company of Ford Credit); Ford International Capital LLC; Ford Mexico Holdings LLC; Ford Motor Service Company; Ford Next LLC; and Ford Trading Company, LLC.
Ford Credit Segment
Debt Extinguishment
Pursuant to Ford Credit’s June 2022 cash tender offer, Ford Credit repurchased approximately $3 billion principal amount of its public unsecured debt securities for an aggregate cost of approximately $3 billion (including transaction costs and accrued and unpaid interest payments for such tendered securities). As a result of these transactions, Ford Credit recorded a pre-tax gain of $17 million (net of unamortized discounts, premiums, fees, and fair value adjustments) in Other income/(loss), net in 2022.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19. DEBT AND COMMITMENTS (Continued)
Asset-Backed Debt
At December 31, 2022, the carrying value of our asset-backed debt was $56.4 billion. This secured debt is issued by Ford Credit and includes asset-backed securities used to fund operations and maintain liquidity. Assets securing the related debt issued as part of all our securitization transactions are included in our consolidated results and are based upon the legal transfer of the underlying assets in order to reflect legal ownership and the beneficial ownership of the debt holder. The third-party investors in the securitization transactions have legal recourse only to the assets securing the debt and do not have such recourse to us, except for the customary representation and warranty provisions or when we are counterparty to certain derivative transactions of the special purpose entities (“SPEs”). In addition, the cash flows generated by the assets are restricted only to pay such liabilities; Ford Credit retains the right to residual cash flows. See Note 24 for additional information.
Although not contractually required, we regularly support our wholesale securitization programs by repurchasing receivables of a dealer from a SPE when the dealer’s performance is at risk, which transfers the corresponding risk of loss from the SPE to us. In order to continue to fund the wholesale receivables, we also may contribute additional cash or wholesale receivables if the collateral falls below required levels. The balance of cash related to these contributions was $1,150 million and $0 at December 31, 2021 and December 31, 2022, respectively, and ranged from $25 million to $3,700 million during 2021 and from $0 to $2,850 million during 2022.
SPEs that are exposed to interest rate or currency risk may reduce their risks by entering into derivative transactions. In certain instances, we have entered into derivative transactions with the counterparty to protect the counterparty from risks absorbed through derivative transactions with the SPEs. Derivative income/(expense) related to the derivative transactions that support Ford Credit’s securitization programs were $(234) million, $41 million, and $466 million for the years ended December 31, 2020, 2021, and 2022, respectively. See Note 20 for additional information regarding the accounting for derivatives.
Interest expense on securitization debt was $1.2 billion, $0.9 billion, and $1.3 billion in 2020, 2021, and 2022, respectively.
The assets and liabilities related to our asset-backed debt arrangements included in our consolidated financial statements at December 31 were as follows (in billions): | | | | | | | | | | | |
| 2021 | | 2022 |
Assets | | | |
Cash and cash equivalents | $ | 3.8 | | | $ | 2.8 | |
Finance receivables, net | 50.6 | | | 61.6 | |
Net investment in operating leases | 7.5 | | | 12.5 | |
| | | |
Liabilities | | | |
Debt (a) | $ | 45.4 | | | $ | 56.4 | |
__________ (a)Debt is net of unamortized discount and issuance costs.
Committed Credit Facilities
At December 31, 2022, Ford Credit’s committed capacity totaled $39.7 billion, compared with $39.8 billion at December 31, 2021. Ford Credit’s committed capacity is primarily comprised of committed asset-backed security facilities from bank-sponsored commercial paper conduits and other financial institutions and unsecured credit facilities with financial institutions.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates, certain commodity prices, and interest rates. To manage these risks, we enter into highly effective derivative contracts:
•Foreign currency exchange contracts, including forwards, that are used to manage foreign exchange exposure;
•Commodity contracts, including forwards, that are used to manage commodity price risk;
•Interest rate contracts, including swaps, that are used to manage the effects of interest rate fluctuations; and
•Cross-currency interest rate swap contracts that are used to manage foreign currency and interest rate exposures on foreign-denominated debt.
Our derivatives are over-the-counter customized derivative transactions and are not exchange-traded. We review our hedging program, derivative positions, and overall risk management strategy on a regular basis.
Derivative Financial Instruments and Hedge Accounting. Derivative assets are reported in Other assets and derivative liabilities are reported in Payables and Other liabilities and deferred revenue.
We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.
Cash Flow Hedges. We have designated certain forward contracts as cash flow hedges of forecasted transactions with exposure to foreign currency exchange and commodity price risks.
Changes in the fair value of cash flow hedges are deferred in Accumulated other comprehensive income/(loss) and are recognized in Cost of sales when the hedged item affects earnings. Our policy is to de-designate foreign currency exchange cash flow hedges prior to the time forecasted transactions are recognized as assets or liabilities on our consolidated balance sheets and report subsequent changes in fair value through Cost of sales. If it becomes probable that the originally forecasted transaction will not occur, the related amount included in Accumulated other comprehensive income/(loss) is reclassified and recognized in earnings. The cash flows associated with hedges designated until maturity are reported in Net cash provided by/(used in) operating activities on our consolidated statement of cash flows. Our cash flow hedges mature within three years.
Fair Value Hedges. Our Ford Credit segment uses derivatives to reduce the risk of changes in the fair value of debt. We have designated certain receive-fixed, pay-float interest rate and cross-currency interest rate swaps as fair value hedges of fixed-rate debt. The risk being hedged is the risk of changes in the fair value of the hedged debt attributable to changes in the benchmark interest rate and foreign exchange. We report the change in fair value of the hedged debt related to the change in benchmark interest rate in Ford Credit debt and Ford Credit interest, operating, and other expenses. We report the change in fair value of the hedged debt and hedging instrument related to foreign currency in Other income/(loss), net. Net interest settlements and accruals and fair value changes on hedging instruments due to the benchmark interest rate change are reported in Ford Credit interest, operating, and other expenses. The cash flows associated with fair value hedges are reported in Net cash provided by/(used in) operating activities on our consolidated statements of cash flows.
When a fair value hedge is de-designated, or when the derivative is terminated before maturity, the fair value adjustment to the hedged debt continues to be reported as part of the carrying value of the debt and is recognized in Ford Credit interest, operating, and other expenses over its remaining life.
Derivatives Not Designated as Hedging Instruments. For total Company excluding Ford Credit, we report changes in the fair value of derivatives not designated as hedging instruments through Cost of sales. Cash flows associated with non-designated or de-designated derivatives are reported in Net cash provided by/(used in) investing activities on our consolidated statements of cash flows.
Our Ford Credit segment reports the gains/(losses) on derivatives not designated as hedging instruments in Other income/(loss), net. Cash flows associated with non-designated or de-designated derivatives are reported in Net cash provided by/(used in) investing activities on our consolidated statements of cash flows.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Normal Purchases and Normal Sales Classification. We have elected to apply the normal purchases and normal sales classification for physical supply contracts that are entered into for the purpose of procuring commodities to be used in production over a reasonable period in the normal course of our business.
Income Effect of Derivative Financial Instruments
The gains/(losses), by hedge designation, reported in income for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Cash flow hedges | | | | | |
Reclassified from AOCI to Cost of sales | | | | | |
Foreign currency exchange contracts (a) | $ | (11) | | | $ | (412) | | | $ | (213) | |
Commodity contracts (b) | (55) | | | 132 | | | 133 | |
Fair value hedges | | | | | |
Interest rate contracts | | | | | |
Net interest settlements and accruals on hedging instruments | 290 | | | 393 | | | (45) | |
Fair value changes on hedging instruments | 986 | | | (1,001) | | | (1,875) | |
Fair value changes on hedged debt | (985) | | | 957 | | | 1,893 | |
Cross-currency interest rate swap contracts | | | | | |
Net interest settlements and accruals on hedging instruments | (2) | | | (8) | | | (27) | |
Fair value changes on hedging instruments | 38 | | | (93) | | | (111) | |
Fair value changes on hedged debt | (37) | | | 82 | | | 113 | |
Derivatives not designated as hedging instruments | | | | | |
Foreign currency exchange contracts (c) | (310) | | | 375 | | | (3) | |
Cross-currency interest rate swap contracts | 486 | | | (507) | | | (780) | |
Interest rate contracts | (100) | | | (3) | | | 390 | |
Commodity contracts | 47 | | | 170 | | | (51) | |
Total | $ | 347 | | | $ | 85 | | | $ | (576) | |
__________ (a)For 2020, 2021, and 2022, a $198 million gain, a $453 million loss, and a $448 million gain, respectively, were reported in Other comprehensive income/(loss), net of tax.
(b)For 2020, 2021, and 2022, a $9 million gain, a $284 million gain, and a $102 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax.
(c)For 2020, 2021, and 2022, a $228 million loss, a $230 million gain, and a $53 million loss, respectively, were reported in Cost of sales and a $82 million loss, an $145 million gain, and a $50 million gain were reported in Other income/(loss), net, respectively.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Balance Sheet Effect of Derivative Financial Instruments
Derivative assets and liabilities are reported on our consolidated balance sheets at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties, which we do not use to offset our derivative assets and liabilities.
The fair value of our derivative instruments and the associated notional amounts at December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2022 |
| Notional | | Fair Value of Assets | | Fair Value of Liabilities | | Notional | | Fair Value of Assets | | Fair Value of Liabilities |
Cash flow hedges | | | | | | | | | | | |
Foreign currency exchange contracts | $ | 11,534 | | | $ | 74 | | | $ | 346 | | | $ | 11,536 | | | $ | 376 | | | $ | 52 | |
Commodity contracts | 931 | | | 182 | | | 5 | | | 990 | | | 16 | | | 56 | |
Fair value hedges | | | | | | | | | | | |
Interest rate contracts | 23,893 | | | 544 | | | 274 | | | 16,883 | | | — | | | 1,653 | |
Cross-currency interest rate swap contracts | 885 | | | — | | | 49 | | | 885 | | | — | | | 161 | |
Derivatives not designated as hedging instruments | | | | | | | | | | | |
Foreign currency exchange contracts | 28,463 | | | 281 | | | 198 | | | 20,851 | | | 162 | | | 285 | |
Cross-currency interest rate swap contracts | 6,533 | | | 117 | | | 61 | | | 6,635 | | | 15 | | | 653 | |
Interest rate contracts | 50,060 | | | 338 | | | 126 | | | 63,210 | | | 931 | | | 483 | |
Commodity contracts | 997 | | | 54 | | | 11 | | | 841 | | | 26 | | | 35 | |
Total derivative financial instruments, gross (a) (b) | $ | 123,296 | | | $ | 1,590 | | | $ | 1,070 | | | $ | 121,831 | | | $ | 1,526 | | | $ | 3,378 | |
| | | | | | | | | | | |
Current portion | | | $ | 924 | | | $ | 535 | | | | | $ | 1,101 | | | $ | 1,656 | |
Non-current portion | | | 666 | | | 535 | | | | | 425 | | | 1,722 | |
Total derivative financial instruments, gross | | | $ | 1,590 | | | $ | 1,070 | | | | | $ | 1,526 | | | $ | 3,378 | |
__________ (a)At December 31, 2021 and 2022, we held collateral of $26 million and $210 million, respectively, and we posted collateral of $71 million and $201 million, respectively.
(b)At December 31, 2021 and 2022, the fair value of assets and liabilities available for counterparty netting was $719 million and $451 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 21. EMPLOYEE SEPARATION ACTIONS AND EXIT AND DISPOSAL ACTIVITIES
We record costs associated with voluntary separations at the time of employee acceptance, unless the acceptance requires explicit approval by the Company. We record costs associated with involuntary separation programs when management has approved the plan for separation, the affected employees are identified, and it is unlikely that actions required to complete the separation plan will change significantly. Costs associated with benefits that are contingent on the employee continuing to provide service are accrued over the required service period.
Company Excluding Ford Credit
Employee separation actions and exit and disposal activities include employee separation costs, facility and other asset-related charges (e.g., impairment, accelerated depreciation), dealer and supplier payments, other statutory and contractual obligations, and other expenses, which are recorded in Cost of sales and Selling, administrative, and other expenses. Below are actions we have initiated, primarily related to the global redesign of our business:
•Ford Motor Company Brasil Ltda exited manufacturing operations in Brazil, which resulted in the sale of the São Bernardo do Campo plant facilities and machinery and equipment during 2020 as well as closure of facilities in Camaçari, Taubaté, and Troller in 2021
•Ford Motor Company Limited ceased production at the Bridgend plant in the United Kingdom and the facility was closed in September 2020
•Ford India Private Limited (“Ford India”) ceased vehicle manufacturing in Sanand in fourth quarter 2021 and ceased manufacturing in Chennai in third quarter 2022. In the third quarter of 2022, Ford India entered into an agreement to sell the Sanand vehicle assembly and powertrain plants. See Note 22
•Ford Espana S.L. ceased production of the Mondeo at the Valencia plant in Spain in March 2022
In addition, we are continuing to reduce our global workforce and take other restructuring actions, including the separation of salaried workers in North America and India in third quarter 2022.
The following table summarizes the activities for the years ended December 31, which are recorded in Other liabilities and deferred revenue (in millions): | | | | | | | | | | | | | | |
| | 2021 | | 2022 |
Beginning balance | | $ | 1,732 | | | $ | 950 | |
Changes in accruals (a) | | 1,150 | | | 557 | |
Payments | | (1,883) | | | (883) | |
Foreign currency translation | | (49) | | | (36) | |
Ending balance | | $ | 950 | | | $ | 588 | |
__________ (a) Excludes pension costs of $156 million and $57 million in 2021 and 2022, respectively.
In 2020, we recorded $1.4 billion of non-cash charges related to the write-off of certain tax and other assets in South America, accelerated depreciation, and other items. In addition, we recognized a pre-tax net gain on sale of assets of $39 million. In 2021, we recorded $739 million for accelerated depreciation and other non-cash items. In 2022, we recorded $32 million for accelerated depreciation, impairment of our India held-for-sale assets, and other non-cash items, partially offset by tax credits and other benefits. In addition, we recognized a $38 million pre-tax net gain on sale of assets in 2022.
We recorded $2 billion and $608 million in 2021 and 2022, respectively, related to the actions above. Total charges in 2023 related to such actions, primarily attributable to employee separations and dealer and supplier settlements, are not expected to be significant. We continue to review our global businesses and may take additional restructuring actions where a path to sustained profitability is not feasible when considering the capital allocation required for those businesses.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 21. EMPLOYEE SEPARATION ACTIONS AND EXIT AND DISPOSAL ACTIVITIES (Continued)
United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”) Voluntary Separation Packages
As agreed in the collective bargaining agreement ratified in November 2019, during the first quarter of 2020, we offered voluntary separation packages to our UAW hourly workforce who were eligible for normal or early retirement and recorded associated costs of $201 million in Cost of sales. All separations occurred during 2020. In addition, we also offered voluntary separation packages in 2022 to certain of our UAW hourly workforce who were eligible for normal or early retirement and recorded associated costs of $19 million in Cost of sales.
Ford Credit
Accumulated foreign currency translation losses included in Accumulated other comprehensive income/(loss) at December 31, 2022 of $223 million are associated with Ford Credit’s investments in Brazil and Argentina that have ceased operations. We expect to reclassify these losses to income upon substantially complete liquidation of Ford Credit’s investments, which may occur over multiple reporting periods. In 2022, we reclassified losses of $155 million to Other income/(loss), net upon the liquidation of three investments in Brazil. Although the timing for the completion of the remaining actions is uncertain, we expect the majority of losses to be recognized in 2024 or later.
NOTE 22. ACQUISITIONS AND DIVESTITURES
Company Excluding Ford Credit
Ford Romania S.R.L. (“Ford Romania”). On July 1, 2022, we completed the sale of Ford Romania, our wholly-owned Romanian manufacturing subsidiary, to Ford Otosan, a joint venture in which Ford has a 41% ownership share. The transaction resulted in deconsolidation of our Ford Romania subsidiary in the third quarter of 2022. The fair value of consideration received, consisting of cash and a note receivable, approximated the carrying value of Ford Romania at the time of sale. The Ford Romania plant in Craiova, Romania will continue to manufacture Ford-branded vehicles for Ford and Ford Otosan. Ford’s portion of the output is expected to be significant; as a result, at the time of sale there were about $100 million of assets, such as embedded leases, and related liabilities that continue to be reported as part of our financial statements.
Sanand, India (“Sanand”) Plants. In the third quarter of 2022, we entered into an agreement to sell our Sanand vehicle assembly and powertrain plants to Tata Passenger Electric Mobility Limited (“Tata”), a subsidiary of Tata Motors Limited. The sale transaction includes the land, buildings, and other fixed assets (excluding the powertrain machinery and equipment) for the plants. Accordingly, we have reported $88 million of fixed assets for this operation as held for sale for the period ended December 31, 2022. We recognized, in Cost of sales, pre-tax impairment charges of $32 million in the third quarter of 2022 to adjust the carrying value of the held-for-sale assets to fair value less costs to sell. We determined fair value using the market approach, estimated based on the negotiated value of the assets. After the sale to Tata, Ford will continue to operate the powertrain facility by leasing back the associated land and building.
On January 10, 2023, we completed the sale of the plants to Tata, which will result in derecognition of the fixed assets and recognition of the powertrain facility operating lease right-of-use asset and related lease liability in the first quarter of 2023. The fair value of the cash consideration received approximated the carrying value of the fixed assets at the time of sale.
Skinny Labs Inc., dba Spin (“Spin”). On April 1, 2022, we completed the sale of Spin, our wholly-owned micro-mobility provider, to TIER Mobility SE, a German-based micro-mobility provider, which resulted in the deconsolidation of our Spin subsidiary in the second quarter of 2022. In exchange for our shares of Spin, we received preferred equity in TIER Mobility SE, which is reflected in our consolidated balance sheets in Other assets as of the second quarter of 2022. The fair value of the preferred equity approximated the carrying value of Spin at the time of the transaction.
Electriphi, Inc. (“Electriphi”). On June 18, 2021, we acquired Electriphi, a California-based provider of charging management and fleet monitoring software for electric vehicles. Assets acquired primarily include goodwill, reported in Other assets, and software, reported in Net property. The acquisition did not have a material impact on our
financial statements.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 22. ACQUISITIONS AND DIVESTITURES (Continued)
Ford Lio Ho Motor Co., Ltd. (“FLH”). On April 1, 2021, we completed the sale of our controlling financial interest in FLH and its wholly owned subsidiary FLH Marketing & Service Limited, which resulted in deconsolidation of our Ford Taiwan subsidiary in the second quarter of 2021. FLH will continue to import, manufacture, and sell Ford-branded vehicles through at least 2025. We recognized a pre-tax gain of $161 million, which was reported in Other income/(loss), net in the second quarter of 2021.
Getrag Ford Transmissions GmbH (“GFT”). Prior to March 2021, Ford and Magna International Inc. (“Magna”) equally owned and operated the GFT joint venture for the purpose of developing, manufacturing, and selling transmissions. We accounted for our investment in GFT as an equity method investment. During the first quarter of 2021 and prior to our acquisition, GFT recorded restructuring charges, of which our share was $40 million. These charges are included in Equity in net income/(loss) of affiliated companies.
On March 1, 2021, we acquired Magna’s shares in the restructured GFT. The purchase price, which was subject to post-closing revisions, was $275 million. The restructured GFT includes the Halewood, UK and Cologne, Germany transmission plants, but excludes the Bordeaux, France transmission plant and China interests acquired by Magna. We concluded with Magna that these businesses would be better served under separate ownership. The Sanand, India transmission plant continues under joint Ford/Magna ownership. As a result of the transaction, we consolidated the restructured GFT, remeasured our prior investment in GFT at its $275 million fair value, and recognized in Other income/(loss), net a pre-tax gain of $178 million during 2021 and post-closing revisions resulting in a pre-tax gain of $2 million during the first quarter of 2022. We estimated the fair value of GFT in negotiations with Magna based on the income approach. The significant assumptions used in the valuation included GFT’s cash flows that reflect the approved business plan, discounted at a rate typically used for a company like GFT.
Argo AI, LLC (“Argo AI”). On June 1, 2020, we completed a transaction with VW that resulted in Ford and VW holding equal interests in Argo AI, which together comprised a majority ownership of the entity. See Note 14 for more information about our retained investment in Argo AI following this transaction.
Ford Credit Segment
In the first quarter of 2020, Ford Credit completed the sale of its wholly-owned subsidiary Forso Nordic AB, recognizing a pre-tax loss of $4 million, reported in Other income/(loss), net, and cash proceeds of $1.3 billion.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 23. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The changes in the balances for each component of accumulated other comprehensive income/(loss) attributable to Ford Motor Company for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Foreign currency translation | | | | | |
Beginning balance | $ | (4,626) | | | $ | (5,526) | | | $ | (5,487) | |
Gains/(Losses) on foreign currency translation | (1,107) | | | 200 | | | (1,199) | |
Less: Tax/(Tax benefit) (a) | (206) | | | 143 | | | (2) | |
Net gains/(losses) on foreign currency translation | (901) | | | 57 | | | (1,197) | |
(Gains)/Losses reclassified from AOCI to net income (b) | 1 | | | (18) | | | 268 | |
Other comprehensive income/(loss), net of tax (c) | (900) | | | 39 | | | (929) | |
Ending balance | $ | (5,526) | | | $ | (5,487) | | | $ | (6,416) | |
| | | | | |
Marketable securities | | | | | |
Beginning balance | $ | 71 | | | $ | 156 | | | $ | (19) | |
Gains/(Losses) on available for sale securities | 155 | | | (209) | | | (576) | |
Less: Tax/(Tax benefit) | 37 | | | (52) | | | (139) | |
Net gains/(losses) on available for sale securities | 118 | | | (157) | | | (437) | |
(Gains)/Losses reclassified from AOCI to net income | (45) | | | (23) | | | 19 | |
Less: Tax/(Tax benefit) | (12) | | | (5) | | | 5 | |
Net (gains)/losses reclassified from AOCI to net income | (33) | | | (18) | | | 14 | |
Other comprehensive income/(loss), net of tax | 85 | | | (175) | | | (423) | |
Ending balance | $ | 156 | | | $ | (19) | | | $ | (442) | |
| | | | | |
Derivative instruments | | | | | |
Beginning balance | $ | (488) | | | $ | (266) | | | $ | (193) | |
Gains/(Losses) on derivative instruments | 207 | | | (169) | | | 346 | |
Less: Tax/(Tax benefit) | 39 | | | (20) | | | 83 | |
Net gains/(losses) on derivative instruments | 168 | | | (149) | | | 263 | |
(Gains)/Losses reclassified from AOCI to net income | 66 | | | 280 | | | 80 | |
Less: Tax/(Tax benefit) | 12 | | | 58 | | | 21 | |
Net (gains)/losses reclassified from AOCI to net income (d) | 54 | | | 222 | | | 59 | |
Other comprehensive income/(loss), net of tax | 222 | | | 73 | | | 322 | |
Ending balance | $ | (266) | | | $ | (193) | | | $ | 129 | |
| | | | | |
Pension and other postretirement benefits | | | | | |
Beginning balance | $ | (2,685) | | | $ | (2,658) | | | $ | (2,640) | |
Prior service (costs)/credits arising during the period | (21) | | | — | | | — | |
Less: Tax/(Tax benefit) | (6) | | | — | | | — | |
Net prior service (costs)/credits arising during the period | (15) | | | — | | | — | |
Amortization and recognition of prior service costs/(credits) (e) | 63 | | | 27 | | | 21 | |
Less: Tax/(Tax benefit) | 10 | | | 6 | | | 4 | |
Net prior service costs/(credits) reclassified from AOCI to net income | 53 | | | 21 | | | 17 | |
Translation impact on non-U.S. plans | (11) | | | (3) | | | 13 | |
Other comprehensive income/(loss), net of tax | 27 | | | 18 | | | 30 | |
Ending balance | $ | (2,658) | | | $ | (2,640) | | | $ | (2,610) | |
| | | | | |
Total AOCI ending balance at December 31 | $ | (8,294) | | | $ | (8,339) | | | $ | (9,339) | |
__________ (a)We do not recognize deferred taxes for a majority of the foreign currency translation gains and losses because we do not anticipate reversal in the foreseeable future. However, we have made elections to tax certain non-U.S. operations simultaneously in U.S. tax returns, and have recorded deferred taxes for temporary differences that will reverse, independent of repatriation plans, in U.S. tax returns. Taxes or tax benefits resulting from foreign currency translation of the temporary differences are recorded in Other comprehensive income/(loss), net of tax.
(b)Reclassified to Other income/(loss), net.
(c)Excludes a loss of $1 million, a gain of $4 million, and a loss of $4 million related to noncontrolling interests in 2020, 2021, and 2022, respectively.
(d)Reclassified to Cost of sales. During the next twelve months we expect to reclassify existing net losses on cash flow hedges of $160 million. See Note 20 for additional information.
(e)Amortization and recognition of prior service costs/(credits) is included in the computation of net periodic pension cost/(income). See Note 17 for additional information.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 24. VARIABLE INTEREST ENTITIES
A VIE is an entity that either (i) has insufficient equity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. We consolidate VIEs of which we are the primary beneficiary. We consider ourselves the primary beneficiary of a VIE when we have both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. Assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against our general assets. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs.
We have the power to direct the significant activities of an entity when our management has the ability to make key operating decisions, such as decisions regarding budgets, capital investment, manufacturing, or product development. For securitization entities, we have the power to direct significant activities when we have the ability to exercise discretion in the servicing of financial assets, issue additional debt, exercise a unilateral call option, add assets to revolving structures, or control investment decisions.
VIEs of Which We are Not the Primary Beneficiary
Certain of our affiliates are VIEs in which we are not the primary beneficiary. Our maximum exposure to any potential losses associated with these unconsolidated affiliates is limited to our equity investments, accounts receivable, loans, and guarantees and was $2.8 billion and $1.0 billion at December 31, 2021 and 2022, respectively, of which $113 million of guarantees related to certain obligations of our VIEs in 2022 are also included in Note 25. The decrease in maximum exposure from December 31, 2021 is primarily explained by Argo AI (see Note 14), partially offset by the investment in BlueOval SK (as described below).
On July 13, 2022, Ford, SK On Co., Ltd., and SK Battery America, Inc. (a wholly owned subsidiary of SK On) completed the creation of BlueOval SK, LLC, a 50/50 joint venture that will build and operate electric vehicle battery plants in Tennessee and Kentucky to supply batteries to Ford and Ford affiliates. BlueOval SK is a variable interest entity of which we are not the primary beneficiary, and we use the equity method of accounting for our investment. As of December 31, 2022, Ford has contributed to BlueOval SK $691 million of its agreed capital contribution of up to $6.6 billion through 2026, subject to any adjustments agreed to by the parties.
VIEs of Which We are the Primary Beneficiary
Securitization Entities. Through Ford Credit, we securitize, transfer, and service financial assets associated with consumer finance receivables, operating leases, and wholesale loans. Our securitization transactions typically involve the legal transfer of financial assets to bankruptcy remote SPEs. We generally retain a portion of the economic interests in the asset-backed securitization transactions, which could be retained in the form of a portion of the senior interests, the subordinated interests, cash reserve accounts, residual interests, and servicing rights. The transfers of assets in our securitization transactions do not qualify for accounting sale treatment. In most cases, the bankruptcy remote SPEs meet the definition of VIEs for which we are the primary beneficiary and, therefore, are consolidated. We account for all securitization transactions as if they were secured financing and therefore the assets, liabilities, and related activity of these transactions are consolidated in our financial statements. See Note 19 for additional information on the accounting for asset-backed debt and the assets securing this debt.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 25. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies primarily consist of guarantees and indemnifications, litigation and claims, and warranty and field service actions.
Guarantees and Indemnifications
Financial Guarantees. Financial guarantees and indemnifications are recorded at fair value at their inception. Subsequent to initial recognition, the guarantee liability is adjusted at each reporting period to reflect the current estimate of expected payments resulting from possible default events over the remaining life of the guarantee. The maximum potential payments for financial guarantees were $357 million and $518 million at December 31, 2021 and 2022, respectively. The carrying value of recorded liabilities related to financial guarantees was $36 million and $31 million at December 31, 2021 and 2022, respectively.
Our financial guarantees consist of debt and lease obligations of certain joint ventures, as well as certain financial obligations of outside third parties, including suppliers, to support our business and economic growth. Expiration dates vary through 2037, and guarantees will terminate on payment and/or cancellation of the underlying obligation. A payment by us would be triggered by failure of the joint venture or other third party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from a third party amounts paid by us under the guarantee.
Non-Financial Guarantees. Non-financial guarantees and indemnifications are recorded at fair value at their inception. We regularly review our performance risk under these arrangements, and in the event it becomes probable we will be required to perform under a guarantee or indemnity, the amount of probable payment is recorded. The maximum potential payments for non-financial guarantees were $453 million and $273 million at December 31, 2021 and 2022, respectively. The carrying value of recorded liabilities related to non-financial guarantees was $38 million and $0 at December 31, 2021 and 2022, respectively.
Included in the $273 million of maximum potential payments at December 31, 2022 are guarantees for the resale value of vehicles sold in certain arrangements to daily rental companies. The maximum potential payment of $267 million as of December 31, 2022 represents the total proceeds we guarantee the rental company will receive on resale. Reflecting our present estimate of proceeds the rental companies will receive on resale from third parties, we do not expect we will have to pay under the guarantee.
In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction, such as the sale of a business. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax, and shareholder matters; intellectual property rights; power generation contracts; governmental regulations and employment-related matters; dealer, supplier, and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of contract claim brought by a counterparty, including a joint venture or alliance partner, or a third-party claim. While some of these indemnifications are limited in nature, many of them do not limit potential payment. Therefore, we are unable to estimate a maximum amount of future payments that could result from claims made under these unlimited indemnities.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 25. COMMITMENTS AND CONTINGENCIES (Continued)
Litigation and Claims
Various legal actions, proceedings, and claims (generally, “matters”) are pending or may be instituted or asserted against us. These include, but are not limited to, matters arising out of alleged defects in our products; product warranties; governmental regulations relating to safety, emissions, and fuel economy or other matters; government incentives; tax matters, including trade and customs; alleged illegal acts resulting in fines or penalties; financial services; employment-related matters; dealer, supplier, and other contractual relationships; intellectual property rights; environmental matters; shareholder or investor matters; and financial reporting matters. Certain of the pending legal actions are, or purport to be, class actions. Some of the matters involve or may involve claims for compensatory, punitive, or antitrust or other treble damages in very large amounts, or demands for field service actions, environmental remediation programs, sanctions, loss of government incentives, assessments, or other relief, which, if granted, would require very large expenditures.
The extent of our financial exposure to these matters is difficult to estimate. Many matters do not specify a dollar amount for damages, and many others specify only a jurisdictional minimum. To the extent an amount is asserted, our historical experience suggests that in most instances the amount asserted is not a reliable indicator of the ultimate outcome.
We accrue for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar
nature, the specific facts and circumstances asserted, the likelihood that we will prevail, and the severity of any potential loss. We reevaluate and update our accruals as matters progress over time.
For the majority of matters, which generally arise out of alleged defects in our products, we establish an accrual based on our extensive historical experience with similar matters. We do not believe there is a reasonably possible outcome materially in excess of our accrual for these matters.
For the remaining matters, where our historical experience with similar matters is of more limited value (i.e., “non-pattern matters”), we evaluate the matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of a material loss in excess of any accrual that can be estimated. Our estimate of reasonably possible loss in excess of our accruals for all material matters currently reflects indirect tax, customs, and regulatory matters, for which we estimate the aggregate risk to be a range of up to about $2 billion.
As noted, the litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. Our assessments are based on our knowledge and experience, but the ultimate outcome of any matter could require payment substantially in excess of the amount that we have accrued and/or disclosed.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 25. COMMITMENTS AND CONTINGENCIES (Continued)
Warranty and Field Service Actions
We accrue the estimated cost of both base warranty coverages and field service actions at the time of sale. We establish our estimate of base warranty obligations using a patterned estimation model, using historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. We establish our estimates of field service action obligations using a patterned estimation model, using historical information regarding the nature, frequency, severity, and average cost of claims for each model year. In addition, from time to time, we issue extended warranties at our expense, the estimated cost of which is accrued at the time of issuance. Warranty and field service action obligations are reported in Other liabilities and deferred revenue. We reevaluate the adequacy of our accruals on a regular basis.
We recognize the benefit from a recovery of the costs associated with our warranty and field service actions when specifics of the recovery have been agreed with our supplier and the amount of recovery is virtually certain. Recoveries are reported in Trade and other receivables, net and Other assets.
The estimate of our future warranty and field service action costs, net of estimated supplier recoveries, for the years ended December 31 was as follows (in millions): | | | | | | | | | | | |
| 2021 | | 2022 |
Beginning balance | $ | 8,172 | | | $ | 8,451 | |
Payments made during the period | (3,952) | | | (4,166) | |
Changes in accrual related to warranties issued during the period | 4,102 | | | 4,028 | |
Changes in accrual related to pre-existing warranties | 221 | | | 1,134 | |
Foreign currency translation and other | (92) | | | (254) | |
Ending balance | $ | 8,451 | | | $ | 9,193 | |
Changes to our estimated costs are reported as changes in accrual related to pre-existing warranties in the table above. Our estimate of reasonably possible costs in excess of our accruals for material field service actions and customer satisfaction actions is a range of up to about $700 million in the aggregate.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 26. SEGMENT INFORMATION
We report segment information consistent with the way our chief operating decision maker (“CODM”) evaluates the operating results and performance of the Company. Accordingly, we analyze the results of our business through the following segments: Automotive, Mobility, and Ford Credit. Items not included within our segments are reported and reviewed as part of Corporate Other, Interest on Debt, and Special Items.
On January 1, 2023, we implemented a new operating model and reporting structure. With this change, we will analyze the results of our business through the following reportable segments: Ford Blue, Ford Model e, and Ford Pro (combined, replacing the Automotive segment); Ford Next (previously Mobility); and Ford Credit. As a result of the change, beginning with our Quarterly Report on Form 10-Q for the quarter ending March 31, 2023, we will report our results in these five reportable segments. Company adjusted earnings before interest and taxes (“EBIT”) will include the financial results of these five reportable segments and Corporate Other, and net income will comprise the financial results of the five reportable segments and Corporate Other, as well as Interest on Debt, Special Items, and Taxes.
Below is a description of our reportable segments and other activities as of December 31, 2022.
Automotive Segment
The Automotive segment primarily includes the sale of Ford and Lincoln vehicles, service parts, and accessories worldwide, together with the associated costs to develop, manufacture, distribute, and service the vehicles, parts, and accessories. This segment includes revenues and costs related to our electrification vehicle programs and enterprise connectivity. The segment includes the following regional business units: North America, South America, Europe, China (including Taiwan), and the International Markets Group.
Mobility Segment
The Mobility segment primarily includes development costs for Ford’s autonomous vehicles and related businesses, Ford’s equity ownership in Argo AI (a developer of autonomous driving systems), and other mobility businesses and investments. For additional information about our investment in Argo AI, see Note 14.
Ford Credit Segment
The Ford Credit segment is comprised of the Ford Credit business on a consolidated basis, which is primarily vehicle-related financing and leasing activities.
Corporate Other
Corporate Other primarily includes corporate governance expenses, interest income (excluding interest earned on our extended service contract portfolio that is included in our Automotive segment) and gains and losses from our cash, cash equivalents, and marketable securities (excluding gains and losses on investments in equity securities), and foreign exchange derivatives gains and losses associated with intercompany lending. Corporate governance expenses are primarily administrative, delivering benefit on behalf of the global enterprise, that are not allocated to operating segments. These include expenses related to setting and directing global policy, providing oversight and stewardship, and promoting the Company’s interests. Corporate Other assets include: cash, cash equivalents, and marketable securities; tax related assets; other investments; and other assets managed centrally.
Interest on Debt
Interest on Debt is presented as a separate reconciling item and consists of interest expense on Company debt excluding Ford Credit. The underlying liability is reported in the Automotive segment and in Corporate Other.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 26. SEGMENT INFORMATION (Continued)
Special Items
Special Items are presented as a separate reconciling item. They consist of (i) pension and OPEB remeasurement gains and losses, (ii) gains and losses on investments in equity securities, (iii) significant personnel expenses, dealer-related costs, and facility-related charges stemming from our efforts to match production capacity and cost structure to market demand and changing model mix, and (iv) other items that we do not necessarily consider to be indicative of earnings from ongoing operating activities. Our management ordinarily excludes these items from its review of the results of the operating segments for purposes of measuring segment profitability and allocating resources. We also report these special items separately to help investors track amounts related to these activities and to allow investors analyzing our results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 26. SEGMENT INFORMATION (Continued)
Key financial information for the years ended or at December 31 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Automotive | | Mobility | | Ford Credit | | Corporate Other | | Interest on Debt | | Special Items | | Eliminations/Adjustments | | Total |
2020 | | | | | | | | | | | | | | | |
Revenues | $ | 115,894 | | | $ | 47 | | | $ | 11,203 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 127,144 | |
Income/(Loss) before income taxes | 1,706 | | | (1,052) | | | 2,608 | | | (726) | | | (1,649) | | | (2,003) | | (a) | — | | | (1,116) | |
Depreciation and tooling amortization | 5,209 | | | 8 | | | 3,269 | | | 52 | | | — | | | 236 | | | — | | | 8,774 | |
Interest expense | — | | | — | | | 3,402 | | | — | | | 1,649 | | | — | | | — | | | 5,051 | |
Investment-related interest income | 158 | | | — | | | 94 | | | 200 | | | — | | | — | | | — | | | 452 | |
Equity in net income/(loss) of affiliated companies | 296 | | | (133) | | | 20 | | | 1 | | | — | | | (142) | | | — | | | 42 | |
Cash outflow for capital spending | 5,483 | | | 44 | | | 40 | | | 175 | | | — | | | — | | | — | | | 5,742 | |
Total assets | 62,741 | | | 3,459 | | | 157,637 | | | 45,410 | | | — | | | — | | | (1,986) | | (b) | 267,261 | |
| | | | | | | | | | | | | | | |
2021 | | | | | | | | | | | | | | | |
Revenues | $ | 126,150 | | | $ | 118 | | | $ | 10,073 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 136,341 | |
Income/(Loss) before income taxes | 7,397 | | | (1,030) | | | 4,717 | | | (1,084) | | | (1,803) | | | 9,583 | | (c) | — | | | 17,780 | |
Depreciation and tooling amortization | 5,024 | | | 8 | | | 1,666 | | | 53 | | | — | | | 567 | | | — | | | 7,318 | |
Interest expense | — | | | — | | | 2,790 | | | — | | | 1,803 | | | — | | | — | | | 4,593 | |
Investment-related interest income | 112 | | | — | | | 38 | | | 104 | | | — | | | — | | | — | | | 254 | |
Equity in net income/(loss) of affiliated companies | 567 | | | (258) | | | 31 | | | 2 | | | — | | | (15) | | | — | | | 327 | |
Cash outflow for capital spending | 5,979 | | | 46 | | | 44 | | | 158 | | | — | | | — | | | — | | | 6,227 | |
Total assets | 68,969 | | | 3,325 | | | 134,428 | | | 51,730 | | | — | | | — | | | (1,417) | | (b) | 257,035 | |
| | | | | | | | | | | | | | | |
2022 | | | | | | | | | | | | | | | |
Revenues | $ | 148,980 | | | $ | 99 | | | $ | 8,978 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 158,057 | |
Income/(Loss) before income taxes | 9,692 | | | (926) | | | 2,657 | | | (1,008) | | | (1,259) | | | (12,172) | | (d) | — | | | (3,016) | |
Depreciation and tooling amortization | 5,159 | | | 5 | | | 2,281 | | | 72 | | | — | | | 157 | | | — | | | 7,674 | |
Interest expense | — | | | — | | | 3,334 | | | — | | | 1,259 | | | — | | | — | | | 4,593 | |
Investment-related interest income | 75 | | | — | | | 178 | | | 386 | | | — | | | — | | | — | | | 639 | |
Equity in net income/(loss) of affiliated companies | 667 | | | (315) | | | 27 | | | 1 | | | — | | | (3,263) | | (e) | — | | | (2,883) | |
Cash outflow for capital spending | 6,284 | | | 23 | | | 58 | | | 204 | | | — | | | 297 | | | — | | | 6,866 | |
Total assets | 69,933 | | | 392 | | | 137,954 | | | 49,132 | | | — | | | — | | | (1,527) | | (b) | 255,884 | |
__________
(a)Primarily reflects Global Redesign actions, mark-to-market adjustments for our global pension and OPEB plans, and the field service action for Takata airbag inflators, partially offset by the gain on our investment in Argo AI as a result of the transaction with Argo AI and VW in the second quarter of 2020.
(b)Primarily includes eliminations of intersegment transactions occurring in the ordinary course of business.
(c)Primarily reflects gains/(losses) on our Rivian investment and mark-to-market adjustments for our global pension and OPEB plans, partially offset by Global Redesign actions and the loss on extinguishment of debt.
(d)Primarily reflects gains/(losses) on our Rivian investment and the impairment of our Argo AI equity method investment.
(e)Primarily reflects the impairment of our Argo AI equity method investment.
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 26. SEGMENT INFORMATION (Continued)
Geographic Information
We report revenue on a “where-sold” basis, which reflects the revenue within the country in which the ultimate sale or financing is made to our external customer.
Total Company revenues and long-lived assets, split geographically by our country of domicile (the United States) and other countries where our major subsidiaries are domiciled, for the years ended December 31 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
| Revenues | | Long-Lived Assets (a) | | Revenues | | Long-Lived Assets (a) | | Revenues | | Long-Lived Assets (a) |
United States | $ | 82,535 | | | $ | 45,360 | | | $ | 87,012 | | | $ | 44,271 | | | $ | 105,481 | | | $ | 41,925 | |
Canada | 8,711 | | | 5,111 | | | 11,153 | | | 5,773 | | | 12,590 | | | 5,739 | |
United Kingdom | 6,110 | | | 1,401 | | | 7,607 | | | 1,383 | | | 8,220 | | | 1,264 | |
Germany | 6,526 | | | 3,197 | | | 6,237 | | | 2,708 | | | 6,471 | | | 2,483 | |
Mexico | 1,030 | | | 3,669 | | | 1,440 | | | 3,903 | | | 1,813 | | | 4,255 | |
All Other | 22,232 | | | 6,296 | | | 22,892 | | | 5,462 | | | 23,482 | | | 4,371 | |
Total Company | $ | 127,144 | | | $ | 65,034 | | | $ | 136,341 | | | $ | 63,500 | | | $ | 158,057 | | | $ | 60,037 | |
__________
(a) Includes Net property and Net investment in operating leases from our consolidated balance sheets.