F 06.30.2012- 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)
 
R
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the quarterly period ended June 30, 2012
 
 
 
or
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the transition period from  __________ to __________
 
 
 
Commission file number 1-3950
 
Ford Motor Company
(Exact name of Registrant as specified in its charter)

Delaware
38-0549190
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
One American Road, Dearborn, Michigan
48126
(Address of principal executive offices)
(Zip Code)
313-322-3000
(Registrant’s telephone number, including area code)



Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  R   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  R   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.   Large accelerated filer R     Accelerated filer o     Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  o   No  R
 
As of July 27, 2012, Ford had outstanding 3,743,134,476 shares of Common Stock and 70,852,076 shares of Class B Stock.  

Exhibit Index begins on page


 









FORD MOTOR COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2012

 
Table of Contents
 
Page
 
 
 
Item 1
Financial Statements
 
 
 
 
Consolidated Statement of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
Item 3
 
 
 
 
Financial Services Sector
 
Item 4
 
 
 
 
 
 
Part II - Other Information
 
 
Item 1
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 6
 
 
Signature
 
 
Exhibit Index
 





PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.
FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Periods Ended June 30, 2012 and 2011
(in millions, except per share amounts)
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
 
(unaudited)
Revenues
 
 
 
 
 
 
 
Automotive
$
31,328

 
$
33,476

 
$
61,853

 
$
64,514

Financial Services
1,883

 
2,051

 
3,803

 
4,127

Total revenues
33,211

 
35,527

 
65,656

 
68,641

 
 
 
 
 
 
 
 
Costs and expenses
 

 
 

 
 
 
 
Automotive cost of sales
27,769

 
29,253

 
54,623

 
56,029

Selling, administrative and other expenses
2,979

 
2,907

 
5,865

 
5,641

Interest expense
986

 
1,127

 
1,997

 
2,301

Financial Services provision for credit and insurance losses
(20
)
 
21

 
(33
)
 
(33
)
Total costs and expenses
31,714

 
33,308

 
62,452

 
63,938

 
 
 
 
 
 
 
 
Automotive interest income and other non-operating income/(expense), net (Note 14)
(85
)
 
199

 
67

 
239

Financial Services other income/(loss), net (Note 14)
82

 
53

 
166

 
138

Equity in net income/(loss) of affiliated companies
101

 
135

 
196

 
302

Income/(Loss) before income taxes
1,595

 
2,606

 
3,633

 
5,382

Provision for/(Benefit from) income taxes (Note 15)
557

 
206

 
1,197

 
426

Net income/(loss)
1,038

 
2,400

 
2,436

 
4,956

Less: Income/(Loss) attributable to noncontrolling interests
(2
)
 
2

 

 
7

Net income/(loss) attributable to Ford Motor Company
$
1,040

 
$
2,398

 
$
2,436

 
$
4,949

 
 
 
 
 
 
 
 
AMOUNTS PER SHARE ATTRIBUTABLE TO FORD MOTOR COMPANY COMMON AND CLASS B STOCK (Note 17)
Basic income/(loss)
$
0.27

 
$
0.63

 
$
0.64

 
$
1.31

Diluted income/(loss)
$
0.26

 
$
0.59

 
$
0.61

 
$
1.20

 
 
 
 
 
 
 
 
Cash dividends declared
$

 
$

 
$
0.05

 
$



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Periods Ended June 30, 2012 and 2011
(in millions)
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
 
(unaudited)
Net income/(loss)
$
1,038

 
$
2,400

 
$
2,436

 
$
4,956

Other comprehensive income/(loss), net of tax (Note 13)
 
 
 
 
 
 
 
Foreign currency translation
(778
)
 
248

 
(255
)
 
836

Derivative instruments
(89
)
 
17

 
(152
)
 
134

Pension and other postretirement benefits
253

 
183

 
213

 
105

Total other comprehensive income/(loss), net of tax
(614
)
 
448

 
(194
)
 
1,075

Comprehensive income/(loss)
424

 
2,848

 
2,242

 
6,031

Less: Comprehensive income/(loss) attributable to noncontrolling interests
(2
)
 
2

 

 
5

Comprehensive income/(loss) attributable to Ford Motor Company
$
426

 
$
2,846

 
$
2,242

 
$
6,026


The accompanying notes are part of the financial statements.

1

Item 1. Financial Statements (Continued)                                                      

FORD MOTOR COMPANY AND SUBSIDIARIES
SECTOR STATEMENT OF OPERATIONS
For the Periods Ended June 30, 2012 and 2011
(in millions, except per share amounts)
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
 
(unaudited)
AUTOMOTIVE
 
 
 
 
 
 
 
Revenues
$
31,328

 
$
33,476

 
$
61,853

 
$
64,514

Costs and expenses
 
 
 
 
 
 
 
Cost of sales
27,769

 
29,253

 
54,623

 
56,029

Selling, administrative and other expenses
2,233

 
2,345

 
4,368

 
4,488

Total costs and expenses
30,002

 
31,598

 
58,991

 
60,517

Operating income/(loss)
1,326

 
1,878

 
2,862

 
3,997

 
 
 
 
 
 
 
 
Interest expense
188

 
202

 
373

 
453

 
 
 
 
 
 
 
 
Interest income and other non-operating income/(expense), net (Note 14)
(85
)
 
199

 
67

 
239

Equity in net income/(loss) of affiliated companies
95

 
129

 
174

 
291

Income/(Loss) before income taxes — Automotive
1,148

 
2,004

 
2,730

 
4,074

 
 
 
 
 
 
 
 
FINANCIAL SERVICES
 

 
 

 
 
 
 
Revenues
1,883

 
2,051

 
3,803

 
4,127

Costs and expenses
 
 
 
 
 
 
 
Interest expense
798

 
925

 
1,624

 
1,848

Depreciation
599

 
378

 
1,199

 
808

Operating and other expenses
147

 
184

 
298

 
345

Provision for credit and insurance losses
(20
)
 
21

 
(33
)
 
(33
)
Total costs and expenses
1,524

 
1,508

 
3,088

 
2,968

 
 
 
 
 
 
 
 
Other income/(loss), net (Note 14)
82

 
53

 
166

 
138

Equity in net income/(loss) of affiliated companies
6

 
6

 
22

 
11

Income/(Loss) before income taxes — Financial Services
447

 
602

 
903

 
1,308

 
 
 
 
 
 
 
 
TOTAL COMPANY
 

 
 

 
 
 
 
Income/(Loss) before income taxes
1,595

 
2,606

 
3,633

 
5,382

Provision for/(Benefit from) income taxes (Note 15)
557

 
206

 
1,197

 
426

Net income/(loss)
1,038

 
2,400

 
2,436

 
4,956

Less: Income/(Loss) attributable to noncontrolling interests
(2
)
 
2

 

 
7

Net income/(loss) attributable to Ford Motor Company
$
1,040

 
$
2,398

 
$
2,436

 
$
4,949


The accompanying notes are part of the financial statements.

2

Item 1. Financial Statements (Continued)                                                      

FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
15,101

 
$
17,148

Marketable securities
20,499

 
18,618

Finance receivables, net (Note 5)
68,094

 
69,976

Other receivables, net
10,160

 
8,565

Net investment in operating leases
15,177

 
12,838

Inventories (Note 7)
7,289

 
5,901

Equity in net assets of affiliated companies
2,938

 
2,936

Net property
22,808

 
22,371

Deferred income taxes
14,064

 
15,125

Net intangible assets
95

 
100

Other assets
5,011

 
4,770

Total assets
$
181,236

 
$
178,348

 
 
 
 
LIABILITIES
 

 
 

Payables
$
19,661

 
$
17,724

Accrued liabilities and deferred revenue (Note 9)
44,004

 
45,369

Debt (Note 11)
99,897

 
99,488

Deferred income taxes
595

 
696

Total liabilities
164,157

 
163,277

 
 
 
 
EQUITY
 

 
 

Capital stock
 

 
 

Common Stock, par value $.01 per share (3,764 million shares issued)
38

 
37

Class B Stock, par value $.01 per share (71 million shares issued)
1

 
1

Capital in excess of par value of stock
20,920

 
20,905

Retained earnings/(Accumulated deficit)
15,230

 
12,985

Accumulated other comprehensive income/(loss) (Note 13)
(18,928
)
 
(18,734
)
Treasury stock
(225
)
 
(166
)
Total equity/(deficit) attributable to Ford Motor Company
17,036

 
15,028

Equity/(Deficit) attributable to noncontrolling interests
43

 
43

Total equity/(deficit)
17,079

 
15,071

Total liabilities and equity
$
181,236

 
$
178,348

 
The following table includes assets to be used to settle liabilities of the consolidated variable interest entities ("VIEs").  These assets and liabilities are included in the consolidated balance sheet above.  See Note 8 for additional information on our VIEs.
 
June 30,
2012
 
December 31, 2011
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
3,273

 
$
3,402

Finance receivables, net
45,938

 
49,795

Net investment in operating leases
4,245

 
6,354

Other assets
10

 
157

LIABILITIES


 


Accrued liabilities and deferred revenue
108

 
97

Debt
36,996

 
41,421


The accompanying notes are part of the financial statements.

3

Item 1. Financial Statements (Continued)                                                      

FORD MOTOR COMPANY AND SUBSIDIARIES
SECTOR BALANCE SHEET
(in millions) 
 
June 30,
2012
 
December 31,
2011
ASSETS
(unaudited)
Automotive
 
 
 
Cash and cash equivalents
$
7,180

 
$
7,965

Marketable securities
16,613

 
14,984

Total cash and marketable securities
23,793

 
22,949

Receivables, less allowances of $126 and $126
4,750

 
4,219

Inventories (Note 7)
7,289

 
5,901

Deferred income taxes
2,085

 
1,791

Net investment in operating leases
1,882

 
1,356

Other current assets
1,029

 
1,053

Current receivable from Financial Services
678

 
878

Total current assets
41,506

 
38,147

Equity in net assets of affiliated companies
2,808

 
2,797

Net property
22,673

 
22,229

Deferred income taxes
12,829

 
13,932

Net intangible assets
95

 
100

Non-current receivable from Financial Services

 
32

Other assets
2,037

 
1,549

Total Automotive assets
81,948

 
78,786

Financial Services
 

 
 

Cash and cash equivalents
7,921

 
9,183

Marketable securities
3,886

 
3,835

Finance receivables, net (Note 5)
72,323

 
73,330

Net investment in operating leases
13,295

 
11,482

Equity in net assets of affiliated companies
130

 
139

Other assets
3,564

 
3,605

Total Financial Services assets
101,119

 
101,574

Intersector elimination
(678
)
 
(1,112
)
Total assets
$
182,389

 
$
179,248

LIABILITIES
 

 
 

Automotive
 

 
 

Trade payables
$
15,820

 
$
14,015

Other payables
2,748

 
2,734

Accrued liabilities and deferred revenue (Note 9)
15,211

 
15,003

Deferred income taxes
26

 
40

Debt payable within one year (Note 11)
1,297

 
1,033

Total current liabilities
35,102

 
32,825

Long-term debt (Note 11)
12,893

 
12,061

Other liabilities (Note 9)
25,320

 
26,910

Deferred income taxes
134

 
255

Total Automotive liabilities
73,449

 
72,051

Financial Services
 

 
 

Payables
1,093

 
975

Debt (Note 11)
85,707

 
86,595

Deferred income taxes
1,588

 
1,301

Other liabilities and deferred income (Note 9)
3,473

 
3,457

Payable to Automotive
678

 
910

Total Financial Services liabilities
92,539

 
93,238

Intersector elimination
(678
)
 
(1,112
)
Total liabilities
165,310

 
164,177

EQUITY
 

 
 

Capital stock
 

 
 

Common Stock, par value $.01 per share (3,764 million shares issued)
38

 
37

Class B Stock, par value $.01 per share (71 million shares issued)
1

 
1

Capital in excess of par value of stock
20,920

 
20,905

Retained earnings/(Accumulated deficit)
15,230

 
12,985

Accumulated other comprehensive income/(loss) (Note 13)
(18,928
)
 
(18,734
)
Treasury stock
(225
)
 
(166
)
Total equity/(deficit) attributable to Ford Motor Company
17,036

 
15,028

Equity/(Deficit) attributable to noncontrolling interests
43

 
43

Total equity/(deficit)
17,079

 
15,071

Total liabilities and equity
$
182,389

 
$
179,248


The accompanying notes are part of the financial statements.

4

Item 1. Financial Statements (Continued)                                                      

FORD MOTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Periods Ended June 30, 2012 and 2011
(in millions)
 
First Half
 
2012
 
2011
 
(unaudited)
Cash flows from operating activities of continuing operations
 
 
 
Net cash provided by/(used in) operating activities
$
5,979

 
$
6,226

 
 
 
 
Cash flows from investing activities of continuing operations
 
 
 
Capital expenditures
(2,284
)
 
(2,022
)
Acquisitions of retail and other finance receivables and operating leases
(18,799
)
 
(17,355
)
Collections of retail and other finance receivables and operating leases
15,992

 
17,052

Purchases of securities
(36,837
)
 
(41,761
)
Sales and maturities of securities
34,911

 
46,680

Proceeds from sale of business
64

 
144

Settlements of derivatives
(348
)
 
103

Other
(248
)
 
(18
)
Net cash provided by/(used in) investing activities
(7,549
)
 
2,823

 
 
 
 
Cash flows from financing activities of continuing operations
 

 
 

Cash dividends
(381
)
 

Purchases of Common Stock
(59
)
 

Changes in short-term debt
(3,013
)
 
662

Proceeds from issuance of other debt
20,157

 
18,513

Principal payments on other debt
(17,099
)
 
(26,292
)
Other
48

 
112

Net cash provided by/(used in) financing activities
(347
)
 
(7,005
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(130
)
 
632

 
 
 
 
Net increase/(decrease) in cash and cash equivalents
$
(2,047
)
 
$
2,676

 
 
 
 
Cash and cash equivalents at January 1
$
17,148

 
$
14,805

Cash and cash equivalents of held-for-sale operations at January 1

 

Net increase/(decrease) in cash and cash equivalents
(2,047
)
 
2,676

Less: Cash and cash equivalents of held-for-sale operations at June 30

 
9

Cash and cash equivalents at June 30
$
15,101

 
$
17,472


The accompanying notes are part of the financial statements.

5

Item 1. Financial Statements (Continued)                                                      

FORD MOTOR COMPANY AND SUBSIDIARIES
CONDENSED SECTOR STATEMENT OF CASH FLOWS
For the Periods Ended June 30, 2012 and 2011
(in millions)
 
First Half 2012
 
First Half 2011
 
Automotive
 
Financial
Services
 
Automotive
 
Financial
Services
 
(unaudited)
Cash flows from operating activities of continuing operations
 
 
 
 
 
 
 
Net cash provided by/(used in) operating activities
$
2,656

 
$
2,625

 
$
5,744

 
$
2,133

 
 
 
 
 
 
 
 
Cash flows from investing activities of continuing operations
 
 
 
 
 
 
 
Capital expenditures
(2,269
)
 
(15
)
 
(2,017
)
 
(5
)
Acquisitions of retail and other finance receivables and operating leases

 
(19,084
)
 

 
(17,062
)
Collections of retail and other finance receivables and operating leases

 
15,992

 

 
17,052

Net collections/(acquisitions) of wholesale receivables

 
983

 

 
(1,944
)
Purchases of securities
(26,905
)
 
(9,932
)
 
(25,560
)
 
(16,201
)
Sales and maturities of securities
25,229

 
9,883

 
27,817

 
18,863

Settlements of derivatives
(345
)
 
(3
)
 
92

 
11

Proceeds from sale of business
54

 
10

 
135

 
9

Investing activity (to)/from Financial Services
541

 

 
1,859

 

Other
(153
)
 
(95
)
 
145

 
(163
)
Net cash provided by/(used in) investing activities
(3,848
)
 
(2,261
)
 
2,471

 
560

 
 
 
 
 
 
 
 
Cash flows from financing activities of continuing operations
 

 
 

 
 

 
 

Cash dividends
(381
)
 

 

 

Purchases of Common Stock
(59
)
 

 

 

Changes in short-term debt
(40
)
 
(2,973
)
 
(241
)
 
903

Proceeds from issuance of other debt
1,328

 
18,829

 
1,201

 
17,312

Principal payments on other debt
(360
)
 
(16,940
)
 
(6,136
)
 
(20,156
)
Financing activity to/(from) Automotive

 
(541
)
 

 
(1,859
)
Other
13

 
35

 
70

 
42

Net cash provided by/(used in) financing activities
501

 
(1,590
)
 
(5,106
)
 
(3,758
)
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(94
)
 
(36
)
 
421

 
211

 
 
 
 
 
 
 
 
Net increase/(decrease) in cash and cash equivalents
$
(785
)
 
$
(1,262
)
 
$
3,530

 
$
(854
)
 
 
 
 
 
 
 
 
Cash and cash equivalents at January 1
$
7,965

 
$
9,183

 
$
6,301

 
$
8,504

Cash and cash equivalents of held-for-sale operations at January 1

 

 

 

Net increase/(decrease) in cash and cash equivalents
(785
)
 
(1,262
)
 
3,530

 
(854
)
Less: Cash and cash equivalents of held-for-sale operations at June 30

 

 
9

 

Cash and cash equivalents at June 30
$
7,180

 
$
7,921

 
$
9,822

 
$
7,650


The accompanying notes are part of the financial statements.

6

Item 1. Financial Statements (Continued)                                                      

FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
For the Periods Ended June 30, 2012 and 2011
(in millions, unaudited)
 
Equity/(Deficit) Attributable to Ford Motor Company
 
 
 
 
 
Capital Stock
 
Cap. in
Excess of
Par Value 
of Stock
 
Retained Earnings/
(Accumulated Deficit)
 
Accumulated Other Comprehensive Income/(Loss) (Note 13)
 
Treasury Stock
 
Total
 
Equity/(Deficit)
Attributable
to Non-controlling Interests
 
Total
Equity/
(Deficit)
Balance at December 31, 2011
$
38

 
$
20,905

 
$
12,985

 
$
(18,734
)
 
$
(166
)
 
$
15,028

 
$
43

 
$
15,071

Net income/(loss)

 

 
2,436

 

 

 
2,436

 

 
2,436

Other comprehensive income/(loss), net of tax

 

 

 
(194
)
 

 
(194
)
 

 
(194
)
Common stock issued (including share-
based compensation impacts)

1

 
15

 

 

 

 
16

 

 
16

Treasury stock/other 

 

 

 

 
(59
)
 
(59
)
 

 
(59
)
Cash dividends declared

 

 
(191
)
 

 

 
(191
)
 

 
(191
)
Balance at June 30, 2012
$
39

 
$
20,920

 
$
15,230

 
$
(18,928
)
 
$
(225
)
 
$
17,036

 
$
43

 
$
17,079

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
38

 
$
20,803

 
$
(7,038
)
 
$
(14,313
)
 
$
(163
)
 
$
(673
)
 
$
31

 
$
(642
)
Net income/(loss)

 

 
4,949

 

 

 
4,949

 
7

 
4,956

Other comprehensive income/(loss), net of tax

 

 

 
1,077

 

 
1,077

 
(2
)
 
1,075

Common stock issued (including share-
based compensation impacts)

 
(35
)
 

 

 

 
(35
)
 

 
(35
)
Treasury stock/other 

 
(6
)
 

 

 
(3
)
 
(9
)
 
5

 
(4
)
Cash dividends declared

 

 

 

 

 

 

 

Balance at June 30, 2011
$
38

 
$
20,762

 
$
(2,089
)
 
$
(13,236
)
 
$
(166
)
 
$
5,309

 
$
41

 
$
5,350


The accompanying notes are part of the financial statements.

7

Item 1. Financial Statements (Continued)                                                      

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

Table of Contents
Footnote
 
Page
Note 1
Presentation
Note 2
Accounting Standards Issued But Not Yet Adopted
Note 3
Fair Value Measurements
Note 4
Restricted Cash
Note 5
Finance Receivables
Note 6
Allowance for Credit Losses
Note 7
Inventories
Note 8
Variable Interest Entities
Note 9
Accrued Liabilities and Deferred Revenue
Note 10
Retirement Benefits
Note 11
Debt and Commitments
Note 12
Derivative Financial Instruments and Hedging Activities
Note 13
Accumulated Other Comprehensive Income/(Loss)
Note 14
Other Income/(Loss)
Note 15
Income Taxes
Note 16
Dispositions
Note 17
Amounts Per Share Attributable to Ford Motor Company Common and Class B Stock
Note 18
Segment Information
Note 19
Commitments and Contingencies



8

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  PRESENTATION

Our financial statements are presented in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. We show certain of our financial statements on both a consolidated and a sector basis for our Automotive and Financial Services sectors. Intercompany items and transactions have been eliminated in both the consolidated and sector balance sheets. Where the presentation of these intercompany eliminations or consolidated adjustments differs between the consolidated and sector financial statements, reconciliations of certain line items are explained below in this Note or in related footnotes.

In the opinion of management, these unaudited financial statements reflect a fair statement of the results of operations and financial condition of Ford Motor Company, its consolidated subsidiaries, and consolidated VIEs of which we are the primary beneficiary for the periods and at the dates presented.  The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.  Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K Report").  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 reclassified certain prior year amounts in our consolidated financial statements to conform to current year presentation.

Adoption of New Accounting Standards

Fair Value Measurement. On January 1, 2012, we adopted the new accounting standard that requires us to report the level in the fair value hierarchy of assets and liabilities not measured at fair value in the balance sheet but for which the fair value is disclosed, and to expand existing disclosures. See Note 3 for further disclosure regarding our fair value measurements.

Comprehensive Income - Presentation. On January 1, 2012, we adopted the new accounting standard that modifies the options for presentation of other comprehensive income. The new accounting standard requires us to present comprehensive income either in a single continuous statement or two separate but consecutive statements. We have elected to present comprehensive income in two separate but consecutive statements.

On January 1, 2012, we also adopted the new accounting standards Intangibles - Goodwill and Other, Transfers and Servicing - Repurchase Agreements, and Financial Services - Insurance. The adoption of these new accounting standards did not impact our financial condition or results of operations.



9

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  PRESENTATION (Continued)

Reconciliations between Consolidated and Sector Financial Statements

Deferred Tax Assets and Liabilities. The difference between the total assets and total liabilities as presented in our sector balance sheet and consolidated balance sheet is the result of netting deferred income tax assets and liabilities. The reconciliation between the totals for the sector and consolidated balance sheets was as follows (in millions):
 
June 30,
2012
 
December 31,
2011
Sector balance sheet presentation of deferred income tax assets
 
 
 
Automotive sector current deferred income tax assets
$
2,085

 
$
1,791

Automotive sector non-current deferred income tax assets
12,829

 
13,932

Financial Services sector deferred income tax assets (a)
303

 
302

Total
15,217

 
16,025

Reclassification for netting of deferred income taxes
(1,153
)
 
(900
)
Consolidated balance sheet presentation of deferred income tax assets
$
14,064

 
$
15,125

 
 
 
 
Sector balance sheet presentation of deferred income tax liabilities
 

 
 

Automotive sector current deferred income tax liabilities
$
26

 
$
40

Automotive sector non-current deferred income tax liabilities
134

 
255

Financial Services sector deferred income tax liabilities
1,588

 
1,301

Total
1,748

 
1,596

Reclassification for netting of deferred income taxes
(1,153
)
 
(900
)
Consolidated balance sheet presentation of deferred income tax liabilities
$
595

 
$
696

__________
(a)
Financial Services deferred income tax assets are included in Financial Services other assets on our sector balance sheet.

10

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  PRESENTATION (Continued)

Sector to Consolidated Cash Flow. We present certain cash flows from wholesale receivables, finance receivables and the acquisition of intersector debt differently on our sector and consolidated statements of cash flows. The reconciliation between totals for the sector and consolidated cash flows for the periods ended June 30 was as follows (in millions):
 
First Half
 
2012
 
2011
Automotive net cash provided by/(used in) operating activities
$
2,656

 
$
5,744

Financial Services net cash provided by/(used in) operating activities
2,625

 
2,133

Total sector net cash provided by/(used in) operating activities
5,281

 
7,877

Reclassifications from investing to operating cash flows
 

 
 

Wholesale receivables (a)
983

 
(1,944
)
Finance receivables (b)
(285
)
 
293

Consolidated net cash provided by/(used in) operating activities
$
5,979

 
$
6,226

 
 
 
 
Automotive net cash provided by/(used in) investing activities
$
(3,848
)
 
$
2,471

Financial Services net cash provided by/(used in) investing activities
(2,261
)
 
560

Total sector net cash provided by/(used in) investing activities
(6,109
)
 
3,031

Reclassifications from investing to operating cash flows
 

 
 

Wholesale receivables (a)
(983
)
 
1,944

Finance receivables (b)
285

 
(293
)
Reclassifications from investing to financing cash flows
 
 
 
Maturity of Financial Services sector debt held by Automotive sector
(201
)
 

Elimination of investing activity to/(from) Financial Services in consolidation
(541
)
 
(1,859
)
Consolidated net cash provided by/(used in) investing activities
$
(7,549
)
 
$
2,823

 
 
 
 
Automotive net cash provided by/(used in) financing activities
$
501

 
$
(5,106
)
Financial Services net cash provided by/(used in) financing activities
(1,590
)
 
(3,758
)
Total sector net cash provided by/(used in) financing activities
(1,089
)
 
(8,864
)
Reclassifications from investing to financing cash flows
 

 
 

Maturity of Financial Services sector debt held by Automotive sector
201

 

Elimination of investing activity to/(from) Financial Services in consolidation
541

 
1,859

Consolidated net cash provided by/(used in) financing activities
$
(347
)
 
$
(7,005
)
 __________
(a)
In addition to the cash flow from vehicles sold by us, the cash flow from wholesale finance receivables (being reclassified from investing to operating) includes financing by Ford Credit of used and non-Ford vehicles. 100% of cash flows from wholesale finance receivables have been reclassified for consolidated presentation as the portion of these cash flows from used and non-Ford vehicles is impracticable to separate.
(b)
Includes cash flows of finance receivables purchased/collected by the Financial Services sector from certain divisions and subsidiaries of the Automotive sector.



11

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  PRESENTATION (Continued)

Venezuelan Operations

At June 30, 2012 and December 31, 2011, we had $460 million and $301 million, respectively, in net monetary assets (primarily cash and receivables partially offset by payables and accrued liabilities) denominated in Venezuelan bolivars. These net monetary assets included $542 million and $331 million in cash and cash equivalents at June 30, 2012 and December 31, 2011, respectively. As a result of regulation of foreign currency exchange in Venezuela, the official exchange rate of 4.3 bolivars to the U.S. dollar is used to re-measure the assets and liabilities of our Venezuelan operations for GAAP financial statement presentation. The Venezuelan government also controls securities transactions in the parallel exchange market. Our ability to obtain funds in the parallel exchange market has been limited. For any U.S. dollars that we obtain at a rate less favorable than the official rate, we realize a loss for the difference in the exchange rates at the time of the transaction. Based on our net monetary position at June 30, 2012, a devaluation equal to a 50% change in the official bolivar exchange rate would have resulted in a balance sheet translation loss of approximately $150 million. Continuing restrictions on the foreign currency exchange market could affect our Venezuelan operations' ability to pay obligations denominated in U.S. dollars as well as our ability to benefit from those operations.

NOTE 2.  ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

Balance Sheet - Offsetting. In December 2011, the Financial Accounting Standards Board issued a new accounting standard that requires disclosures about offsetting and related arrangements for recognized financial instruments and derivative instruments. The new accounting standard is effective for us as of January 1, 2013.

NOTE 3.  FAIR VALUE MEASUREMENTS

Cash equivalents, marketable securities, and derivative instruments are presented in our financial statements on a recurring basis at fair value, while other assets and liabilities are measured at fair value on a nonrecurring basis such as when we have an asset impairment.

Fair Value Measurements

In measuring fair value, we use various valuation methodologies 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 assessment.

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

We review the inputs to the fair value measurements to ensure they are appropriately categorized within the fair value hierarchy. Transfers into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.

Valuation Methodologies

Cash and Cash Equivalents. Included in Cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of change in value due to interest rate, market 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 90 days or less from the date of acquisition. 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 and excluded from the tables below.


12

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.  FAIR VALUE MEASUREMENTS (Continued)

Marketable Securities. Investments in securities with a maturity date greater than 90 days at the date of purchase and other securities for which there is more than an insignificant risk of change in value due to interest rate, market price, or penalty on withdrawal are classified as Marketable securities. We generally measure fair value using prices obtained from pricing services. Pricing methodologies 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 to determine fair value. In certain cases, when market data are not available, we use broker quotes to determine fair value.

A 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.  

Derivative Financial Instruments. Our derivatives are over-the-counter customized derivative transactions and are not exchange traded. We estimate the fair value of these instruments using industry-standard valuation models such as a discounted cash flow. These models project future cash flows and discount the future amounts 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 interbank deposit rate (e.g., LIBOR) 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 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 certain cases, market data are not available and we use broker quotes and models (e.g., Black Scholes) to determine fair value. This includes situations where there is illiquidity for a particular currency or commodity or for longer-dated instruments.

Ford Credit's two Ford Upgrade Exchange Linked securitization transactions ("FUEL Notes") had derivative features which included a mandatory exchange to Ford Credit unsecured notes when Ford Credit's senior unsecured debt received two investment grade credit ratings among Fitch, Moody's, and S&P, and a make-whole provision.  Ford Credit estimated the fair value of these features by comparing the market value of the FUEL Notes to the value of a hypothetical debt instrument without these features.

In the second quarter of 2012, Ford Credit received two investment grade credit ratings thereby triggering the mandatory exchange feature and the FUEL Notes derivatives were extinguished.

Finance Receivables. The fair value of finance receivables is measured for purposes of disclosure (see Note 5). We measure the fair value of finance receivables using internal valuation models. These models project future cash flows of financing contracts based on scheduled contract payments (including principal and interest). The projected cash flows are discounted to a present value based on assumptions regarding credit losses, pre-payment speed, and our discount rate. Our assumptions regarding pre-payment speed and credit losses are based on historical performance. The fair value of finance receivables is categorized within Level 3 of the hierarchy.

On a nonrecurring basis, when retail contracts are greater than 120 days past due or deemed to be uncollectible, or if individual dealer loans are probable of foreclosure, we use the fair value of collateral, adjusted for estimated costs to sell, to determine the fair value adjustment to our receivables. The collateral for retail receivables is the vehicle financed, and for dealer loans is real estate or other property.

The fair value measurements for retail receivables are based on the number of contracts multiplied by the loss severity and the probability of default ("POD") percentage, or the outstanding receivable balances multiplied by the average recovery value ("ARV") percentage to determine the fair value adjustment.


13

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.  FAIR VALUE MEASUREMENTS (Continued)

The fair value measurements for dealer loans are based on an assessment of the estimated market value of collateral. The assessment is performed 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. The fair value adjustment is determined by comparing the net carrying value of the dealer loan and the estimated market value of collateral.

Debt. We measure debt at fair value for purposes of disclosure (see Note 11) using quoted market prices for our own debt with approximately the same remaining maturities, where possible. Where market prices are not available, we estimate fair value using discounted cash flows and market-based expectations for interest rates, our own 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. For asset-backed debt issued in securitization transactions, the principal payments are based on projected payments for specific assets securing the underlying debt considering historical pre-payment speeds. The fair value of debt is categorized within Level 2 of the hierarchy.
  

14

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.  FAIR VALUE MEASUREMENTS (Continued)

Input Hierarchy of Items Measured at Fair Value on a Recurring Basis

The following tables categorize the fair values of items measured at fair value on a recurring basis on our balance sheet (in millions):
 
June 30, 2012
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents – financial instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

U.S. government-sponsored enterprises

 
583

 

 
583

 

 
319

 

 
319

Non-U.S. government

 
74

 

 
74

 

 
168

 

 
168

Non-U.S. government agencies (a)

 
51

 

 
51

 

 
820

 

 
820

Corporate debt

 
9

 

 
9

 

 
2

 

 
2

Total cash equivalents – financial instruments (b)

 
717

 

 
717

 

 
1,309

 

 
1,309

Marketable securities (c)
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
U.S. government
3,915

 

 

 
3,915

 
2,960

 

 

 
2,960

U.S. government-sponsored enterprises

 
4,476

 

 
4,476

 

 
4,852

 

 
4,852

Non-U.S. government agencies (a)

 
4,529

 

 
4,529

 

 
4,558

 

 
4,558

Corporate debt

 
1,970

 

 
1,970

 

 
1,631

 

 
1,631

Mortgage-backed and other asset-backed

 
23

 

 
23

 

 
38

 

 
38

Equities
100

 

 

 
100

 
129

 

 

 
129

Non-U.S. government

 
1,571

 

 
1,571

 

 
598

 

 
598

Other liquid investments (d)

 
29

 

 
29

 

 
17

 

 
17

Total marketable securities
4,015

 
12,598

 

 
16,613

 
3,089

 
11,694

 

 
14,783

Derivative financial instruments
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
128

 

 
128

 

 
198

 
14

 
212

Commodity contracts

 
3

 

 
3

 

 
1

 
1

 
2

Other – warrants

 

 

 

 

 

 
4

 
4

Total derivative financial instruments (e)

 
131

 

 
131

 

 
199

 
19

 
218

Total assets at fair value
$
4,015

 
$
13,446

 
$

 
$
17,461

 
$
3,089

 
$
13,202

 
$
19

 
$
16,310

Liabilities
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Derivative financial instruments
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
575

 
$

 
$
575

 
$

 
$
442

 
$
6

 
$
448

Commodity contracts

 
257

 
78

 
335

 

 
289

 
83

 
372

Total derivative financial instruments (e)

 
832

 
78

 
910

 

 
731

 
89

 
820

Total liabilities at fair value
$

 
$
832

 
$
78

 
$
910

 
$

 
$
731

 
$
89

 
$
820

 __________
(a)
Includes notes issued by non-U.S. government agencies, as well as notes issued by supranational institutions.
(b)
Excludes time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value on our balance sheet totaling $4.9 billion and $4.6 billion at June 30, 2012 and December 31, 2011, respectively, for the Automotive sector. In addition to these cash equivalents, our Automotive sector also had cash on hand totaling $1.6 billion and $2.1 billion at June 30, 2012 and December 31, 2011, respectively.
(c)
Excludes an investment in Ford Credit debt securities held by the Automotive sector with a carrying value of $201 million and an estimated fair value of $201 million at December 31, 2011.
(d)
Includes certificates of deposit and time deposits subject to changes in value.
(e)
See Note 12 for additional information regarding derivative financial instruments.

15

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.  FAIR VALUE MEASUREMENTS (Continued)
 
June 30, 2012
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Services Sector
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents – financial instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
2

 
$

 
$

 
$
2

 
$
1

 
$

 
$

 
$
1

U.S. government-sponsored enterprises

 
75

 

 
75

 

 
75

 

 
75

Non-U.S. government

 
5

 

 
5

 

 
15

 

 
15

Non-U.S. government agencies (a)

 
1

 

 
1

 

 
150

 

 
150

Corporate debt

 
9

 

 
9

 

 

 

 

Total cash equivalents – financial instruments (b)
2

 
90

 

 
92

 
1

 
240

 

 
241

Marketable securities
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
U.S. government
770

 

 

 
770

 
619

 

 

 
619

U.S. government-sponsored enterprises

 
1,043

 

 
1,043

 

 
713

 

 
713

Non-U.S. government agencies (a)

 
577

 

 
577

 

 
778

 

 
778

Corporate debt

 
1,276

 

 
1,276

 

 
1,186

 

 
1,186

Mortgage-backed and other asset-backed

 
80

 

 
80

 

 
88

 

 
88

Non-U.S. government

 
123

 

 
123

 

 
444

 

 
444

Other liquid investments (c)

 
17

 

 
17

 

 
7

 

 
7

Total marketable securities
770

 
3,116

 

 
3,886

 
619

 
3,216

 

 
3,835

Derivative financial instruments
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Interest rate contracts

 
1,316

 

 
1,316

 

 
1,196

 

 
1,196

Foreign currency exchange contracts

 
15

 

 
15

 

 
30

 

 
30

Cross-currency interest rate swap contracts

 
5

 

 
5

 

 
12

 

 
12

Other (d)

 

 

 

 

 

 
137

 
137

Total derivative financial instruments (e)

 
1,336

 

 
1,336

 

 
1,238

 
137

 
1,375

Total assets at fair value
$
772

 
$
4,542

 
$

 
$
5,314

 
$
620

 
$
4,694

 
$
137

 
$
5,451

Liabilities
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Derivative financial instruments
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
254

 
$

 
$
254

 
$

 
$
237

 
$

 
$
237

Foreign currency exchange contracts

 
13

 

 
13

 

 
50

 

 
50

Cross-currency interest rate swap contracts

 
32

 

 
32

 

 
12

 

 
12

Total derivative financial instruments (e)

 
299

 

 
299

 

 
299

 

 
299

Total liabilities at fair value
$

 
$
299

 
$

 
$
299

 
$

 
$
299

 
$

 
$
299

 __________
(a)
Includes notes issued by non-U.S. government agencies, as well as notes issued by supranational institutions.
(b)
Excludes time deposits, certificates of deposit, and money market accounts reported at par value on our balance sheet totaling $5.7 billion and $6 billion at June 30, 2012 and December 31, 2011, respectively, for the Financial Services sector. In addition to these cash equivalents, our Financial Services sector also had cash on hand totaling $2.1 billion and $3 billion at June 30, 2012 and December 31, 2011, respectively.
(c)
Includes certificates of deposit and time deposits subject to changes in value.
(d)
Represents derivative features included in the FUEL Notes.
(e)
See Note 12 for additional information regarding derivative financial instruments.








16

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.  FAIR VALUE MEASUREMENTS (Continued)

Reconciliation of Changes in Level 3 Balances

The following table summarizes the changes recorded through income in Level 3 items measured at fair value on a recurring basis and reported on our balance sheet for the periods ended June 30 (in millions):
 
First Half
 
2012
 
2011
 
Marketable Securities
 
Derivative Financial Instruments,
Net
 
Total Level 3
Fair Value
 
Marketable Securities
 
Derivative Financial Instruments,
Net
 
Total Level 3
Fair Value
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$

 
$
(70
)
 
$
(70
)
 
$
2

 
$
38

 
$
40

Realized/unrealized gains/(losses)
 

 
 
 
 

 
 
 
 
 
 

Cost of sales 

 
(24
)
 
(24
)
 

 
(23
)
 
(23
)
Interest income and other non-operating income/(expense), net

 
(4
)
 
(4
)
 
(1
)
 
1

 

Other comprehensive income/(loss) (a)

 

 

 

 

 

Total realized/unrealized gains/(losses)

 
(28
)
 
(28
)
 
(1
)
 
(22
)
 
(23
)
Purchases, issues, sales, and settlements
 

 
 

 
 

 
 
 
 
 
 
Purchases

 

 

 
7

 

 
7

Issues

 

 

 

 

 

Sales

 

 

 
(1
)
 

 
(1
)
Settlements

 
30

 
30

 

 
(32
)
 
(32
)
Total purchases, issues, sales, and settlements

 
30

 
30

 
6

 
(32
)
 
(26
)
Transfers into Level 3

 

 

 

 

 

Transfers out of Level 3 (b)

 
(10
)
 
(10
)
 
(1
)
 

 
(1
)
Ending balance
$

 
$
(78
)
 
$
(78
)
 
$
6

 
$
(16
)
 
$
(10
)
Unrealized gains/(losses) on instruments still held
$

 
$
(32
)
 
$
(32
)
 
$

 
$
(20
)
 
$
(20
)
 
 
 
 
 
 
 
 
 
 
 
 
Financial Services Sector
 

 
 

 
 

 
 
 
 
 
 
Beginning balance
$

 
$
137

 
$
137

 
$
1

 
$
(89
)
 
$
(88
)
Realized/unrealized gains/(losses)
 

 
 
 
 

 
 
 
 
 
 

Other income/(loss), net

 
(81
)
 
(81
)
 

 
(13
)
 
(13
)
Other comprehensive income/(loss) (a)

 

 

 

 
(2
)
 
(2
)
Interest income/(expense) (c)

 

 

 

 
26

 
26

Total realized/unrealized gains/(losses)

 
(81
)
 
(81
)
 

 
11

 
11

Purchases, issues, sales, and settlements
 

 
 

 
 

 
 
 
 
 
 
Purchases

 

 

 
5

 

 
5

Issues (d)

 

 

 

 
73

 
73

Sales

 

 

 

 

 

Settlements (e)

 
(56
)
 
(56
)
 

 
103

 
103

Total purchases, issues, sales, and settlements

 
(56
)
 
(56
)
 
5

 
176

 
181

Transfers into Level 3

 

 

 

 

 

Transfers out of Level 3 (f)

 

 

 
(1
)
 
(3
)
 
(4
)
Ending balance
$

 
$

 
$

 
$
5

 
$
95

 
$
100

Unrealized gains/(losses) on instruments still held
$

 
$

 
$

 
$

 
$
80

 
$
80

 _________
(a)
Represents foreign currency translation on derivative asset and liability balances held by non-U.S. dollar foreign affiliates.
(b)
Represents transfers out due to the increase in availability of observable data as a result of greater market activity on long-duration foreign currency forwards.
(c)
Recorded in Interest expense.
(d) Represents derivative features included in the FUEL Notes.
(e) Reflects $56 million due to the extinguishment of the derivative features included in the FUEL Notes as a result of the mandatory exchange of the FUEL Notes to unsecured notes in the second quarter of 2012.
(f) Represents transfers out due to the increase in availability of observable data for $1 million of marketable securities as a result of greater market activity for these securities and $3 million due to shorter duration of derivative financial instruments.

17

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.  FAIR VALUE MEASUREMENTS (Continued)

Input Hierarchy of Items Measured at Fair Value on a Nonrecurring Basis

The following table summarizes the items measured at fair value subsequent to initial recognition on a nonrecurring basis by input hierarchy for the periods ended June 30, 2012 and December 31, 2011 that were still held on our balance sheet at those dates (in millions):
 
June 30, 2012
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Services Sector
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail receivables
$

 
$

 
$
60

 
$
60

 
$

 
$

 
$
70

 
$
70

Dealer loans, net

 

 
2

 
2

 

 

 
6

 
6

Total North America

 

 
62

 
62

 

 

 
76

 
76

International
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Retail receivables

 

 
27

 
27

 

 

 
39

 
39

Total International

 

 
27

 
27

 

 

 
39

 
39

Total Financial Services sector
$

 
$

 
$
89

 
$
89

 
$

 
$

 
$
115

 
$
115


Nonrecurring Fair Value Changes

The following table summarizes the total change in value of items for which a nonrecurring fair value adjustment has been included in our statement of operations for the periods ended June 30, related to items still held on our balance sheet at those dates (in millions):
 
Total Gains/(Losses)
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Financial Services Sector
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
Retail receivables
$
(7
)
 
$
(6
)
 
$
(15
)
 
$
(16
)
Dealer loans, net

 
(1
)
 

 
(1
)
Total North America
(7
)
 
(7
)
 
(15
)
 
(17
)
International
 
 
 
 
 
 
 
Retail receivables
(5
)
 
(5
)
 
(10
)
 
(10
)
Total International
(5
)
 
(5
)
 
(10
)
 
(10
)
Total Financial Services sector
$
(12
)
 
$
(12
)
 
$
(25
)
 
$
(27
)

Fair value changes related to retail and dealer loan finance receivables that have been written down based on the fair value of collateral adjusted for estimated costs to sell are recorded in Financial Services provision for credit and insurance losses.


18

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3.  FAIR VALUE MEASUREMENTS (Continued)

Information About Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

The following table summarizes significant unobservable inputs and the variability of those inputs to alternate methodologies for the period ended June 30, 2012 (in millions):
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Fair Value Range
Automotive Sector
 
 
 
 
 
 
 
Recurring basis
 
 
 
 
 
 
 
Net commodity contracts
$(78)
 
Income Approach
 
Forward commodity prices for certain commodity types. A lower forward price will result in a lower fair value.
 
$(79) - $(77)
 
 
 
 
 
 
 
 
Financial Services Sector
 
 
 
 
 
 
 
Nonrecurring basis
 
 
 
 
 
 
 
Retail receivables
 
 
 
 
 
 
 
North America
$60
 
Income Approach
 
POD percentage
 
$48 - $60
International
$27
 
Income Approach
 
ARV percentage
 
$21 - $32
Dealer loans, net
$2
 
Income Approach
 
Estimated market value
 
$2 - $4


NOTE 4.  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 on our balance sheet.

Our Automotive sector restricted cash balances primarily include cash collateral required to be held against loans from the European Investment Bank ("EIB"). Additionally, restricted cash includes various escrow agreements related to legal, insurance, customs, and environmental matters. Our Financial Services sector 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.

Restricted cash balances were as follows (in millions):
 
June 30,
2012
 
December 31,
2011
Automotive sector
$
250

 
$
330

Financial Services sector
246

 
149

Total Company
$
496

 
$
479



19

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5.  FINANCE RECEIVABLES

Finance receivable balances were as follows (in millions):
 
June 30,
2012
 
December 31,
2011
Automotive sector (a)
$
536

 
$
355

Financial Services sector
72,323

 
73,330

Reclassification of receivables purchased by Financial Services sector from Automotive sector to Other receivables, net
(4,765
)
 
(3,709
)
Finance receivables, net
$
68,094

 
$
69,976

__________
(a)
Finance receivables are reported on our sector balance sheet in Receivables, less allowances and Other assets.

Automotive Sector

Our Automotive sector notes receivable consist primarily of amounts loaned to Geely Sweden AB and FordSollers. Performance of this group of receivables is evaluated based on payment activity and the financial stability of the debtor. Notes receivable initially are recorded at fair value and subsequently measured at amortized cost.

Notes receivable, net were as follows (in millions):
 
June 30,
2012
 
December 31,
2011
Notes receivable
$
570

 
$
384

Less:  Allowance for credit losses
(34
)
 
(29
)
   Notes receivable, net
$
536

 
$
355


Financial Services Sector

Ford Credit segments its North America and International portfolio of finance receivables into "consumer" and "non-consumer" receivables.  The receivables are secured by the vehicles, inventory, or other property being financed.

Consumer Segment.  Receivables in this portfolio segment relate to products offered to individuals and businesses that finance the acquisition of Ford vehicles from dealers for personal or commercial use.  The products include:

Retail financing – retail installment contracts for new and used vehicles
Direct financing leases – direct financing leases with retail customers, government entities, daily rental companies, and fleet customers

Non-Consumer Segment. Receivables in this portfolio segment relate to products offered to automotive dealers.  The products include:

Wholesale financing – loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing
Dealer loans – loans to dealers to finance working capital, and to finance the purchase of dealership real estate and/or make improvements to dealership facilities
Other financing – receivables related to the sale of parts and accessories to dealers

At June 30, 2012 and December 31, 2011, the recorded investment in Ford Credit's finance receivables excluded $171 million and $180 million, respectively, of accrued uncollected interest receivable, which we report in Other assets on the balance sheet.


20

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5.  FINANCE RECEIVABLES (Continued)

Finance receivables, net were as follows (in millions):
 
June 30, 2012
 
December 31, 2011
 
North
America
 
International
 
Total Finance Receivables
 
North
America
 
International
 
Total Finance Receivables
Consumer
 
 
 
 
 
 
 
 
 
 
 
Retail, gross
$
38,414

 
$
8,100

 
$
46,514

 
$
38,406

 
$
8,400

 
$
46,806

Less: Unearned interest supplements
(1,304
)
 
(228
)
 
(1,532
)
 
(1,407
)
 
(219
)
 
(1,626
)
Retail
37,110

 
7,872

 
44,982

 
36,999

 
8,181

 
45,180

Direct financing leases, gross
5

 
2,392

 
2,397

 
4

 
2,683

 
2,687

Less: Unearned interest supplements

 
(97
)
 
(97
)
 

 
(116
)
 
(116
)
Direct financing leases
5

 
2,295

 
2,300

 
4

 
2,567

 
2,571

Consumer finance receivables
$
37,115

 
$
10,167

 
$
47,282

 
$
37,003

 
$
10,748

 
$
47,751

Non-Consumer
 

 
 

 
 

 
 

 
 

 
 

Wholesale
$
15,466

 
$
7,316

 
$
22,782

 
$
15,413

 
$
8,416

 
$
23,829

Dealer loans
1,102

 
55

 
1,157

 
1,088

 
63

 
1,151

Other
1,071

 
415

 
1,486

 
723

 
377

 
1,100

Non-Consumer finance receivables
17,639

 
7,786

 
25,425

 
17,224

 
8,856

 
26,080

Total recorded investment
$
54,754

 
$
17,953

 
$
72,707

 
$
54,227

 
$
19,604

 
$
73,831

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in finance receivables
$
54,754

 
$
17,953

 
$
72,707

 
$
54,227

 
$
19,604

 
$
73,831

Less:  Allowance for credit losses
(287
)
 
(97
)
 
(384
)
 
(388
)
 
(113
)
 
(501
)
Finance receivables, net
$
54,467

 
$
17,856

 
$
72,323

 
$
53,839

 
$
19,491

 
$
73,330

 
 
 
 
 
 
 
 
 
 
 
 
Net finance receivables subject to fair value (a)
 
 
 
 
$
70,023

 
 
 
 
 
$
70,754

Fair value
 
 
 
 
71,713

 
 
 
 
 
72,294

__________
(a)
At June 30, 2012 and December 31, 2011, excludes $2.3 billion and $2.6 billion, respectively, of certain receivables (primarily direct financing leases) that are not subject to fair value disclosure requirements. All finance receivables are categorized within Level 3 of the fair value hierarchy. See Note 3 for additional information.

Included in the recorded investment in finance receivables at June 30, 2012 and December 31, 2011 were North America consumer receivables of $24.5 billion and $29.4 billion and non-consumer receivables of $14.2 billion and $14.2 billion, respectively, and International consumer receivables of $6.9 billion and $7.1 billion and non-consumer receivables of $5.3 billion and $5.6 billion, respectively, that secure certain debt obligations. The receivables are available only for payment of the debt and other obligations issued or arising in securitization transactions; they are not available to pay the other obligations of our Financial Services sector or the claims of its other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt and other obligations issued or arising in securitization transactions (see Note 8).


21

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5.  FINANCE RECEIVABLES (Continued)

Aging. For all classes of finance receivables, Ford Credit defines "past due" as any payment, including principal and interest, that has not been collected and is at least 31 days past the contractual due date. The aging analysis of Ford Credit's finance receivables balances at June 30, 2012 was as follows (in millions):
 
31-60
Days Past
Due
 
61-90
Days Past
Due
 
91-120
Days Past
Due
 
Greater
Than 120
Days
Past Due
 
Total Past
Due
 
Current
 
Total
Finance Receivables
North America
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
638

 
$
68

 
$
19

 
$
60

 
$
785

 
$
36,325

 
$
37,110

Direct financing leases

 

 

 

 

 
5

 
5

Non-Consumer
 
 
 
 
 
 
 
 
 

 
 

 
 

Wholesale

 

 

 
1

 
1

 
15,465

 
15,466

Dealer loans

 
17

 

 
2

 
19

 
1,083

 
1,102

Other

 

 

 

 

 
1,071

 
1,071

Total North America recorded investment
638

 
85

 
19

 
63

 
805

 
53,949

 
54,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
39

 
20

 
11

 
27

 
97

 
7,775

 
7,872

Direct financing leases
6

 
4

 
1

 
3

 
14

 
2,281

 
2,295

Non-Consumer
 
 
 
 
 
 
 
 
 

 
 

 
 

Wholesale
3

 

 

 
8

 
11

 
7,305

 
7,316

Dealer loans

 

 

 
1

 
1

 
54

 
55

Other

 

 

 
1

 
1

 
414

 
415

Total International recorded investment
48

 
24

 
12

 
40

 
124

 
17,829

 
17,953

Total recorded investment
$
686

 
$
109

 
$
31

 
$
103

 
$
929

 
$
71,778

 
$
72,707


Consumer Credit Quality. When originating all classes of consumer receivables, Ford Credit uses a proprietary scoring system that measures the credit quality of the receivables using several factors, such as credit bureau information, consumer credit risk scores (e.g., FICO score), and customer and contract characteristics. In addition to its proprietary scoring system, Ford Credit considers other individual consumer factors, such as employment history, financial stability, and capacity to pay.
    
Subsequent to origination, Ford Credit reviews the credit quality of retail and direct financing lease receivables based on customer payment activity. As each customer develops a payment history, Ford Credit uses an internally-developed behavioral scoring model to assist in determining the best collection strategies. 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. These models allow for more focused collection activity on higher-risk accounts and are used to refine Ford Credit's risk-based staffing model to ensure collection resources are aligned with portfolio risk.

Credit quality ratings for Ford Credit's consumer receivables are categorized as follows:

Passcurrent to 60 days past due
Special Mention – 61 to 120 days past due and in intensified collection status
Substandardgreater 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


22

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5.  FINANCE RECEIVABLES (Continued)

The credit quality analysis of Ford Credit's consumer receivables portfolio was as follows (in millions):
 
June 30, 2012
 
December 31, 2011
 
Retail
 
Direct Financing
Leases
 
Retail
 
Direct Financing
Leases
North America
 
 
 
 
 
 
 
Pass
$
36,963

 
$
5

 
$
36,839

 
$
4

Special Mention
87

 

 
90

 

Substandard
60

 

 
70

 

Total North America recorded investment
37,110

 
5

 
36,999

 
4

 
 
 
 
 
 
 
 
International
 

 
 

 
 

 
 

Pass
7,814

 
2,287

 
8,107

 
2,559

Special Mention
31

 
5

 
34

 
5

Substandard
27

 
3

 
40

 
3

Total International recorded investment
7,872

 
2,295

 
8,181

 
2,567

Total recorded investment
$
44,982

 
$
2,300

 
$
45,180

 
$
2,571


Non-Consumer Credit Quality. For all classes of non-consumer receivables, Ford Credit extends commercial credit to dealers primarily in the form of approved lines of credit to purchase new Ford and Lincoln vehicles as well as used vehicles. Each commercial lending request is evaluated by taking into consideration 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 performance data to identify key factors about a dealer that Ford Credit considers significant in predicting a dealer's ability to meet its financial obligations. Ford Credit also considers numerous other financial and qualitative factors including capitalization and leverage, liquidity and cash flow, profitability, and credit history with Ford Credit and other creditors. A dealer's risk rating does not reflect any guarantees or a dealer owner's net worth.

Dealers are assigned to one of four groups according to their risk rating as follows:

Group I – strong to superior financial metrics
Group II – fair to favorable financial metrics
Group III – marginal to weak financial metrics
Group IV – poor financial metrics, including dealers classified as uncollectible

Ford Credit suspends credit lines and extends no further funding to dealers classified in Group IV.

Ford Credit regularly reviews its model to confirm the continued business significance and statistical predictability of the factors and updates the model to incorporate new factors or other information that improves its statistical predictability. In addition, Ford Credit verifies the existence of the assets collateralizing the receivables by physical audits of vehicle inventories, which are performed with increased frequency for higher-risk (i.e., Group III and Group IV) dealers. Ford Credit performs a credit review of each dealer at least annually and adjusts the dealer's risk rating, if necessary.





23

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5.  FINANCE RECEIVABLES (Continued)

Performance of non-consumer receivables is evaluated based on Ford Credit's internal dealer risk rating analysis, as payment for wholesale receivables generally is not required until the dealer has sold the vehicle. Wholesale and dealer loan receivables with the same dealer share the same risk rating. The credit quality analysis of wholesale and dealer loan receivables was as follows (in millions):
 
June 30, 2012
 
December 31, 2011
 
Wholesale
 
Dealer Loan
 
Wholesale
 
Dealer Loan
North America
 
 
 
 
 
 
 
Group I
$
12,868

 
$
891

 
$
12,645

 
$
861

Group II
2,299

 
153

 
2,489

 
165

Group III
280

 
45

 
273

 
58

Group IV
19

 
13

 
6

 
4

Total North America recorded investment
15,466

 
1,102

 
15,413

 
1,088

 
 
 
 
 
 
 
 
International
 

 
 

 
 

 
 

Group I
4,560

 
38

 
5,115

 
42

Group II
1,594

 
8

 
1,965

 
10

Group III
1,155

 
8

 
1,327

 
10

Group IV
7

 
1

 
9

 
1

Total International recorded investment
7,316

 
55

 
8,416

 
63

Total recorded investment
$
22,782

 
$
1,157

 
$
23,829

 
$
1,151


Non-Accrual Status. The accrual of revenue is discontinued at the earlier of the time a receivable is determined to be uncollectible, at bankruptcy status notification, or greater than 120 days past due. Finance receivable 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 then to the unpaid principal balance.

The recorded investment of Ford Credit's consumer receivables in non-accrual status was $343 million, or 0.7% of its consumer receivables, at June 30, 2012, and $402 million, or 0.9% of its consumer receivables, at December 31, 2011.

The recorded investment of Ford Credit's non-consumer receivables in non-accrual status was $45 million, or 0.2% of its non-consumer receivables, at June 30, 2012, and $27 million, or 0.1% of its non-consumer receivables, at
December 31, 2011.

Ford Credit's finance receivables greater than 90 days past due and still accruing interest included $15 million and $14 million of non-bankrupt consumer accounts at June 30, 2012 and December 31, 2011, respectively, and were
de minimis for non-consumer loans at June 30, 2012 and December 31, 2011.


24

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5.  FINANCE RECEIVABLES (Continued)

Consumer Impairment. Ford Credit's finance receivables are evaluated both collectively and specifically for impairment. Impaired consumer receivables include accounts that have been re-written or modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code that are considered to be Troubled Debt Restructurings ("TDRs"), as well as all accounts greater than 120 days past due. The recorded investment of consumer receivables that were impaired at June 30, 2012 and December 31, 2011 was $399 million, or 0.8% of consumer receivables, and $382 million, or 0.8% of consumer receivables, respectively.

Non-Consumer Impairment. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer loans that have been modified in TDRs. The following factors (not necessarily in order of importance or probability of occurrence) are considered in determining whether a non-consumer receivable is impaired:

Delinquency in contractual payments of principal or interest
Deterioration of the borrower's competitive position
Cash flow difficulties experienced by the borrower
Breach of loan covenants or conditions
Initiation of dealer bankruptcy or other insolvency proceedings
Fraud or criminal conviction

The recorded investment of non-consumer receivables that were impaired at June 30, 2012 and December 31, 2011, was $81 million, or 0.3% of non-consumer receivables, and $64 million, or 0.2% of the non-consumer receivables, respectively.

Troubled Debt Restructurings

Effective July 1, 2011, Ford Credit applied the requirements of the new accounting standard related to TDRs to restructurings occurring on or after January 1, 2011.

A restructuring of debt constitutes a TDR if Ford Credit grants a concession to a customer or borrower for economic or legal reasons related to the debtor's financial difficulties that Ford Credit otherwise would not consider.

Consumer. Payment extensions are granted to consumers in the normal course of business. Payment extensions result in a short-term deferral of the customer's normal monthly payment and do not constitute TDRs because payment concessions are not granted on the principal amount of the account or the interest rate charged and are not granted to consumers considered to be in financial difficulty.

Consumer receivable contracts may be modified to lower the customer's payment by extending the term of the contract or lowering the interest rate as a remedy to avoid or cure delinquency. Ford Credit does not grant concessions on the principal balance for re-written contracts. Contracts that are modified at an interest rate that is below the market rate are considered to be TDRs. In addition, consumer receivables modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code are considered to be TDRs.

The outstanding recorded investment at time of modification for consumer receivables that are considered to be TDRs was $123 million, or 0.3% of Ford Credit's consumer receivables during the period ended June 30, 2012 and $207 million, or 0.4% during the period ended June 30, 2011. A subsequent default occurs when contracts that were previously modified in TDRs within the last twelve months and subsequently had past due payments that resulted in repossession. The subsequent annualized default rate for consumer contracts was 5.9% of TDRs during the period ended June 30, 2012.

Consumer receivables involved in TDRs are specifically assessed for impairment. A specific allowance is estimated based on the present value of the expected future cash flows of the receivable discounted at the loan's original effective interest rate or the fair value of any collateral adjusted for estimated costs to sell. For loans where foreclosure is probable, the fair value of collateral is used to estimate the specific impairment. The allowance for credit losses related to consumer TDRs was $17 million at June 30, 2012. Ford Credit did not have any reserves for TDRs at June 30, 2011.

25

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5.  FINANCE RECEIVABLES (Continued)

Non-Consumer. Within Ford Credit's non-consumer receivables segment, only dealer loans subject to forbearance, moratoriums, extension agreements, or other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral are classified as TDRs. Ford Credit does not grant concessions on the principal balance of dealer loans. Dealer loans modified as TDRs during the period ended June 30, 2012 were de minimis.

Dealer loans involved in TDRs are assessed for impairment and included in Ford Credit's allowance for credit losses based on either the present value of the expected future cash flows of the receivable discounted at the loan's original effective interest rate, or the fair value of collateral adjusted for estimated costs to sell. For loans where foreclosure is probable, the fair value of collateral is used to estimate the specific impairment. An impairment charge is recorded as part of the provision to the allowance for credit losses for the amount by which the recorded investment of the receivable exceeds its estimated fair value. The allowance for credit losses related to non-consumer TDRs was de minimis.

NOTE 6. ALLOWANCE FOR CREDIT LOSSES

Automotive Sector

Following is an analysis of the allowance for credit losses for the periods ended June 30 (in millions):
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Allowance for credit losses
 
 
 
 
 
 
 
Beginning balance
$
34

 
$
101

 
$
29

 
$
120

Charge-offs

 

 

 

Recoveries

 
(59
)
 
(2
)
 
(59
)
Provision for credit losses
2

 

 
2

 
2

Other
(2
)
 
15

 
5

 
(6
)
Ending balance
$
34

 
$
57

 
$
34

 
$
57



26

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. ALLOWANCE FOR CREDIT LOSSES (Continued)

Financial Services Sector

Following is an analysis of the allowance for credit losses related to finance receivables and net investment in operating leases for the periods ended June 30 (in millions):
 
Second Quarter 2012
 
Finance Receivables
 
Net Investment in
Operating Leases
 
 
 
Consumer
 
Non-consumer
 
Total
 
 
Total Allowance
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
424

 
$
28

 
$
452

 
$
33

 
$
485

Charge-offs
(67
)
 
(3
)
 
(70
)
 
(11
)
 
(81
)
Recoveries
47

 
2

 
49

 
14

 
63

Provision for credit losses
(34
)
 
(8
)
 
(42
)
 
(9
)
 
(51
)
Other (a)
(5
)
 

 
(5
)
 
(1
)
 
(6
)
Ending balance
$
365

 
$
19

 
$
384

 
$
26

 
$
410

 
 
First Half 2012
 
Finance Receivables
 
Net Investment in
Operating Leases
 
 
 
Consumer
 
Non-consumer
 
Total
 
 
Total Allowance
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
457

 
$
44

 
$
501

 
$
40

 
$
541

Charge-offs
(152
)
 
(7
)
 
(159
)
 
(24
)
 
(183
)
Recoveries
94

 
7

 
101

 
28

 
129

Provision for credit losses
(32
)
 
(26
)
 
(58
)
 
(17
)
 
(75
)
Other (a)
(2
)
 
1

 
(1
)
 
(1
)
 
(2
)
Ending balance
$
365

 
$
19

 
$
384

 
$
26

 
$
410

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for
credit losses
 

 
 

 
 

 
 

 
 

Collective impairment allowance
$
348

 
$
18

 
$
366

 
$
26

 
$
392

Specific impairment allowance
17

 
1

 
18

 

 
18

Ending balance
$
365

 
$
19

 
$
384

 
$
26

 
$
410

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
46,884

 
$
25,344

 
$
72,228

 
$
13,321

 
 

Specifically evaluated for impairment
398

 
81

 
479

 

 
 

Recorded investment (b)
$
47,282

 
$
25,425

 
$
72,707

 
$
13,321

 
 

 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
46,917

 
$
25,406

 
$
72,323

 
$
13,295

 
 

__________
(a)
Represents amounts related to translation adjustments.
(b)
Represents finance receivables and net investment in operating leases before allowance for credit losses.














27

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. ALLOWANCE FOR CREDIT LOSSES (Continued)

 
Second Quarter 2011
 
Finance Receivables
 
Net Investment in
Operating Leases
 
 
 
Consumer
 
Non-consumer
 
Total
 
 
Total Allowance
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
628

 
$
50

 
$
678

 
$
75

 
$
753

Charge-offs
(93
)
 
(9
)
 
(102
)
 
(26
)
 
(128
)
Recoveries
53

 
1

 
54

 
25

 
79

Provision for credit losses
(21
)
 
5

 
(16
)
 
(10
)
 
(26
)
Other (a)
3

 
2

 
5

 

 
5

Ending balance
$
570

 
$
49

 
$
619

 
$
64

 
$
683

 
 
First Half 2011
 
Finance Receivables
 
Net Investment in
Operating Leases
 
 
 
Consumer
 
Non-consumer
 
Total
 
 
Total Allowance
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
707

 
$
70

 
$
777

 
$
87

 
$
864

Charge-offs
(206
)
 
(7
)
 
(213
)
 
(55
)
 
(268
)
Recoveries
110

 
2

 
112

 
50

 
162

Provision for credit losses
(51
)
 
(18
)
 
(69
)
 
(19
)
 
(88
)
Other (a)
10

 
2

 
12

 
1

 
13

Ending balance
$
570

 
$
49

 
$
619

 
$
64

 
$
683

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for
credit losses
 

 
 

 
 

 
 

 
 

Collective impairment allowance
$
570

 
$
39

 
$
609

 
$
64

 
$
673

Specific impairment allowance

 
10

 
10

 

 
10

Ending balance
$
570

 
$
49

 
$
619

 
$
64

 
$
683

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
49,337

 
$
27,076

 
$
76,413

 
$
10,648

 
 

Specifically evaluated for impairment

 
108

 
108

 

 
 

Recorded investment (b)
$
49,337

 
$
27,184

 
$
76,521

 
$
10,648

 
 

 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
48,767

 
$
27,135

 
$
75,902

 
$
10,584

 
 

__________
(a)
Represents amounts related to translation adjustments.
(b)
Represents finance receivables and net investment in operating leases before allowance for credit losses.



28

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 7.  INVENTORIES

All inventories are stated at the lower of cost or market. Cost for a substantial portion of U.S. inventories is determined on a last-in, first-out ("LIFO") basis. LIFO was used for approximately 27% and 17% of total inventories at June 30, 2012 and December 31, 2011, respectively. Cost of other inventories is determined by costing methods that approximate a first-in, first-out ("FIFO") basis.

Inventories were as follows (in millions):
 
June 30,
2012
 
December 31,
2011
Raw materials, work-in-process and supplies
$
3,475

 
$
2,847

Finished products
4,759

 
3,982

Total inventories under FIFO
8,234

 
6,829

Less: LIFO adjustment
(945
)
 
(928
)
   Total inventories
$
7,289

 
$
5,901


NOTE 8.  VARIABLE INTEREST ENTITIES

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has 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.

We have the power to direct the activities of an entity when our management has the ability to make key operating decisions, such as decisions regarding capital or product investment or manufacturing production schedules. We have the power to direct the activities of our special purpose entities 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.
    
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. Conversely, 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.
 
Automotive Sector

VIEs of Which We are Not the Primary Beneficiary

Getrag Ford Transmissions GmbH ("GFT") is a joint venture that constitutes a significant VIE of which we are not the primary beneficiary, and which was not consolidated as of June 30, 2012 or December 31, 2011. GFT is a 50/50 joint venture with Getrag Deutsche Venture GmbH and Co. KG. Ford and its related parties purchase substantially all of the joint venture's output. We do not, however, have the power to direct economically-significant activities of the joint venture.

Zeledyne, LLC ("Zeledyne") is a VIE (that is not a joint venture) of which we are not the primary beneficiary as of
June 30, 2012 or December 31, 2011. Zeledyne manufactures and sells glass products for automotive glass markets. Ford provides certain guarantees to Zeledyne. In 2011, Zeledyne sold a portion of its glass business to Central Glass. As the guarantees are still in place, Zeledyne remains a VIE of which Ford is not the primary beneficiary. The carrying value of our obligation relating to the guarantees to Zeledyne's shareholders was $6 million at June 30, 2012.

Our maximum exposure to loss from VIEs of which we are not the primary beneficiary was as follows (in millions):
 
June 30,
2012
 
December 31,
2011
 
Change in
Maximum
Exposure
Investments
$
206

 
$
229

 
$
23

Guarantees
6

 
6

 

Total maximum exposure
$
212

 
$
235

 
$
23



29

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 8.  VARIABLE INTEREST ENTITIES (Continued)

Financial Services Sector

VIEs of Which We are the Primary Beneficiary

Our Financial Services sector uses special purpose entities to issue asset-backed securities in transactions to public and private investors, bank conduits, and government-sponsored entities or others who obtain funding from government programs. We have deemed most of these special purpose entities to be VIEs. The asset-backed securities are secured by finance receivables and interests in net investments in operating leases. The assets continue to be consolidated by our Financial Services sector. We retain interests in the securitization VIEs, including primarily subordinated securities issued by the VIEs, and rights to cash held for the benefit of the securitization investors.

The transactions create and pass along risks to the variable interest holders, depending on the assets securing the debt and the specific terms of the transactions. Our Financial Services sector aggregates and analyzes the asset-backed securitization transactions based on the risk profile of the product and the type of funding structure, including:

Retail - consumer credit risk and prepayment risk
Wholesale - dealer credit risk
Net investments in operating lease - vehicle residual value risk, consumer credit risk, and prepayment risk

As a residual interest holder, we are exposed to the underlying residual and credit risk of the collateral, and are exposed to interest rate risk in some transactions. The amount of risk absorbed by our residual interests generally is represented by and limited to the amount of overcollaterization of the assets securing the debt and any cash reserves.

We have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default, except under standard representations and warranties such as good and marketable title to the assets, or when certain changes are made to the underlying asset contracts. Securitization investors have no recourse to our Financial Services sector or its other assets and have no right to require our Financial Services sector to repurchase the investments. We generally have no obligation to provide liquidity or contribute cash or additional assets to the VIEs and do not guarantee any asset-backed securities. Ford Credit may be required to support the performance of certain securitization transactions, however, by increasing cash reserves.

VIEs that are exposed to interest rate or currency risk have reduced their risks by entering into derivative transactions. In certain instances, Ford Credit has entered into offsetting derivative transactions with the VIE to protect the VIE from the risks that are not mitigated through the derivative transactions between the VIE and its external counterparty. In other instances, Ford Credit has entered into derivative transactions with the counterparty to protect the counterparty from risks absorbed through derivative transactions with the VIEs. See Note 3 and Note 12 for additional information regarding derivatives.

Although not contractually required, Ford Credit regularly supports its wholesale securitization programs by repurchasing receivables of a dealer from a VIE when the dealer's performance is at risk, which transfers the corresponding risk of loss from the VIE to Ford Credit. In order to continue to fund the wholesale receivables, Ford Credit also may contribute additional cash or wholesale receivables if the collateral falls below required levels. The balances of cash related to these contributions were $130 million and $0 at June 30, 2012 and December 31, 2011, respectively, and ranged from $0 to $130 million during the first half of 2012. In addition, while not contractually required, Ford Credit may purchase the commercial paper issued by Ford Credit's FCAR Owner Trust asset-backed commercial paper program.




30

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 8.  VARIABLE INTEREST ENTITIES (Continued)

The following table includes assets to be used to settle the liabilities of the consolidated VIEs. We may retain debt issued by consolidated VIEs and this debt is excluded from the table below. We hold the right to the excess cash flows from the assets that are not needed to pay liabilities of the consolidated VIEs. The assets and debt reflected on our consolidated balance sheet were as follows (in billions):
 
June 30, 2012
 
Cash and Cash
Equivalents
 
Finance
Receivables, Net
and
Net Investment in
Operating Leases
 
Debt
Finance receivables
 
 
 
 
 
Retail
$
2.4

 
$
27.9

 
$
22.5

Wholesale
0.6

 
18.0

 
11.6

Total finance receivables
3.0

 
45.9

 
34.1

Net investment in operating leases
0.3

 
4.2

 
2.9

Total (a)
$
3.3

 
$
50.1

 
$
37.0

__________
(a)
Certain notes issued by the VIEs to affiliated companies served as collateral for accessing the European Central Bank ("ECB") open market operations program. This external funding of $127 million at June 30, 2012 was not reflected as debt of the VIEs and is excluded from the table above, but was included in our consolidated debt. The finance receivables backing this external funding are included in the table above.

 
December 31, 2011
 
Cash and Cash
Equivalents
 
Finance
Receivables, Net
and
Net Investment in
Operating Leases
 
Debt
Finance receivables
 
 
 
 
 
Retail
$
2.5

 
$
31.9

 
$
26.0

Wholesale
0.5

 
17.9

 
11.2

Total finance receivables
3.0

 
49.8

 
37.2

Net investment in operating leases
0.4

 
6.4

 
4.2

Total (a)
$
3.4

 
$
56.2

 
$
41.4

__________
(a)
Certain notes issued by the VIEs to affiliated companies served as collateral for accessing the ECB open market operations program. This external funding of $246 million at December 31, 2011 was not reflected as debt of the VIEs and is excluded from the table above, but was included in our consolidated debt. The finance receivables backing this external funding are included in the table above.

Interest expense on securitization debt related to consolidated VIEs was $201 million and $261 million for the second quarter of 2012 and 2011, respectively, and $428 million and $515 million for the first half of 2012 and 2011, respectively.

Ford Credit's exposure based on the fair value of derivative instruments related to consolidated VIEs that support its securitization transactions was as follows (in millions):
 
June 30, 2012
 
December 31, 2011
 
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
VIE – Securitization entities
$
10

 
$
108

 
$
157

 
$
97

Ford Credit related to VIE
89

 
64

 
81

 
63

Total including Ford Credit related to VIE (a)
$
99

 
$
172

 
$
238

 
$
160

__________
(a)
Ford Credit derivative assets and liabilities are included in Other assets and Accrued liabilities and deferred revenue, respectively, on our consolidated balance sheet.


31

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 8.  VARIABLE INTEREST ENTITIES (Continued)

Derivative expense/(income) related to consolidated VIEs that support Ford Credit's securitization programs for the periods ended June 30 was as follows (in millions):
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Derivative expense/(income)
 
 
 
 
 
 
 
VIE - Securitization entities
$
56

 
$
88

 
$
151

 
$
33

Ford Credit related to VIE
(27
)
 
(27
)
 
(15
)
 
38

Total including Ford Credit related to VIE
$
29

 
$
61

 
$
136

 
$
71


VIEs of Which We are Not the Primary Beneficiary

Ford Credit has an investment in Forso Nordic AB, a joint venture determined to be a VIE of which Ford Credit is not the primary beneficiary. The joint venture provides consumer and dealer financing in its local markets and is financed by external debt and additional subordinated debt provided by the joint venture partner. The operating agreement indicates that the power to direct economically significant activities is shared with the joint venture partner, and the obligation to absorb losses or right to receive benefits resides primarily with the joint venture partner. Ford Credit's investment in the joint venture is accounted for as an equity method investment and is included in Other assets. Ford Credit's maximum exposure to any potential losses associated with this VIE is limited to Ford Credit's equity investment, and amounted to $74 million and $71 million at June 30, 2012 and December 31, 2011, respectively.

NOTE 9.  ACCRUED LIABILITIES AND DEFERRED REVENUE

Accrued liabilities and deferred revenue were as follows (in millions):
 
June 30,
2012
 
December 31,
2011
Automotive Sector
 
 
 
Current
 
 
 
Dealer and customer allowances and claims
$
6,690

 
$
6,971

Deferred revenue
3,220

 
2,216

Employee benefit plans
1,508

 
1,552

Accrued interest
273

 
253

Other postretirement employee benefits ("OPEB")
439

 
439

Pension (a)
371

 
388

Other
2,710

 
3,184

Total Automotive accrued liabilities and deferred revenue
15,211

 
15,003

Non-current
 

 
 

Pension (a)
13,285

 
15,091

OPEB
6,132

 
6,152

Dealer and customer allowances and claims
2,517

 
2,453

Deferred revenue
1,864

 
1,739

Employee benefit plans
637

 
709

Other
885

 
766

Total Automotive other liabilities
25,320

 
26,910

Total Automotive sector
40,531

 
41,913

Financial Services Sector
3,473

 
3,457

Total sectors
44,004

 
45,370

Intersector elimination (b)

 
(1
)
Total Company
$
44,004

 
$
45,369

__________
(a)
Balances at June 30, 2012 reflect net pension liabilities at December 31, 2011, updated for year-to-date service and interest cost, expected return on assets, separation expense, actual benefit payments, and cash contributions. The discount rate and rate of expected return assumptions are unchanged from year-end 2011.
(b)
Accrued interest related to Ford's acquisition of Ford Credit debt securities.  

32

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 10.  RETIREMENT BENEFITS

We provide pension benefits and OPEB, such as health care and life insurance, to employees in many of our operations around the world.

The expense for our defined benefit pension and OPEB plans for the periods ended June 30 was as follows (in millions):
 
Second Quarter
 
Pension Benefits
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Worldwide OPEB
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
130

 
$
117

 
$
93

 
$
84

 
$
17

 
$
16

Interest cost
552

 
594

 
298

 
314

 
72

 
83

Expected return on assets
(718
)
 
(757
)
 
(335
)
 
(358
)
 

 

Amortization of
 

 
 

 
 

 
 

 
 

 
 

Prior service costs/(credits)
55

 
85

 
18

 
18

 
(136
)
 
(151
)
(Gains)/Losses
106

 
48

 
103

 
77

 
32

 
28

Separation programs/other
(2
)
 

 
11

 
48

 

 
1

(Gains)/Losses from curtailments and settlements

 

 

 
104

 

 

Net expense/(income)
$
123

 
$
87

 
$
188

 
$
287

 
$
(15
)
 
$
(23
)

 
First Half
 
Pension Benefits
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Worldwide OPEB
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
260

 
$
234

 
$
186

 
$
164

 
$
34

 
$
31

Interest cost
1,104

 
1,188

 
596

 
617

 
144

 
165

Expected return on assets
(1,436
)
 
(1,514
)
 
(669
)
 
(706
)
 

 

Amortization of
 
 
 

 
 
 
 

 
 
 
 

Prior service costs/(credits)
110

 
171

 
36

 
36

 
(272
)
 
(303
)
(Gains)/Losses
212

 
96

 
206

 
153

 
64

 
57

Separation programs/other
5

 
(1
)
 
45

 
60

 
1

 
1

(Gains)/Losses from curtailments and settlements

 

 

 
104

 
(10
)
 

Net expense/(income)
$
255

 
$
174

 
$
400

 
$
428

 
$
(39
)
 
$
(49
)

Pension Plan Contributions

In the first half of 2012, we contributed about $1.9 billion to our worldwide funded pension plans (including $1 billion in discretionary contributions to our U.S. plans), and made about $200 million of benefit payments directly by the Company for unfunded plans.  We expect to contribute from Automotive cash and cash equivalents an additional $1.5 billion to our worldwide funded plans in 2012 (including discretionary contributions to our U.S. plans of $1 billion), and to make an additional $200 million of benefit payments directly by the Company for unfunded plans, for a total of about $3.8 billion this year.

Based on current assumptions and regulations, we do not expect to have a legal requirement to fund our major U.S. pension plans in 2012 or 2013.




33

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 11.  DEBT AND COMMITMENTS

The carrying value of our debt was as follows (in millions):
 
June 30,
2012
 
December 31,
2011
Automotive Sector
 
Debt payable within one year
 
 
 
Short-term with non-affiliates
$
287

 
$
559

Short-term with unconsolidated affiliates

 
18

Long-term payable within one year
 

 
 

U.S. Department of Energy ("DOE") loans
577

 
240

Other debt
433

 
216

Total debt payable within one year
1,297

 
1,033

Long-term debt payable after one year
 

 
 

Public unsecured debt securities
5,417

 
5,260

Unamortized discount
(74
)
 
(77
)
Convertible notes
908

 
908

Unamortized discount
(158
)
 
(172
)
DOE loans
5,187

 
4,556

EIB loan
705

 
698

Other debt
908

 
888

Total long-term debt payable after one year
12,893

 
12,061

Total Automotive sector
$
14,190

 
$
13,094

Fair value of Automotive sector debt (a)
$
14,535

 
$
13,451

Financial Services Sector
 

 
 

Short-term debt
 

 
 

Asset-backed commercial paper
$
5,650

 
$
6,835

Other asset-backed short-term debt
714

 
2,987

Floating rate demand notes
5,073

 
4,713

Unsecured commercial paper
563

 
156

Other short-term debt
1,640

 
1,905

Total short-term debt
13,640

 
16,596

Long-term debt
 

 
 

Unsecured debt
 

 
 

Notes payable within one year
4,245

 
6,144

Notes payable after one year
32,263

 
26,167

Asset-backed debt
 

 
 

Notes payable within one year
14,777

 
16,538

Notes payable after one year
20,159

 
20,621

Unamortized discount
(152
)
 
(152
)
Fair value adjustments (b)
775

 
681

Total long-term debt
72,067

 
69,999

Total Financial Services sector
$
85,707

 
$
86,595

Fair value of Financial Services sector debt (a)
$
89,046

 
$
88,823

Total Automotive and Financial Services sectors
$
99,897

 
$
99,689

Intersector elimination (c)

 
(201
)
Total Company
$
99,897

 
$
99,488

__________
(a)
The fair value of debt includes $287 million and $326 million of Automotive sector short-term debt and $7.4 billion and $7 billion of Financial Services sector short-term debt at June 30, 2012 and December 31, 2011, respectively, carried at cost which approximates fair value. All debt is categorized within Level 2 of the fair value hierarchy. See Note 3 for additional information.
(b)
Adjustments related to designated fair value hedges of unsecured debt.
(c)
Debt related to Ford's acquisition of Ford Credit debt securities.



34

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12.  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 various derivatives contracts:

Foreign currency exchange contracts that are used to manage foreign exchange exposure;
Commodity contracts, including forwards and options, that are used to manage commodity price risk;
Interest rate contracts including swaps, caps, and floors 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. All derivatives are recognized on the balance sheet at fair value. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. We do, however, consider our net position for determining fair value.
 
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. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.
 
Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting. Regardless, we only enter into transactions that we believe will be highly effective at offsetting the underlying economic risk. We report changes in the fair value of derivatives not designated as hedging instruments through Automotive cost of sales, Automotive interest income and other non-operating income/(expense), net, or Financial Services other income/(loss), net depending on the sector and underlying exposure. Cash flows associated with non-designated or de-designated derivatives are reported in Net cash provided by/(used in) investing activities in our statements of cash flows.

Cash Flow Hedges. Our Automotive sector has designated certain forward contracts as cash flow hedges of forecasted transactions with exposure to foreign currency exchange risk.

The effective portion of changes in the fair value of cash flow hedges is deferred in Accumulated other comprehensive income/(loss) and is recognized in Automotive cost of sales when the hedged item affects earnings. The ineffective portion is reported in Automotive cost of sales. Our policy is to de-designate cash flow hedges prior to the time forecasted transactions are recognized as assets or liabilities on the balance sheet and report subsequent changes in fair value through Automotive cost of sales. If it becomes probable that the originally-forecasted transaction will not occur, the related amount also is reclassified from Accumulated other comprehensive income/(loss) and recognized in earnings. The majority of our cash flow hedges mature in two years or less.

Fair Value Hedges. Our Financial Services sector uses derivatives to reduce the risk of changes in the fair value of liabilities. We have designated certain receive-fixed, pay-float 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. If the hedge relationship is deemed to be highly effective, we record the changes in the fair value of the hedged debt related to the risk being hedged in Financial Services debt with the offset in Financial Services other income/(loss), net. The change in fair value of the related derivative (excluding accrued interest) also is recorded in Financial Services other income/(loss), net. Consequently, hedge ineffectiveness (the difference between the change in fair value of the derivative and the change in the value of the hedged debt that is attributable to the changes in the benchmark interest rate) is reflected in Financial Services other income/(loss), net.


35

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

For our Financial Services sector, net interest settlements and accruals on fair value hedges are excluded from the assessment of hedge effectiveness. We report net interest settlements and accruals on fair value hedges in Interest expense, with the exception of foreign currency revaluation on accrued interest, which is reported in Selling, administrative, and other expenses. Ineffectiveness on fair value hedges and gains and losses on interest rate contracts not designated as hedging instruments are reported in Financial Services other income/(loss), net. Gains and losses on foreign exchange and cross-currency interest rate swap contracts not designated as hedging instruments are reported in Selling, administrative, and other expenses. The cash flows associated with fair value hedges are reported in Net cash provided by/(used in) operating activities on our statement 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 amortized over its remaining life.
 
Net Investment Hedges. We have used foreign currency exchange derivatives to hedge the net assets of certain foreign entities to offset the translation and economic exposures related to our investment in these entities. The effective portion of changes in the value of designated instruments is included in Accumulated other comprehensive income/(loss) as a foreign currency translation adjustment until the hedged investment is sold or liquidated. When the investment is sold or liquidated, the hedge gains and losses previously reported in Accumulated other comprehensive income/(loss) are recognized in Automotive interest income and other non-operating income/(expense), net as part of the gain or loss on sale. Presently, we have had no derivative instruments in an active net investment hedging relationship. We have elected the spot-to-spot method.

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.


36

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Income Effect of Derivative Financial Instruments

The following tables summarize by hedge designation the pre-tax gains/(losses) recorded in Other comprehensive income/(loss) ("OCI"), reclassified from Accumulated other comprehensive income/(loss) ("AOCI") to income and/or recognized directly in income for the periods ended June 30 (in millions):
 
Second Quarter 2012
 
First Half 2012
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
(222
)
 
$
(98
)
 
$
(1
)
 
$
(369
)
 
$
(150
)
 
$

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Foreign currency exchange contracts - operating exposures
 

 
 

 
$
(8
)
 
 

 
 

 
$
(35
)
Commodity contracts
 

 
 

 
(186
)
 
 

 
 

 
(115
)
Other – warrants
 

 
 

 

 
 

 
 

 
(4
)
Total
 

 
 

 
$
(194
)
 
 

 
 

 
$
(154
)
 
 
 
 
 
 
 
 
 
 
 
 
Financial Services Sector
 

 
 

 
 

 
 

 
 

 
 

Fair value hedges
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
 

 
 

 
 

 
 

Net interest settlements and accruals excluded from the assessment of hedge effectiveness
 

 
 

 
$
41

 
 

 
 

 
$
82

Ineffectiveness (a)
 

 
 

 
1

 
 

 
 

 
2

Total
 

 
 

 
$
42

 
 

 
 

 
$
84

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
$

 
 

 
 

 
$
(4
)
Foreign currency exchange contracts
 

 
 

 
(6
)
 
 

 
 

 
(54
)
Cross-currency interest rate swap contracts
 

 
 

 

 
 

 
 

 
(48
)
Other (b)
 

 
 

 
(43
)
 
 

 
 

 
(81
)
Total
 

 
 

 
$
(49
)
 
 

 
 

 
$
(187
)
 __________
(a)
For the second quarter and first half of 2012, hedge ineffectiveness reflects change in fair value on derivatives of $238 million gain and $158 million gain, respectively, and change in fair value on hedged debt of $237 million loss and $156 million loss, respectively.
(b)
Reflects gains/(losses) for derivative features included in the FUEL Notes (see Note 3).



















37

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

 
Second Quarter 2011
 
First Half 2011
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
69

 
$
42

 
$
2

 
$
194

 
$
36

 
$
2

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Foreign currency exchange contracts - operating exposures
 

 
 

 
$
4

 
 

 
 

 
$
13

Commodity contracts
 

 
 

 
(27
)
 
 

 
 

 
(12
)
Other – warrants
 

 
 

 
1

 
 

 
 

 
1

Total
 

 
 

 
$
(22
)
 
 

 
 

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
Financial Services Sector
 

 
 

 
 

 
 

 
 

 
 

Fair value hedges
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
 

 
 

 
 

 
 

Net interest settlements and accruals excluded from the assessment of hedge effectiveness
 

 
 

 
$
67

 
 

 
 

 
$
133

Ineffectiveness (a)
 

 
 

 
2

 
 

 
 

 
(16
)
Total
 

 
 

 
$
69

 
 

 
 

 
$
117

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
$
4

 
 

 
 

 
$
(4
)
Foreign currency exchange contracts
 

 
 

 
(49
)
 
 

 
 

 
(37
)
Cross-currency interest rate swap contracts
 

 
 

 
(17
)
 
 

 
 

 
(31
)
Other (b)
 

 
 

 
2

 
 

 
 

 
2

Total
 

 
 

 
$
(60
)
 
 

 
 

 
$
(70
)
 __________
(a)
For the second quarter and first half of 2011, hedge ineffectiveness reflects change in fair value on derivatives of $134 million gain and $46 million gain, respectively, and change in fair value on hedged debt of $132 million loss and $62 million loss, respectively.
(b)
Reflects gains/(losses) for derivative features included in the FUEL Notes (see Note 3).




38

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

The following table summarizes the notional amount and estimated fair value of our derivative financial instruments (in millions):
 
June 30, 2012
 
December 31, 2011
 
Notionals
 
Fair Value of
Assets
 
Fair Value of
Liabilities
 
Notionals
 
Fair Value of
Assets
 
Fair Value of
Liabilities
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
15,717

 
$
62

 
$
502

 
$
14,535

 
$
120

 
$
368

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
5,746

 
66

 
73

 
5,692

 
92

 
80

Commodity contracts
2,033

 
3

 
335

 
2,396

 
2

 
372

Other – warrants
12

 

 

 
12

 
4

 

Total derivatives not designated as hedging instruments
7,791

 
69

 
408

 
8,100

 
98

 
452

Total Automotive sector derivative financial instruments
$
23,508

 
$
131

 
$
910

 
$
22,635

 
$
218

 
$
820

 
 
 
 
 
 
 
 
 
 
 
 
Financial Services Sector
 

 
 

 
 

 
 
 
 
 
 
Fair value hedges
 

 
 

 
 

 
 
 
 
 
 
Interest rate contracts
$
12,793

 
$
708

 
$

 
$
7,786

 
$
526

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
60,289

 
608

 
254

 
70,639

 
670

 
237

Foreign currency exchange contracts
2,452

 
15

 
13

 
3,582

 
30

 
50

Cross-currency interest rate swap contracts
2,579

 
5

 
32

 
987

 
12

 
12

Other (a)

 

 

 
2,500

 
137

 

Total derivatives not designated as hedging instruments
65,320

 
628

 
299

 
77,708

 
849

 
299

Total Financial Services sector derivative financial instruments
$
78,113

 
$
1,336

 
$
299

 
$
85,494

 
$
1,375

 
$
299

 __________
(a)
Represents derivative features included in the FUEL Notes (see Note 3). The derivative features included in the FUEL Notes were extinguished as a result of the mandatory exchange of the FUEL Notes to unsecured notes in the second quarter of 2012.
 
On our consolidated balance sheet, derivative assets are reported in Other assets for Automotive and Financial Services sectors, and derivative liabilities are reported in Payables for our Automotive sector and in Accrued liabilities and deferred revenue for our Financial Services sector.

The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. Notional amounts are presented on a gross basis with no netting of offsetting exposure positions. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or commodity volumes and prices.



39

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Counterparty Risk and Collateral

Use of derivatives exposes us to the risk that a counterparty may default on a derivative contract. We establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. Substantially all of our derivative exposures are with counterparties that have an investment grade rating. The aggregate fair value of derivative instruments in asset positions on June 30, 2012 was $1.5 billion, representing the maximum loss that we would recognize at that date if all counterparties failed to perform as contracted. We enter into master agreements with counterparties that generally allow for netting of certain exposures; therefore, the actual loss we would recognize if all counterparties failed to perform as contracted would be lower.

We include an adjustment for non-performance risk in the fair value of derivative instruments. Our adjustment for non-performance risk is relative to a measure based on an unadjusted inter-bank deposit rate (e.g., LIBOR). For our Automotive sector, at June 30, 2012 and December 31, 2011, our adjustment decreased derivative assets by $1 million and $3 million, respectively, and decreased derivative liabilities by $5 million and $10 million, respectively. For our Financial Services sector, at June 30, 2012 and December 31, 2011, our adjustment decreased derivative assets by $47 million and $54 million, respectively, and decreased derivative liabilities by $4 million and $7 million, respectively. See Note 3 for more detail on valuation methodologies.

We post cash collateral with certain counterparties based on our net position with regard to foreign currency and commodity derivative contracts. We posted $123 million and $70 million as of June 30, 2012 and December 31, 2011, respectively, which is reported in Other assets on our consolidated balance sheet.


40

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 13.  ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

The following table summarizes the changes in the accumulated balances for each component of AOCI attributable to Ford Motor Company for the periods ended June 30 (in millions):
 
First Half
 
2012
 
2011
Foreign currency translation
 
 
 
Beginning balance
$
(1,383
)
 
$
(665
)
Net gain/(loss) on foreign currency translation (net of tax of $0 and $0)
(255
)
 
844

Reclassifications to net income (net of tax of $0 and $0)

 
(6
)
Other comprehensive income/(loss), net of tax (a)
(255
)
 
838

Ending balance
$
(1,638
)
 
$
173

 
 
 
 
Derivative instruments
 
 
 
Beginning balance
$
(181
)
 
$
(29
)
Net gain/(loss) on derivative instruments (net of tax benefit of $118 and tax of $27)
(251
)
 
167

Reclassifications to net income (net of tax of $51 and tax benefit of $3)
99

 
(33
)
Other comprehensive income/(loss), net of tax
(152
)
 
134

Ending balance
$
(333
)
 
$
105

 
 
 
 
Pension and other postretirement benefits
 
 
 
Beginning balance
$
(17,170
)
 
$
(13,617
)
Prior service cost arising during the period (net of tax of $0 and $0)

 
(45
)
Net gain/(loss) arising during the period (net of tax of $0 and $0)

 

Amortization of prior service cost included in net income (net of tax benefit of $54 and tax of $5)
(82
)
 
(101
)
Amortization of (gain)/loss included in net income (net of tax of $151 and $21)
331

 
389

Translation impact on non-U.S. plans (net of tax of $0 and $0)
(36
)
 
(138
)
Other comprehensive income/(loss), net of tax
213

 
105

Ending balance
$
(16,957
)
 
$
(13,512
)
 
 
 
 
Net holding gain/(loss)
 
 
 
Beginning balance
$

 
$
(2
)
Reclassifications to net income (net of tax of $0 and $0)

 

Ending balance
$

 
$
(2
)
 
 
 
 
Total AOCI ending balance at June 30
$
(18,928
)
 
$
(13,236
)
__________
(a)
For 2011, there were $2 million of losses attributable to noncontrolling interests.


41

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 14.  OTHER INCOME/(LOSS)

Automotive Sector

The following table summarizes amounts included in Automotive interest income and other non-operating income/(expense), net for the periods ended June 30 (in millions):
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Interest income
$
65

 
$
105

 
$
152

 
$
190

Realized and unrealized gains/(losses) on cash equivalents and marketable securities
(21
)
 
50

 
5

 
6

Gains/(Losses) on the sale of held-for-sale operations, equity and cost investments, and other dispositions
(183
)
 
8

 
(186
)
 
33

Gains/(Losses) on extinguishment of debt

 

 

 
(60
)
Other
54

 
36

 
96

 
70

Total
$
(85
)
 
$
199

 
$
67

 
$
239


Financial Services Sector

The following table summarizes the amounts included in Financial Services other income/(loss), net for the periods ended June 30 (in millions):
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Interest income (investment-related)
$
21

 
$
13

 
$
37

 
$
37

Realized and unrealized gains/(losses) on cash equivalents and marketable securities

 
21

 
13

 
25

Gains/(Losses) on the sale of held-for-sale operations, equity and cost investments, and other dispositions
(1
)
 

 

 

Gains/(Losses) on extinguishment of debt
(6
)
 
(28
)
 
(9
)
 
(36
)
Investment and other income related to sales of receivables

 

 
1

 

Insurance premiums earned, net
25

 
23

 
51

 
46

Other
43

 
24

 
73

 
66

Total
$
82

 
$
53

 
$
166

 
$
138


NOTE 15. INCOME TAXES

For interim tax reporting we estimate one single effective tax rate for tax jurisdictions not subject to a valuation allowance, which is applied to the year-to-date ordinary income/(loss). Tax effects of significant unusual or extraordinary items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.


42

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 16. DISPOSITIONS

Automotive Sector

Automotive Components Holdings, LLC ("ACH"). On June 1, 2012, ACH completed the sale of its automotive interior trim components business located at its Saline, Michigan plant to Faurecia. Faurecia will continue to supply Ford with interior trim components from the Saline facility as well as other Faurecia facilities. As a result of this transaction, we recognized a second quarter pre-tax loss of $96 million reported in Automotive interest income and other non-operating income/(expense), net.  Additionally, Ford assumed contractual obligations of $182 million associated with the pricing of products to be purchased over the six-year term of the Purchase and Supply Agreement.

On June 30, 2012, ACH completed the sale of its automotive lighting business located at its Ohio facilities to Ventra Sandusky, a Flex-N-Gate group affiliate.  Ventra Sandusky will continue to supply Ford with automotive lighting components and service parts from the Sandusky and Bellevue facilities. As a result of this transaction, we recognized a second quarter pre-tax loss of $77 million reported in Automotive interest income and other non-operating income/(expense), net.  Additionally, Ford assumed a contractual obligation of $15 million associated with the pricing of products to be purchased over the four and one-half-year term of the Purchase and Supply Agreement.




43

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 17.  AMOUNTS PER SHARE ATTRIBUTABLE TO FORD MOTOR COMPANY COMMON AND CLASS B STOCK

We present both basic and diluted earnings per share ("EPS") amounts in our financial reporting.  EPS is computed independently each quarter for income from continuing operations, income/(loss) from discontinued operations, and net income; as a result, the sum of per-share amounts from continuing operations and discontinued operations may not equal the total per-share amount for net earnings.  Basic EPS excludes dilution and is computed by dividing income available to Common and Class B Stock holders by the weighted-average number of Common and Class B Stock outstanding for the period.  Diluted EPS, on the other hand, reflects the maximum potential dilution that could occur if all of our equity-linked securities and other share-based compensation, including stock options, warrants, and rights under our convertible notes, were exercised.  Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

Warrants

All warrants outstanding expire January 1, 2013. The net dilutive effect for warrants, included below, is approximately 57 million and 76 million dilutive shares for the second quarter and first half of 2012, respectively, representing the net share settlement methodology for the 362 million warrants outstanding as of June 30, 2012.

Dividend Declaration

On July 12, 2012, our Board of Directors declared a third quarter 2012 dividend on our Common and Class B Stock of $0.05 per share payable on September 4, 2012 to stockholders of record on August 3, 2012.

Amounts 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):
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Basic and Diluted Income/(Loss) Attributable to Ford Motor Company
 
 
 
 
 
 
 
Basic income/(loss) from continuing operations
$
1,040

 
$
2,398

 
$
2,436

 
$
4,949

Effect of dilutive 2016 Convertible Notes (a)
10

 
14

 
21

 
28

Effect of dilutive 2036 Convertible Notes (a)

 

 

 
1

Effect of dilutive Trust Preferred Securities (a) (b)

 

 

 
36

Diluted income/(loss) from continuing operations
$
1,050

 
$
2,412

 
$
2,457

 
$
5,014

 
 
 
 
 
 
 
 
Basic and Diluted Shares
 

 
 

 
 
 
 
Basic shares (average shares outstanding)
3,815

 
3,799

 
3,809

 
3,785

Net dilutive options and warrants
101

 
205

 
129

 
234

Dilutive 2016 Convertible Notes
95

 
95

 
95

 
95

Dilutive 2036 Convertible Notes
3

 
3

 
3

 
3

Dilutive Trust Preferred Securities (b)

 

 

 
66

Diluted shares
4,014

 
4,102

 
4,036

 
4,183

__________
(a)
As applicable, includes interest expense, amortization of discount, amortization of fees, and other changes in income or loss that would result from the assumed conversion.
(b)
The Trust Preferred Securities, which were convertible into Ford Common Stock, were fully redeemed on March 15, 2011.


44

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 18.  SEGMENT INFORMATION

Key operating data for our business segments for the periods ended or at June 30 were as follows (in millions):
 
Automotive Sector
 
Operating Segments
 
Reconciling Items
 
 

 
Ford North
America
 
Ford South
America
 
Ford
Europe
 
Ford Asia
Pacific
Africa
 
Other
Automotive
 
Special
Items
 
Total
Second Quarter 2012
 

 
 

 
 

 
 

 
 

 
 

 
 

Revenues
 

 
 

 
 

 
 

 
 

 
 

 
 

External customer
$
19,710

 
$
2,351

 
$
7,013

 
$
2,254

 
$

 
$

 
$
31,328

Intersegment
99

 

 
232

 

 

 

 
331

Income
 
 
 
 
 
 
 
 
 
 
 
 
 

Income/(Loss) before income taxes
2,010

 
5

 
(404
)
 
(66
)
 
(163
)
 
(234
)
 
1,148

Total assets at June 30
50,483

 
6,165

 
18,588

 
6,712

 

 

 
81,948

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Second Quarter 2011
 

 
 

 
 

 
 

 
 

 
 

 
 

Revenues
 

 
 

 
 

 
 

 
 

 
 

 
 

External customer
$
19,446

 
$
2,931

 
$
9,000

 
$
2,099

 
$

 
$

 
$
33,476

Intersegment
36

 

 
279

 

 

 

 
315

Income
 
 
 
 
 
 
 
 
 
 
 
 
 

Income/(Loss) before income taxes
1,908

 
267

 
176

 
1

 
(76
)
 
(272
)
 
2,004

Total assets at June 30
31,106

 
7,207

 
24,841

 
6,099

 

 

 
69,253


 
Automotive Sector
 
Operating Segments
 
Reconciling Items
 
 

 
Ford North
America
 
Ford South
America
 
Ford
Europe
 
Ford Asia
Pacific
Africa
 
Other
Automotive
 
Special
Items
 
Total
First Half 2012
 

 
 

 
 

 
 

 
 

 
 

 
 

Revenues
 

 
 

 
 

 
 

 
 

 
 

 
 

External customer
$
38,309

 
$
4,733

 
$
14,282

 
$
4,529

 
$

 
$

 
$
61,853

Intersegment
291

 

 
404

 

 

 

 
695

Income
 
 
 
 
 
 
 
 
 
 
 
 
 

Income/(Loss) before income taxes
4,143

 
59

 
(553
)
 
(161
)
 
(269
)
 
(489
)
 
2,730

Total assets at June 30
50,483

 
6,165

 
18,588

 
6,712

 

 

 
81,948

 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Half 2011
 

 
 

 
 

 
 

 
 

 
 

 
 

Revenues
 

 
 

 
 

 
 

 
 

 
 

 
 

External customer
$
37,403

 
$
5,250

 
$
17,705

 
$
4,156

 
$

 
$

 
$
64,514

Intersegment
137

 

 
517

 

 

 

 
654

Income
 
 
 
 
 
 
 
 
 
 
 
 
 

Income/(Loss) before income taxes
3,752

 
477

 
469

 
34

 
(325
)
 
(333
)
 
4,074

Total assets at June 30
31,106

 
7,207

 
24,841

 
6,099

 

 

 
69,253




45

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 18.  SEGMENT INFORMATION (Continued)


 
Financial Services Sector
 
Total Company
 
Operating Segments
 
Reconciling Item
 
 
 
 
 
 
 
Ford
Credit
 
Other
Financial
Services
 
Elims
 
Total
 
Elims (a)
 
Total
Second Quarter 2012
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
External customer
$
1,815

 
$
68

 
$

 
$
1,883

 
$

 
$
33,211

Intersegment
123

 
1

 

 
124

 
(455
)
 

Income
 
 
 
 
 
 
 

 
 
 
 
Income/(Loss) before income taxes
438

 
9

 

 
447

 

 
1,595

Total assets at June 30
99,901

 
8,126

 
(6,908
)
 
101,119

 
(1,831
)
 
181,236

 
 
 
 
 
 
 
 
 
 
 
 
Second Quarter 2011
 

 
 

 
 

 
 

 
 

 
 

Revenues
 

 
 

 
 

 
 

 
 

 
 

External customer
$
1,967

 
$
84

 
$

 
$
2,051

 
$

 
$
35,527

Intersegment
156

 
2

 

 
158

 
(473
)
 

Income
 
 
 
 
 
 
 

 
 
 
 
Income/(Loss) before income taxes
604

 
(2
)
 

 
602

 

 
2,606

Total assets at June 30
100,335

 
9,121

 
(7,379
)
 
102,077

 
(3,244
)
 
168,086


 
Financial Services Sector
 
Total Company
 
Operating Segments
 
Reconciling Item
 
 
 
 
 
 
 
Ford
Credit
 
Other
Financial
Services
 
Elims
 
Total
 
Elims (a)
 
Total
First Half 2012
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
External customer
$
3,664

 
$
139

 
$

 
$
3,803

 
$

 
$
65,656

Intersegment
250

 
2

 

 
252

 
(947
)
 

Income
 
 
 
 
 
 
 

 
 
 
 
Income/(Loss) before income taxes
890

 
13

 

 
903

 

 
3,633

Total assets at June 30
99,901

 
8,126

 
(6,908
)
 
101,119

 
(1,831
)
 
181,236

 
 
 
 
 
 
 
 
 
 
 
 
First Half 2011
 

 
 

 
 

 
 

 
 

 
 

Revenues
 

 
 

 
 

 
 

 
 

 
 

External customer
$
3,962

 
$
165

 
$

 
$
4,127

 
$

 
$
68,641

Intersegment
288

 
3

 

 
291

 
(945
)
 

Income
 
 
 
 
 
 
 

 
 
 
 
Income/(Loss) before income taxes
1,317

 
(9
)
 

 
1,308

 

 
5,382

Total assets at June 30
100,335

 
9,121

 
(7,379
)
 
102,077

 
(3,244
)
 
168,086

__________
(a)
Includes intersector transactions and deferred tax netting.


46

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 19.  COMMITMENTS AND CONTINGENCIES

Commitments and contingencies consist primarily of guarantees and indemnifications, litigation and claims, and warranty.

Guarantees

At June 30, 2012 and December 31, 2011, the following guarantees and indemnifications were issued and outstanding:

Guarantees related to affiliates and third parties. We guarantee 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 2017, and guarantees will terminate on payment and/or cancellation of the 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 the third party amounts paid by us under the guarantee. However, our ability to enforce these rights is sometimes stayed until the guaranteed party is paid in full, and may be limited in the event of insolvency of the third party or other circumstances. The maximum potential payments under guarantees and the carrying value of recorded liabilities related to guarantees were as follows(in millions):
 
June 30,
2012
 
December 31,
2011
Maximum potential payments
$
416

 
$
444

Carrying value of recorded liabilities related to guarantees
27

 
31


We regularly review our performance risk under these guarantees, which has resulted in no changes to our initial valuations.

Indemnifications. 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; dealers, supplier, and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of terms of the contract or by a third-party claim. We also are party to numerous indemnifications which do not limit potential payment; therefore, we are unable to estimate a maximum amount of potential future payments that could result from claims made under these indemnities.

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; 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 compensatory, punitive, or antitrust or other treble damage claims in very large amounts, or demands for recall campaigns, 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.


47

Item 1. Financial Statements (Continued)                                                     

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 19.  COMMITMENTS AND CONTINGENCIES (Continued)

In evaluating for accrual and disclosure purposes matters filed against us, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, 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, and we do not believe that there is a reasonably possible outcome materially in excess of our accrual.

For the remaining matters, where our historical experience with similar matters is of more limited value (i.e., "non-pattern matters"), we evaluate matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of material loss in excess of any accrual. Our estimate of reasonably possible loss in excess of our accruals for all material matters currently reflects non-U.S. indirect tax matters, for which we estimate this aggregate risk to be a range of up to about $2.3 billion.

As noted, the litigation process is subject to many uncertainties, and the outcome of individual litigated 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.

Warranty

Included in warranty cost accruals are the costs for basic warranty coverages and field service actions (i.e., product recalls and owner notification programs) on products sold. These costs are estimates based primarily on historical warranty claim experience. Warranty accruals accounted for in Accrued liabilities and deferred revenue for the periods ended June 30 were as follows (in millions):
 
First Half
 
2012
 
2011
Beginning balance
$
3,915

 
$
3,855

Payments made during the period
(1,103
)
 
(1,557
)
Changes in accrual related to warranties issued during the period
1,084

 
1,026

Changes in accrual related to pre-existing warranties
43

 
298

Foreign currency translation and other
(13
)
 
97

Ending balance
$
3,926

 
$
3,719


Excluded from the table above are costs accrued for customer satisfaction actions.


48



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Ford Motor Company:

We have reviewed the accompanying consolidated balance sheet of Ford Motor Company and its subsidiaries as of June 30, 2012, and the related consolidated statements of operations, comprehensive income, and equity for the three-month and six-month periods ended June 30, 2012 and 2011 and the condensed consolidated statement of cash flows for the six-month periods ended June 30, 2012 and 2011. These interim financial statements are the responsibility of the Company's management.

The accompanying sector balance sheets and the related sector statements of operations and of cash flows are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the review procedures applied in the review of the basic financial statements.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2011, and the related consolidated statements of operations, equity, and cash flows for the year then ended (not presented herein), and in our report dated February 21, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of
December 31, 2011, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Detroit, Michigan
August 3, 2012

49



ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

TOTAL COMPANY

Our net income attributable to Ford Motor Company was $1 billion or $0.26 per share of Common and Class B Stock in the second quarter of 2012, a decrease of $1.4 billion from net income attributable to Ford Motor Company of $2.4 billion or $0.59 per share of Common and Class B Stock in the second quarter of 2011. Our net income attributable to Ford Motor Company was $2.4 billion or $0.61 per share of Common and Class B Stock in the first half of 2012, a decrease of $2.5 billion from net income attributable to Ford Motor Company of $4.9 billion or $1.20 per share of Common and Class B Stock in the first half of 2011. The decrease in net income is explained primarily by lower operating results and higher tax expense related to the tax valuation allowance release in the fourth quarter of 2011.

Total Company results are shown below:
 
Second Quarter
 
First Half
 
2012
 
Better/(Worse)
2011
 
2012
 
Better/(Worse)
2011
 
(Mils.)
 
(Mils.)
 
(Mils.)
 
(Mils.)
Income/(Loss)
 
 
 
 
 
 
 
Pre-tax results (excl. special items)
$
1,829

 
$
(1,049
)
 
$
4,122

 
$
(1,593
)
Special items
(234
)
 
38

 
(489
)
 
(156
)
Pre-tax results (incl. special items)
1,595

 
(1,011
)
 
3,633

 
(1,749
)
(Provision for)/Benefit from income taxes
(557
)
 
(351
)
 
(1,197
)
 
(771
)
Net income/(loss)
1,038

 
(1,362
)
 
2,436

 
(2,520
)
Less: Income/(Loss) attributable to noncontrolling interests
(2
)
 
(4
)
 

 
(7
)
Net income/(loss) attributable to Ford
$
1,040

 
$
(1,358
)
 
$
2,436

 
$
(2,513
)

Income/(Loss) before income taxes includes certain items ("special items") that we have grouped into "Personnel and Dealer-Related Items" and "Other Items" to provide useful information to investors about the nature of the special items. The first category includes items related to our efforts to match production capacity and cost structure to market demand and changing model mix and therefore helps investors track amounts related to those activities. The second category includes items that we do not generally consider to be indicative of our ongoing operating activities, and therefore allows investors analyzing our pre-tax results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results.

As detailed in Note 18 of the Notes to the Financial Statements, we allocate special items to a separate reconciling item, as opposed to allocating them among the operating segments and Other Automotive, reflecting the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources among the segments.
    
The following table details Automotive sector special items in each category:
 
Second Quarter
First Half
 
2012
 
2011
 
2012
 
2011
 
(Mils.)
 
(Mils.)
 
(Mils.)
 
(Mils.)
Personnel and Dealer-Related Items
 
 
 
 
 
 
 
Personnel-reduction actions
$
(51
)
 
$
(110
)
 
$
(290
)
 
$
(132
)
Mercury discontinuation/Other dealer actions
(13
)
 
(61
)
 
(29
)
 
(62
)
Job Security Benefits/Other
12

 
5

 
18

 
4

Total Personnel and Dealer-Related Items
(52
)
 
(166
)
 
(301
)
 
(190
)
Other Items
 

 
 

 
 

 
 

Loss on sale of two component businesses
(173
)
 

 
(173
)
 

Belgium pension settlement

 
(104
)
 

 
(104
)
Trust Preferred redemption

 

 

 
(60
)
Other
(9
)
 
(2
)
 
(15
)
 
21

Total Other Items
(182
)
 
(106
)

(188
)

(143
)
Total Special Items
$
(234
)
 
$
(272
)
 
$
(489
)
 
$
(333
)

50

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Discussion of Automotive sector, Financial Services sector, and total Company results of operations below is on a pre-tax basis and excludes special items unless otherwise specifically noted.

The chart below details second quarter 2012 pre-tax operating results by sector:
Second quarter 2012 total Company pre-tax profit of $1.8 billion was a decline of $1 billion compared with a year ago, with both sectors contributing to the decline.


51

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

AUTOMOTIVE SECTOR

In general, we measure year-over-year change in Automotive pre-tax operating profit for our total Automotive sector and reportable segments using the causal factors listed below, with revenue and cost variances calculated at present-year volume and mix and exchange:

Market Factors:
Volume and Mix - Primarily measures profit variance from changes in wholesale volumes (at prior-year average margin per unit) driven by changes in industry volume, market share, and dealer stocks, as well as the profit variance resulting from changes in product mix, including mix among vehicle lines and mix of trim levels and options within a vehicle line.
Net Pricing - Primarily measures profit variance driven by changes in wholesale prices to dealers and marketing incentive programs such as rebate programs, low-rate financing offers, and special lease offers.

Contribution Costs - Primarily measures profit variance driven by per-unit changes in cost categories that typically vary with volume, such as material costs (including commodity and component costs), warranty expense, and freight and duty costs.

Other Costs - Primarily measures profit variance driven by absolute change in cost categories that typically do not have a directly proportionate relationship to production volume. These include mainly structural costs, described below, as well as all other costs, which include items such as litigation costs and costs related to our after-market parts, accessories, and service business. Structural costs include the following cost categories:
Manufacturing and Engineering - consists primarily of costs for hourly and salaried manufacturing- and engineering-related personnel, plant overhead (such as utilities and taxes), new product launch expense, prototype materials, and outside engineering services.
Spending-Related - consists primarily of depreciation and amortization of our manufacturing and engineering assets, but also includes asset retirements and operating leases.
Advertising and Sales Promotions - includes costs for advertising, marketing programs, brand promotions, customer mailings and promotional events, and auto shows.
Administrative and Selling - includes primarily costs for salaried personnel and purchased services related to our staff activities and selling functions, as well as associated information technology costs.
Pension and OPEB - consists primarily of past service pension cost and other post-retirement employee benefit costs.

Exchange - Primarily measures profit variance driven by one or more of the following: (i) impact of gains or losses arising from transactions denominated in currencies other than the functional currency of the locations, (ii) effect of remeasuring income, assets, and liabilities of foreign subsidiaries using U.S. dollars as the functional currency, or (iii) results of our foreign currency hedging activities.

Net Interest and Other - Primarily measures profit variance driven by changes in our Automotive sector's centrally-managed net interest (primarily interest expense, interest income, and other adjustments) and related fair value market adjustments in our investment portfolio and marketable securities as well as other items not included in the causal factors defined above.


52

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Total Automotive. The charts below detail key metrics and the change in pre-tax operating results for the second quarter of 2012 compared with the second quarter of 2011 by causal factor. Automotive operating margin is defined as Automotive pre-tax operating results, excluding special items and Other Automotive, divided by Automotive revenue.
As shown above, second quarter 2012 wholesale volume and revenue decreased from a year ago, primarily explained by lower wholesales at Ford Europe. The decrease in pre-tax operating results and operating margin for the second quarter of 2012 was more than explained by lower results for Ford Europe, Ford South America, and Ford Asia Pacific Africa. As shown in the memo above, first half 2012 wholesale volume, revenue, pre-tax operating results, and operating margin were each lower than in 2011.

The decline of about $900 million in total Automotive pre-tax operating profit from a year ago is explained mainly by higher costs, primarily related to product and capacity launches this year, investment for future growth, and higher commodity costs including hedging effects. Market factors, including a reduction in dealer stocks, and exchange were also unfavorable.

The decrease of about $400 million in pre-tax operating profit for the second quarter of 2012 compared with the first quarter of 2012 was more than explained by higher costs.

53

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Total costs and expenses for our Automotive sector for second quarter 2012 and 2011 was $30 billion and $31.6 billion, respectively, a difference of $1.6 billion; for first half 2012 and 2011 these were $59 billion and $60.5 billion, respectively, a difference of $1.5 billion. An explanation of the changes, as reconciled to our statement of operations, is shown below (in billions):
 
2012 Better/(Worse) 2011
 
Second Quarter
 
First
Half
Explanation of change:
 
 
 
Volume and mix, exchange, and other
$
2.0

 
$
2.9

Contribution costs (a)
 

 
 

Commodity costs (incl. hedging)
(0.3
)
 
(0.5
)
Material costs excluding commodity costs
(0.1
)
 
(0.2
)
Warranty/Freight
0.1

 
0.1

Other costs (a)
 

 
 

Structural costs
(0.3
)
 
(0.6
)
Other

 
(0.2
)
Special items
0.2

 

Total
$
1.6

 
$
1.5

_________
(a)
Our key cost change elements are measured primarily at present-year exchange; in addition, costs that vary directly with volume, such as material, freight and warranty costs, are measured at present-year volume and mix.  Excludes special items.

Results by Automotive Segment. Details by segment of Income/(Loss) before income taxes are shown below for the second quarter of 2012.

Second quarter 2012 total Automotive pre-tax operating profit of $1.4 billion is more than explained by Ford North America. The loss in Other Automotive mainly reflects net interest expense and an unfavorable fair market value adjustment, primarily on our investment in Mazda.

We expect full-year 2012 net interest expense to be between $500 million and $550 million.


54

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Ford North America Segment. The charts below detail key metrics and the change in pre-tax operating results for second quarter 2012 compared with second quarter 2011 by causal factor.
As shown above, second quarter 2012 wholesale volume and revenue were roughly the same as a year ago, while pre-tax operating profit and operating margin were higher. For first half 2012, wholesale volume, revenue, pre-tax operating profit, and operating margin were all higher than 2011. Pre-tax operating profit of $2 billion for the second quarter of 2012 was up $100 million from a year ago, explained by higher net pricing, improved contribution costs, and other factors, offset partially by higher structural costs for growth and unfavorable volume and mix, including an adverse change in U.S. dealer stocks. The decrease of $100 million in pre-tax operating profit for the second quarter of 2012 compared with the first quarter of 2012 was more than explained by higher costs, with higher volume a partial offset.

Our total U.S. market share in the second quarter, at 15.6%, was down 1.7 percentage points from the same period last year. This is explained by lower share in both retail and fleet segments, with lower total share primarily reflecting the impact of discontinued products such as Ranger and Crown Victoria, new competitive entrants in the small-car segment, and Japanese competitors rebuilding dealer stocks and sales after the impact of the tsunami in second quarter 2011.

Our outlook for Ford North America is unchanged. We expect significantly higher full-year pre-tax profit and operating margin compared with 2011 as consumers continue to respond to our strong product line-up, including the recently launched all-new Escape and the all-new Fusion launching later in the year. We also remain committed to maintaining our competitive cost structure as we grow our business.

55

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Ford South America Segment. The charts below detail key metrics and the change in pre-tax operating results for second quarter 2012 compared with second quarter 2011 by causal factor.
As shown above, second quarter 2012 wholesale volume and revenue were lower than a year ago, decreasing by 12% and 21% respectively. Exchange was a contributing factor that adversely affected net revenue. Pre-tax operating profit and operating margin, while slightly positive, each declined substantially from a year ago. For first half 2012, wholesale volume, revenue, pre-tax operating profit, and operating margin were each lower than a year ago.

Ford South America had a pre-tax operating profit of $5 million for the second quarter of 2012, compared with a profit of $267 million a year ago. The decrease is explained by lower volume, higher costs, and unfavorable exchange. Although net pricing was higher, it was constrained compared with recent periods by a more intense competitive environment.

The decrease in pre-tax operating profit for the second quarter of 2012 compared with first quarter 2012 was more than explained by higher costs, mainly structural costs related to developing and launching new products in the region.

Although we continue to expect Ford South America to be profitable for the full year, we now expect the level to be substantially lower than 2011. This reflects increased competitive pressures, weakening currencies, and changes in government policies affecting areas such as trade and access to foreign currency. We are continuing to work on actions to strengthen our competitiveness in this changing environment, looking at all areas of the business to improve our results. These actions include fully leveraging our One Ford plan, including the introduction of an all-new lineup of global products over the next two years, starting with the launch of Ranger, EcoSport, and Fusion in the second half of 2012.

56

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Ford Europe Segment. The charts below detail key metrics and the change in pre-tax operating results for second quarter 2012 compared with second quarter 2011 by causal factor.
As shown above, second quarter 2012 wholesale volume and revenue declined by 15% and 21%, respectively, compared with the prior year, reflecting primarily lower industry sales and market share, along with production adjustments to maintain dealer stocks at appropriate levels. Exchange was also a contributing factor adversely affecting net revenue. Pre-tax operating profit and operating margin moved from a profit and positive margin in 2011 to a loss and negative margin this year. For first half 2012, wholesale volume, revenue, pre-tax operating profit, and operating margin declined compared with 2011.

Ford Europe had a pre-tax operating loss of $404 million for the second quarter, a decline of $580 million from a year ago. The decline in results mostly reflects unfavorable market factors. In particular, volume was unfavorable due to lower industry, share, and associated dealer stock changes. Net pricing was lower as the industry responded to excess capacity with higher incentives.

The decrease of $255 million in pre-tax operating profits for the second quarter of 2012 compared with the first quarter of 2012 reflects unfavorable market factors and higher costs.

Given the deteriorating external environment in Europe, we now expect our full-year loss for the region to exceed $1 billion. The magnitude of the loss will be affected by a variety of factors, including the overall economic environment, competitive actions, and our response to these developments. See "Outlook" below for additional discussion.

57

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Ford Asia Pacific Africa Segment. The charts below detail key metrics and the change in pre-tax operating results for second quarter 2012 compared with second quarter 2011 by causal factor.
As shown above, second quarter 2012 wholesale volume and revenue improved 11% and 10%, respectively, compared with a year ago. Pre-tax operating results and operating margin for the second quarter of 2012 were both lower than a year ago. For the first half of 2012, wholesale volume was about equal to 2011, while revenue was higher. Pre-tax operating results and operating margin for the first half of 2012 both declined compared with a year ago.

Ford Asia Pacific Africa had a pre-tax operating loss of $66 million for the second quarter of 2012, compared with a slight profit a year ago. Market factors were strongly positive, but were more than offset by higher costs associated with new products and investments to support higher volumes and future growth, as well as other factors.

The improvement in pre-tax operating results in the second quarter of 2012 compared with the first quarter of 2012 was more than explained by higher volume.

Although we incurred a first half 2012 pre-tax operating loss for Ford Asia Pacific Africa, we expect results to improve in the second half mainly due to favorable volume and mix as we benefit from added capacity in China and Thailand and the new Focus and all-new Ranger.

58

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FINANCIAL SERVICES SECTOR

As shown in the total Company discussion above, we present our Financial Services sector results in two segments, Ford Credit and Other Financial Services. Ford Credit, in turn, has two segments, North America and International.

Ford Credit. The chart below details the decrease in pre-tax operating profit by causal factor:

The decline of $166 million in pre-tax profits is more than explained by fewer lease terminations, which resulted in fewer vehicles sold at a gain, and lower financing margin; the decline in financing margin is primarily explained by the run-off of higher yielding assets originated in prior years.

We continue to expect full-year 2012 pre-tax profits of about $1.5 billion at Ford Credit, with distributions for full year of between $500 million and $1 billion. Ford Credit will continue to assess future distributions based on available liquidity and managed leverage objectives. Ford Credit anticipates managed receivables to be in the range of $110 billion to $120 billion by mid-decade, and to be in the range of $85 billion to $90 billion at year-end 2012. It also projects managed leverage of 8-9:1 for the foreseeable future, which is a decrease from the prior target of 10-11:1 and is consistent with its goal of achieving and maintaining a strong investment grade balance sheet. Lower leverage has resulted in a change in its mid-decade outlook for return on equity from low double digits to high single digits.


59

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Ford Credit's receivables, including finance receivables and operating leases at June 30, 2012 and December 31, 2011 were as follows (in billions):
 
June 30,
2012
 
December 31, 2011
Receivables
 
 
 
Finance receivables – North America Segment
 
 
 
Consumer
 
 
 
Retail installment and direct financing leases
$
38.4

 
$
38.4

Non-Consumer
 
 
 

Wholesale
15.5

 
15.5

Dealer loan and other
2.3

 
2.1

Total North America Segment – finance receivables (a)
56.2

 
56.0

Finance receivables – International Segment
 
 
 

Consumer
 
 
 

Retail installment and direct financing leases
8.8

 
9.1

Non-Consumer
 
 
 

Wholesale
7.5

 
8.5

Dealer loan and other
0.5

 
0.4

Total International Segment – finance receivables (a)
16.8

 
18.0

Unearned interest supplements
(1.6
)
 
(1.6
)
Allowance for credit losses
(0.4
)
 
(0.5
)
Finance receivables, net
71.0

 
71.9

Net investment in operating leases (a)
12.9

 
11.1

Total receivables (b)
$
83.9

 
$
83.0

Memo:
 
 
 

Total managed receivables (c)
$
85.5

 
$
84.6


(a)
At June 30, 2012 and December 31, 2011, includes consumer receivables before allowance for credit losses of $31 billion and $36 billion, respectively, and non-consumer receivables before allowance for credit losses of $19.5 billion and $19.8 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. In addition, at June 30, 2012 and December 31, 2011, includes net investment in operating leases before allowance for credit losses of $4.2 billion and $6.4 billion, respectively, that have been included in securitization transactions but continue to be reported in our financial statements. The receivables are available only for payment of the debt and other obligations issued or arising in the securitization transactions; they are not available to pay Ford Credit's other obligations or the claims of its other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions.
(b)
Includes allowance for credit losses of $406 million and $534 million at June 30, 2012 and December 31, 2011, respectively.
(c)
Excludes unearned interest supplements related to finance receivables.

Receivables at June 30, 2012 increased from year-end 2011, primarily due to higher leasing in North America.

60

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Losses. The charts below detail quarterly trends of charge-offs (credit losses, net of recoveries), loss-to-receivables ratios (charge-offs on an annualized basis divided by the average amount of receivables outstanding for the period, excluding the reserves and unearned interest supplements related to finance receivables), credit loss reserves, and Ford Credit's credit loss reserves as a percentage of end-of-period ("EOP") receivables:

Ford Credit's second quarter credit losses continued at historically low levels and have improved in all geographic regions from the same period a year ago.

Charge-offs in the second quarter were $17 million, down $32 million from the same period a year ago reflecting lower repossessions in the United States. Charge-offs were down $18 million from the first quarter of 2012, reflecting the same factor.

The credit loss reserves were $406 million, down $267 million from a year ago and down $73 million from the first quarter of 2012, reflecting the decrease in charge-offs.

In purchasing retail finance and lease contracts, Ford Credit uses a proprietary scoring system that classifies contracts using several factors, such as credit bureau information, credit bureau scores (e.g., FICO score), customer characteristics, and contract characteristics. In addition to Ford Credit's proprietary scoring system, it considers other factors, such as employment history, financial stability, and capacity to pay. At June 30, 2012 and December 31, 2011, Ford Credit classified between 5% - 6% of the outstanding U.S. retail finance and lease contracts in its portfolio as high risk at contract inception.



61

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Residual Risk. Ford Credit is exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to Ford Credit. Residual risk is the possibility that the amount Ford Credit obtains from returned vehicles will be less than its estimate of the expected residual value for the vehicle. Ford Credit estimates the expected residual value by evaluating recent auction values, return volumes for its leased vehicles, industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data.

The following chart shows return volumes and auction values at constant second quarter 2012 vehicle mix for vehicles returned in the respective periods. Ford Credit's U.S. Ford and Lincoln operating lease portfolio accounted for about 85% of its total investment in operating leases at June 30, 2012.
Lease return volumes in the second quarter of 2012 were 40% lower than the same period last year, primarily reflecting the lower lease placements in 2009. The second quarter 2012 lease return rate was 59%, up four percentage points compared with the same period last year, reflecting a higher mix of 24-month contracts, which typically have higher return rates than longer term contracts.

In the second quarter of 2012, Ford Credit's auction values for 36-month vehicles declined by $325 per unit from the same period last year. Compared with the first quarter of 2012, Ford Credit's 24-month and 36-month auction value performance was mixed.

Ford Credit's worldwide net investment in operating leases was $12.9 billion at the end of the second quarter of 2012, up from $11.1 billion at year-end 2011.





62

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES

Automotive Sector

Our Automotive liquidity strategy includes ensuring that we have sufficient liquidity available with a high degree of certainty throughout the business cycle by generating cash from operations and maintaining access to other sources of funding. For a discussion of risks to our liquidity, see "Item 1A. Risk Factors" in our 2011 Form 10-K Report, as well as Note 19 of the Notes to the Financial Statements regarding commitments and contingencies that could impact our liquidity.

Gross Cash. Automotive gross cash includes cash and cash equivalents and marketable securities, net of any securities-in-transit. Gross cash is detailed below as of the dates shown (in billions):
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
June 30,
2011
Cash and cash equivalents
$
7.2

 
$
7.3

 
$
7.9

 
$
9.8

Marketable securities
16.6

 
15.8

 
15.0

 
12.2

Total cash, marketable securities and loaned securities
23.8

 
23.1

 
22.9

 
22.0

Securities-in-transit (a)
(0.1
)
 
(0.1
)
 

 

Gross cash
$
23.7

 
$
23.0

 
$
22.9

 
$
22.0

__________
(a)
The purchase or sale of marketable securities for which the cash settlement was not made by period-end and for which there was a payable or receivable recorded on the balance sheet at period-end.

Our cash, cash equivalents, and marketable securities are held primarily in highly liquid investments, which provide for anticipated and unanticipated cash needs. Our cash, cash equivalents, and marketable securities primarily include U.S. Department of Treasury obligations, federal agency securities, bank time deposits with investment-grade institutions, corporate investment-grade securities, commercial paper rated A-1/P-1 or higher, and debt obligations of a select group of non-U.S. governments, non-U.S. governmental agencies, and supranational institutions. The average maturity of these investments ranges from 90 days to up to one year, and is adjusted based on market conditions and liquidity needs. We monitor our cash levels and average maturity on a daily basis. Within our Automotive gross cash portfolio, we currently do not hold investments in government obligations of Greece, Ireland, Italy, Portugal, or Spain, nor did we hold any at June 30, 2012.

In managing our business, we classify changes in Automotive gross cash into operating-related and other items (which includes the impact of certain special items, contributions to funded pension plans, certain tax-related transactions, acquisitions and divestitures, capital transactions with the Financial Services sector, dividends paid to shareholders, and other - primarily financing-related). Our key liquidity metrics are operating-related cash flow (which best represents the ability of our Automotive operations to generate cash), Automotive gross cash, and Automotive liquidity. Automotive gross cash and liquidity as of the dates shown were as follows (in billions):
 
June 30,
2012
 
December 31,
2011
Gross cash
$
23.7

 
$
22.9

Available credit lines
 

 
 

Secured credit facility, unutilized portion
9.5

 
8.8

Local lines available to foreign affiliates, unutilized portion
0.7

 
0.7

Automotive liquidity
$
33.9

 
$
32.4


We believe the cash flow analysis reflected in the table below is useful to investors because it includes in operating-related cash flow elements that we consider to be related to our Automotive operating activities (e.g., capital spending) and excludes cash flow elements that we do not consider to be related to the ability of our operations to generate cash. This differs from a GAAP cash flow statement and differs from Net cash provided by/(used in) operating activities, the most directly comparable GAAP financial measure.


63

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Changes in Automotive gross cash are summarized below (in billions):
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Gross cash at end of period
$
23.7

 
$
22.0

 
$
23.7

 
$
22.0

Gross cash at beginning of period
23.0

 
21.3

 
22.9

 
20.5

Total change in gross cash
$
0.7

 
$
0.7

 
$
0.8

 
$
1.5

 
 
 
 
 
 
 
 
Automotive income/(loss) before income taxes (excluding special items)
$
1.4

 
$
2.3

 
$
3.2

 
$
4.4

Capital expenditures
(1.2
)
 
(1.1
)
 
(2.3
)
 
(2.0
)
Depreciation and special tools amortization
0.9

 
0.9

 
1.8

 
1.8

Changes in working capital (a)
(0.6
)
 

 
(0.7
)
 
1.5

Other/Timing differences (b)
0.3

 
0.2

 
(0.3
)
 
(1.2
)
Total operating-related cash flows
0.8

 
2.3

 
1.7

 
4.5

 
 
 
 
 
 
 
 
Cash impact of personnel-reduction programs accrual
(0.2
)
 
(0.1
)
 
(0.3
)
 
(0.1
)
Net receipts from Financial Services sector (c)
0.1

 
1.0

 
0.4

 
2.3

Other
0.6

 
0.4

 
0.4

 
0.5

Cash flow before other actions
1.3

 
3.6

 
2.2

 
7.2

 
 
 
 
 
 
 
 
Net proceeds from/(Payments on) Automotive sector debt
0.4

 
(2.6
)
 
0.9

 
(5.1
)
Contributions to funded pension plans
(0.8
)
 
(0.5
)
 
(1.9
)
 
(0.8
)
Dividends/Other
(0.2
)
 
0.2

 
(0.4
)
 
0.2

Total change in gross cash
$
0.7

 
$
0.7

 
$
0.8

 
$
1.5

__________
(a)
Working capital comprised of changes in receivables, inventory and trade payables.
(b)
Primarily expense and payment timing differences for items such as pension and OPEB, compensation, marketing, and warranty, as well as additional factors, such as the impact of tax payments.
(c)
Primarily distributions and tax payments received from Ford Credit.

With respect to "Changes in working capital," in general we carry relatively low trade receivables compared to our trade payables because the majority of our Automotive wholesales are financed (primarily by Ford Credit) immediately upon sale of vehicles to dealers, which generally occurs at the time the vehicles are gate-released shortly after being produced. In addition, our inventories are lean because we build to order, not for inventory. In contrast, our Automotive trade payables are based primarily on industry-standard production supplier payment terms generally ranging between 30 days to 45 days. As a result, our cash flow tends to improve as wholesale volumes increase, but can deteriorate significantly when wholesale volumes drop sharply. In addition, these working capital balances generally are subject to seasonal changes that can impact cash flow. For example, we typically experience cash flow timing differences associated with inventories and payables due to our annual summer and December shutdown periods, when production, and therefore inventories and wholesale volumes, are usually at their lowest levels, while payables continue to come due and be paid. The net impact of this typically results in cash outflows from changes in our working capital balances during these shutdown periods.
  

64

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Shown below is a reconciliation between financial statement Net cash provided by/(used in) operating activities and operating-related cash flows (calculated as shown in the table above), as of the dates shown (in billions):
 
Second Quarter
 
First Half
 
2012
 
2011
 
2012
 
2011
Net cash provided by/(used in) by operating activities
$
1.8

 
$
2.7

 
$
2.7

 
$
5.7

Items included in operating-related cash flows
 

 
 
 
 

 
 
Capital expenditures
(1.2
)
 
(1.1
)
 
(2.3
)
 
(2.0
)
Proceeds from the exercise of stock options

 

 

 
0.1

Net cash flows from non-designated derivatives
(0.2
)
 
0.1

 
(0.3
)
 
0.1

Items not included in operating-related cash flows
 

 
 

 
 

 
 

Cash impact of Job Security Benefits and personnel-reduction actions
0.2

 
0.1

 
0.3

 
0.1

Contributions to funded pension plans
0.8

 
0.5

 
1.9

 
0.8

Tax refunds, tax payments, and tax receipts from affiliates

 

 
(0.1
)
 
(0.4
)
Settlement of outstanding obligation with affiliates
(0.3
)
 

 
(0.3
)
 

Other
(0.3
)
 

 
(0.2
)
 
0.1

Operating-related cash flows
$
0.8

 
$
2.3

 
$
1.7

 
$
4.5


Credit Agreement. Lenders have commitments under our Credit Agreement totaling $9,255 million in a revolving facility that will mature on November 30, 2015, an increase of $255 million from March 31, 2012, and commitments totaling an additional $307 million in a revolving facility that will mature on November 30, 2013. Our Credit Agreement is free of material adverse change clauses, restrictive financial covenants (for example, debt-to-equity limitations and minimum net worth requirements) and credit rating triggers that could limit our ability to obtain funding. On May 22, 2012, the collateral securing our Credit Agreement was automatically released upon our unsecured, long-term debt being upgraded to investment grade by Fitch and Moody's.

At June 30, 2012, the utilized portion of the revolving credit facilities was $93 million, representing amounts utilized as letters of credit. Less than 1% of the commitments in the revolving credit facilities are from financial institutions that are based in Greece, Ireland, Italy, Portugal, and Spain.

U.S. Department of Energy ("DOE") Advanced Technology Vehicle Manufacturer ("ATVM") Incentive Program. In the second quarter of 2012, we drew $503 million and, on August 1, 2012, we drew an additional $137 million (representing the remaining available funds) under the Loan Arrangement and Reimbursement Agreement with the DOE under the ATVM Incentive Program. As a result, at June 30, 2012, an aggregate of $5.8 billion was outstanding, and, at August 1, 2012, an aggregate of $5.9 billion was outstanding under the DOE loan facility, which is now fully drawn. The proceeds of the loan have been used to finance certain costs for fuel efficient, advanced technology vehicles. The principal amount of the ATVM loan bears interest at a blended rate based on the U.S. Treasury yield curve at the time of each draw and is repayable in equal quarterly installments commencing September 15, 2012 and ending June 15, 2022.
 
Export-Import Bank of the United States ("Ex-Im") and Private Export Funding Corporation ("PEFCO") Secured Revolving Loan. On June 15, 2012, we entered into a new $300 million secured revolving credit facility with PEFCO that is guaranteed by Ex-Im to replace the previously existing facility in the amount of $250 million. At June 30, 2012, this working capital facility, which supports vehicle exports from the United States, was fully drawn. The new facility will renew annually until June 15, 2015, provided that no payment or bankruptcy default exists and Ex-Im continues to have a perfected security interest in the collateral, which consists of vehicles in transit in the United States to be exported to Canada, Mexico, and other select markets.

Other Automotive Credit Facilities. At June 30, 2012, we had $786 million of local credit facilities available to non-U.S. Automotive affiliates, of which $96 million has been utilized. Of the $786 million of committed credit facilities, $50 million expires in 2012, $181 million expires in 2013, $196 million expires in 2014, and $319 million expires in 2015 and $40 million thereafter.


65

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Net Cash. Our Automotive sector net cash calculation as of the dates shown were as follows (in billions):
 
June 30,
2012
 
December 31,
2011
Gross cash
$
23.7

 
$
22.9

Less:
 

 
 

Long-term debt
12.9

 
12.1

Debt payable within one year
1.3

 
1.0

Total debt
14.2

 
13.1

Net cash
$
9.5

 
$
9.8


Total debt at June 30, 2012 increased by about $1.1 billion from December 31, 2011, primarily reflecting the additional drawdowns of low-cost loans for advanced technology vehicle development and our renminbi-denominated debt issuance in Hong Kong.
 
Liquidity Sufficiency. One of the four key priorities of our One Ford plan is to finance our plan and strengthen our balance sheet, while at the same time having resources available to grow our business. The actions described above are consistent with this priority. Based on our planning assumptions, we believe that we have sufficient liquidity and capital resources to continue to invest in new products that customers want and value, grow our business, pay our debts and obligations as and when they come due, pay a sustainable dividend, and provide a cushion within an uncertain global economic environment. We will continue to look for opportunities to strengthen our balance sheet, primarily by working to ensure our underlying business generates positive Automotive operating-related cash flow, even as we continue to invest in the growth of our business.


66

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Financial Services Sector

Ford Credit

Funding Overview. Ford Credit's funding strategy remains focused on diversification and it plans to continue accessing a variety of markets, channels, and investors. Ford Credit's liquidity remains strong, and it maintains cash balances and committed capacity that meet its business and funding requirements in all global market conditions.

Ford Credit ended the quarter with $21.6 billion of liquidity and $32.9 billion of committed capacity, compared with $17.1 billion of liquidity and $32.6 billion of committed capacity at December 31, 2011. It renewed about $10 billion of committed capacity in the second quarter.

At the end of the second quarter, managed receivables were $86 billion. Ford Credit ended the quarter with $11 billion in cash, and securitized funding was 48% of managed receivables, compared with 55% at year-end 2011. This reflects the mandatory exchange of $2.5 billion of asset-backed FUEL Notes for unsecured notes of Ford Credit, which was triggered by the upgrade to investment grade of Ford Credit's long-term, unsecured debt by two credit rating agencies during the second quarter of 2012.

Ford Credit is now projecting year-end 2012 managed receivables in the range of $85 billion to $90 billion, and securitized funding is expected to represent about 49% of total managed receivables. Ford Credit has reduced the upper end of the range to reflect uncertainty in Europe. It is Ford Credit's expectation that securitized funding as a percent of managed receivables will decline going forward.

Public Term Funding Plan. The following table illustrates Ford Credit's planned issuances for full-year 2012, and its public term funding issuances through August 2, 2012, and for full-years 2011 and 2010 (in billions):

 
Term Funding Plan
 
2012
 
 
 
 
 
Full-Year
Forecast
 
Through
August 2
 

Full-Year 2011
 

Full-Year 2010
 
 
 
 
 
 
 
 
Unsecured
$ 8-10
 
$
6

 
$
8

 
$
6

Securitizations (a)
12-14
 
9

 
11

 
11

Total
$ 20-24
 
$
15

 
$
19

 
$
17

__________
(a)
Includes Rule 144A offerings such as FUEL Notes issuance in 2011.

Ford Credit is on track to achieve its 2012 funding plan. Through August 2, 2012, Ford Credit completed $15 billion of public term funding in the United States, Canada, and Europe, including about $6 billion of unsecured debt, of which about $350 million was issued under the Ford Credit U.S. Retail Notes program. This reflects over half of its public term funding needs for the year.

For 2012, Ford Credit projects full-year public term funding in the range of $20 billion to $24 billion, consisting of $8 billion to $10 billion of unsecured debt and $12 billion to $14 billion of public securitizations. The public securitization range is up about $2 billion from the first quarter, reflecting a shift from private securitizations to public securitizations as a result of the success it had in the public markets.



67

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity. The following table illustrates Ford Credit's liquidity programs and utilization (in billions):

 
June 30,
2012
 
December 31,
2011
Liquidity Sources (a)
 
 
 
Cash (b)
$
11.1

 
$
12.1

Unsecured credit facilities
0.7

 
0.7

FCAR bank lines
6.6

 
7.9

Conduit / Bank Asset-Backed Securitizations ("ABS")
25.6

 
24.0

Total liquidity sources
$
44.0

 
$
44.7

 
 
 
 
Utilization of Liquidity
 
 
 
Securitization cash (c)
$
(3.4
)
 
$
(3.7
)
Unsecured credit facilities

 
(0.2
)
FCAR bank lines
(5.6
)
 
(6.8
)
Conduit / Bank ABS
(9.4
)
 
(14.5
)
Total utilization of liquidity
(18.4
)
 
(25.2
)
Gross liquidity
25.6

 
19.5

Capacity in excess of eligible receivables
(4.0
)
 
(2.4
)
Liquidity available for use
$
21.6

 
$
17.1

__________
(a)
FCAR and conduits subject to availability of sufficient assets and ability to obtain derivatives to manage interest rate risk; FCAR commercial paper must be supported by bank lines equal to at least 100% of the principal amount; conduits include committed securitization programs.
(b)
Cash, cash equivalents, and marketable securities (excludes marketable securities related to insurance activities).
(c)
Securitization cash is to be used only to support on-balance sheet securitization transactions.

At June 30, 2012 Ford Credit had $44 billion of committed capacity and cash diversified across a variety of markets and platforms. The utilization of its liquidity totaled $18.4 billion at quarter-end, compared to $25.2 billion at year end. The reduction of $6.8 billion from year end primarily reflects lower usage of its private conduits. Ford Credit ended the quarter with gross liquidity of $25.6 billion, which includes about $4 billion in capacity in excess of eligible receivables, providing a funding source for future originations and flexibility to transfer capacity among markets and asset classes where most needed.

Liquidity available for use remained strong at $21.6 billion at the end of the quarter, compared with $17.1 billion at year-end 2011. The increase of $4.5 billion from year end primarily reflects lower conduit utilization and the FUEL Notes exchange. Ford Credit expects liquidity to reduce by year end, closer to the first quarter level of $18.1 billion.

Cash, Cash Equivalents, and Marketable Securities.  At June 30, 2012, Ford Credit's cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) totaled $11.1 billion, compared with $12.1 billion at year-end 2011.  In the normal course of its funding activities, Ford Credit may generate more proceeds than are required for its immediate funding needs.  These excess amounts are maintained primarily as highly liquid investments, which provide liquidity for its short-term funding needs and give it flexibility in the use of its other funding programs.  Ford Credit's cash, cash equivalents, and marketable securities are held primarily in highly liquid investments, which provide for anticipated and unanticipated cash needs.  Ford Credit's cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) primarily include U.S. Department of Treasury obligations, federal agency securities, bank time deposits with investment-grade institutions and non-U.S. central banks, corporate investment-grade securities, commercial paper rated A-1/P-1 or higher, debt obligations of a select group of non-U.S. governments, non-U.S. government agencies, supranational institutions and money market funds that carry the highest possible ratings.  Ford Credit currently does not hold cash, cash equivalents, or marketable securities consisting of investments in government obligations of Greece, Ireland, Italy, Portugal, or Spain, nor did it hold any at June 30, 2012. The average maturity of these investments ranges from 90 days to up to one year, and is adjusted based on market conditions and liquidity needs.  Ford Credit monitors its cash levels and average maturity on a daily basis.  Cash, cash equivalents, and marketable securities include amounts to be used only to support Ford Credit's securitization transactions of $3.4 billion and $3.7 billion at June 30, 2012 and December 31, 2011, respectively.

Ford Credit's substantial liquidity and cash balance have provided the opportunity to selectively call and repurchase its outstanding unsecured and asset-backed debt. Ford Credit repurchased unsecured and asset-backed debt of $165 million and $215 million in the second quarter and first half of 2012, respectively.
 

68

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Committed Liquidity Programs. Ford Credit and its subsidiaries, including Ford Credit Europe ("FCE"), have entered into agreements with a number of bank-sponsored asset-backed commercial paper conduits ("conduits") and other financial institutions. Such counterparties are contractually committed, at Ford Credit's option, to purchase from it eligible retail or wholesale assets or to purchase or make advances under asset-backed securities backed by retail, lease, or wholesale assets for proceeds of up to $25.6 billion ($12.9 billion of retail, $8.5 billion of wholesale, and $4.2 billion of lease assets) at June 30, 2012, of which about $7.1 billion are commitments to FCE. These committed liquidity programs have varying maturity dates, with $22.8 billion (of which $5.8 billion relates to FCE commitments), having maturities within the next twelve months and the remaining balance having maturities between September 2013 and August 2014. Ford Credit plans to achieve committed capacity renewals to protect its global funding needs, optimize capacity utilization and maintain sufficient liquidity.
 
Ford Credit's ability to obtain funding under these programs is subject to having a sufficient amount of assets eligible for these programs as well as its ability to obtain interest rate hedging arrangements for certain securitization transactions. Ford Credit's capacity in excess of eligible receivables protects it against the risk of lower than planned renewal rates. At June 30, 2012, $9.4 billion of these commitments were in use. These programs are free of material adverse change clauses, restrictive financial covenants (for example, debt-to-equity limitations and minimum net worth requirements), and generally, credit rating triggers that could limit its ability to obtain funding. However, the unused portion of these commitments may be terminated if the performance of the underlying assets deteriorates beyond specified levels. Based on Ford Credit's experience and knowledge as servicer of the related assets, it does not expect any of these programs to be terminated due to such events.
 
Credit Facilities. At June 30, 2012, Ford Credit and its majority-owned subsidiaries had $721 million of contractually-committed unsecured credit facilities with financial institutions, including FCE's £440 million (equivalent to $690 million at June 30, 2012) credit facility (the "FCE Credit Agreement") which matures in 2014. During the second quarter of 2012, FCE fully repaid the amount outstanding under the FCE Credit Agreement and at June 30, 2012, Ford Credit and its majority-owned subsidiaries had $721 million available for use. The FCE Credit Agreement contains certain covenants, including an obligation for FCE to maintain its ratio of regulatory capital to risk weighted assets at no less than the applicable regulatory minimum, and for the support agreement between FCE and Ford Credit to remain in full force and effect (and enforced by FCE to ensure that its net worth is maintained at no less than $500 million). In addition to customary payment, representation, bankruptcy, and judgment defaults, the FCE Credit Agreement contains cross-payment and cross-acceleration defaults with respect to other debt. At June 30, 2012, FCE had £55 million (equivalent to about $86 million) of commitments from financial institutions in Italy and Spain. There were no commitments from financial institutions in Greece, Ireland, or Portugal.

In addition, at July 1, 2012, Ford Credit had about $6.6 billion of contractually-committed liquidity facilities provided by banks to support its FCAR program, of which $300 million expires in 2012, $3.3 billion expires in 2013, and $3 billion expires in 2014. Utilization of these facilities is subject to conditions specific to the FCAR program and Ford Credit having a sufficient amount of eligible retail assets for securitization. The FCAR program must be supported by liquidity facilities equal to at least 100% of its outstanding balance. At July 1, 2012, $6.6 billion of FCAR's bank liquidity facilities were available to support FCAR's asset-backed commercial paper, subordinated debt, or FCAR's purchase of its asset-backed securities. At July 1, 2012, the outstanding commercial paper balance for the FCAR program was $5.6 billion.


69

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Leverage. Ford Credit uses leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for retail, wholesale, and lease financing, and assessing its capital structure. Ford Credit refers to its shareholder's interest as equity.
 
The following table shows the calculation of Ford Credit's financial statement leverage (in billions, except for ratios):
 
June 30,
2012
 
December 31, 2011
Total debt
$
83.9

 
$
84.7

Equity
9.1

 
8.9

Financial statement leverage (to 1)
9.2

 
9.5


The following table shows the calculation of Ford Credit's managed leverage (in billions, except for ratios):
 
June 30,
2012
 
December 31, 2011
Total debt
$
83.9

 
$
84.7

Adjustments for cash, cash equivalents, and marketable securities (a)
(11.1
)
 
(12.1
)
Adjustments for derivative accounting (b)
(0.8
)
 
(0.7
)
Total adjusted debt
$
72.0

 
$
71.9

 
 
 
 
Equity
$
9.1

 
$
8.9

Adjustments for derivative accounting (b)
(0.2
)
 
(0.2
)
Total adjusted equity
$
8.9

 
$
8.7

Managed leverage (to 1) (c)
8.1

 
8.3

__________
(a)
Excludes marketable securities related to insurance activities.
(b)
Primarily related to market valuation adjustments to derivatives due to movements in interest rates.  Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings.
(c)
Equals total adjusted debt over total adjusted equity.

Ford Credit plans its managed leverage by considering prevailing market conditions and the risk characteristics of its business. At June 30, 2012, Ford Credit's managed leverage was 8.1 to 1 compared with 8.3 to 1 at December 31, 2011, significantly below the threshold of 11.5 to 1 set forth in the Amended and Restated Support Agreement with us. Through June 30, 2012, Ford Credit paid $300 million in distributions to its parent, including $200 million and $100 million in the first quarter and second quarter, respectively.




70

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Total Company

Equity/(Deficit). At June 30, 2012, Total equity/(deficit) attributable to Ford Motor Company was $17 billion, an increase of $2 billion compared with December 31, 2011. The increase reflects favorable changes in Retained earnings, primarily related to first half 2012 net income attributable to Ford of $2.4 billion, offset partially by cash dividends declared of $191 million, and unfavorable changes in Accumulated other comprehensive income/(loss) of $194 million.

Credit Ratings. Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations ("NRSROs") by the U.S. Securities and Exchange Commission:

DBRS Limited ("DBRS");
Fitch, Inc. ("Fitch");
Moody's Investors Service, Inc. ("Moody's"); and
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P").

In several markets, locally-recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with a corporate entity or particular securities issued by that entity. Rating agencies' ratings of us are based on information provided by us and other sources. Credit ratings are not recommendations to buy, sell, or hold securities, and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency. Lower credit ratings generally result in higher borrowing costs and reduced access to capital markets.

The following ratings actions have been taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012:

On May 22, 2012, Moody's upgraded Ford's long-term senior unsecured debt to Baa3 from Ba2. Moody's also upgraded Ford Credit's long-term senior unsecured rating to Baa3 from Ba1. The outlook is stable.

The following chart summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:
 
NRSRO RATINGS
 
Ford
 
Ford Credit
 
Issuer Default/
Corporate/
Issuer Rating
 
Long-Term
Senior
Unsecured
 
Outlook /
Trend
 
Long-Term
Senior
Unsecured
 
Short-Term
Unsecured
 
Outlook /
Trend
DBRS
BB
 
B (high)
 
Positive *
 
BB (high)
 
R-4
 
Positive *
Fitch
BBB-
 
BBB-
 
Stable
 
BBB-
 
F3
 
Stable
Moody's
N/A
 
Baa3
 
Stable
 
Baa3
 
P3
 
Stable
S&P
BB+
 
BB+
 
Stable
 
BB+ **
 
NR
 
Stable
__________
*
DBRS placed Ford and Ford Credit under review with positive implications on May 4, 2012.
**
S&P assigns FCE a long-term senior unsecured rating of BBB-, maintaining a one notch differential versus Ford Credit.


71

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

OUTLOOK

Our One Ford plan - to aggressively restructure to operate profitably at current demand and changing model mix, accelerate development of new products customers want and value, finance our plan and improve our balance sheet, and work together effectively as one team leveraging our global assets - provides the guiding strategy for our business.

Our projected vehicle production is as follows (in thousands):
 
Third Quarter 2012 (a)
 
Planned Vehicle Unit Production
 
Over/(Under) Third Quarter 2011
Ford North America
690

 
34

Ford South America
120

 
1

Ford Europe
320

 
(31
)
Ford Asia Pacific Africa
275

 
65

Total
1,405

 
69

__________    
(a) Includes production of Ford and JMC brand vehicles to be sold by our unconsolidated affiliates.

The year-over-year increase in planned production is more than explained by higher volumes in North America and Asia Pacific Africa. Although third quarter production in South America is expected to be about the same as last year, this includes substantial production reductions in Venezuela in response to restricted availability of foreign currency. Compared with second quarter 2012, third quarter 2012 production is down 45,000 units, reflecting seasonal summer shutdowns in North America and Europe. Our planned production level is consistent with our disciplined strategy to match production with consumer demand.

We expect 2012 global economic growth to continue in a range of 2% to 3%. Economic growth in the United States is expected to be in the range of 2% to 2.5% this year, with industry sales supported by increasing replacement demand given the older age of vehicles on the road. In South America, Brazil's economic growth is projected to range from 2% to 3%, supported by fiscal- and monetary-policy easing to stimulate the economy. In Europe, we expect weak conditions to continue, with several European markets undergoing fiscal austerity programs to achieve debt restructuring. In the Asia Pacific Africa region, China and India have experienced broad-based weakness in growth rates, which has prompted some policy easing, including interest rate cuts and increased government spending. We expect more policy actions are likely to stabilize economic growth in these countries.

Within the current economic environment, our planning assumptions and key metrics for 2012 include the following:
 
Memo:
First Half 2012
 
2012 Full-Year Plan
 
2012 Full-Year Outlook
Industry Volume (million units) (a)
 
 
 
 
 
–United States
14.6
 
13.5 – 14.5
 
14.5 – 15.0
–Europe (b)
14.3
 
14.0 – 15.0
 
About 14
 
 
 
 
 
 
Operational Metrics
 
 
 
 
 
Compared with prior full year:
 
 
 
 
 
–U.S. Market Share
15.4%
 
About Equal (compared with 16.5%)
 
Lower
–Europe Market Share (b)
8.1%
 
About Equal (compared with 8.3%)
 
Lower
–Quality
Mixed
 
Improve
 
Mixed
 
 
 
 
 
 
Financial Metrics
 
 
 
 
 
Compared with prior full year:
 
 
 
 
 
  –Automotive Pre-Tax Operating Profit (c)
$3.2 Billion
 
Higher (compared with $6.3 Billion)
 
About Equal / Lower
  –Ford Credit Pre-Tax Operating Profit
$0.9 Billion
 
Lower (compared with $2.4 Billion)
 
On Track
  –Total Company Pre-Tax Operating Profit (c)
$4.1 Billion
 
About Equal (compared with $8.8 Billion)
 
Lower
  –Automotive Structural Cost Increase (d)
$0.6 Billion
 
Less than $2 Billion
 
On Track
  –Automotive Operating Margin (c)
5.6%
 
Improve (compared with 5.4%)
 
About Equal / Lower
 
 
 
 
 
 
Absolute amount:
 
 
 
 
 
–Capital Spending
$2.2 Billion
 
$5.5 Billion – $6 Billion
 
About $5 Billion
__________    
(a)
Includes medium and heavy trucks; seasonally-adjusted annual rate.
(b)
For the 19 markets we track.
(c)
Excludes special items; Automotive operating margin equal to Automotive pre-tax results excluding Other Automotive divided by Automotive revenue.
(d)
Structural cost changes are measured primarily at present-year exchange, and exclude special items and discontinued operations.    

72

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Our expectation for industry sales volumes is unchanged from prior guidance, although U.S. industry sales volume, based on recent months, could be at the lower end of our forecasted range. We expect U.S. and Europe full-year market share to be lower compared with 2011, and continue to expect quality to be mixed.

Our full-year guidance is unchanged in the following areas:

Ford Credit pre-tax profit to be about $1.5 billion
Automotive structural cost increase of less than $2 billion compared with the prior year
Positive full-year Automotive operating-related cash flow

Given business conditions primarily in Europe and South America, we now expect:

Automotive pre-tax operating profit and Automotive operating margin to be about equal to or lower than 2011
Total Company pre-tax operating profit to be strong, but lower than 2011

We now also expect capital spending to be lower, at about $5 billion, reflecting mainly efficiencies. We now expect net interest expense in 2012 to be in the range of $500 million to $550 million.

As we look at the regions, our outlook for Ford North America is unchanged. We expect significantly higher full year pre-tax profit and operating margin compared with 2011, as consumers continue to respond to our strong product line-up, including the recently launched all-new Escape and the all-new Fusion launching later in the year. We also remain committed to maintaining our competitive cost structure as we grow our business.

Although we continue to expect Ford South America to be profitable for the full year, we now expect the level to be substantially lower than 2011. This reflects increased competitive pressures, weakening currencies, and changes in government policies affecting areas such as trade and access to foreign currency. We are continuing to work on actions to strengthen our competitiveness in this changing environment, looking at all areas of the business to improve our operating results. These actions include fully leveraging our One Ford plan, including the introduction of an all-new lineup of global products over the next two years, starting with the launch of the Ranger, EcoSport and Fusion in the second half of 2012.

Given the deteriorating external environment in Europe, we now expect our full year loss for Ford Europe to exceed $1 billion. The magnitude of the loss will be affected by a variety of factors, including the overall economic environment, competitive actions, and our response to these developments. We recognize the seriousness of the situation in Europe, and we view the challenges the industry faces as more structural than cyclical in nature. While we are affected significantly because of our strong presence in the region, we understand what it takes to be profitable and to generate an appropriate return on our investments. We have faced very challenging situations in other parts of our business before and addressed them successfully through our One Ford plan. We will do the same now in Europe, which is an important and valued part of our business. We are reviewing all areas of our business to address the near-term challenges while ensuring we are building a strong business for the future. It is premature to discuss details of what our plans may be in response to the situation in Europe, but we will continue to communicate our plans at the appropriate times to all of our stakeholders.

Although we incurred a first half loss at Ford Asia Pacific Africa, we expect the results to improve in the second half, due mainly to favorable volume and mix as we benefit from added capacity in China and Thailand and the new Focus and all-new Ranger.

We continue to expect full-year 2012 pre-tax profits of about $1.5 billion at Ford Credit, with distributions for full year of between $500 million and $1 billion. Ford Credit will continue to assess future distributions based on available liquidity and managed leverage objectives. Ford Credit anticipates managed receivables to be in the range of $110 billion to $120 billion by mid-decade, and to be in the range of $85 billion to $90 billion at year-end 2012. It also projects managed leverage of 8-9:1 for the foreseeable future, which is a decrease from the prior target of 10-11:1 and is consistent with its goal of achieving and maintaining a strong investment grade balance sheet. Lower leverage has resulted in a change in its mid-decade outlook for return on equity from low double digits to high single digits.
    
We have made substantial progress in recent years by executing the fundamentals of our One Ford plan, and we are working toward our mid-decade outlook. Looking ahead, our One Ford plan will continue to guide us as we work to sustain our strong North America operation and grow our important Ford Credit business, while addressing the diverse challenges and opportunities we have in other parts of the world.         

73

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Risk Factors

Statements included or incorporated by reference herein may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts, and assumptions by our management and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated, including, without limitation:

Decline in industry sales volume, particularly in the United States or Europe, due to financial crisis, recession, geopolitical events, or other factors; 
Decline in market share or failure to achieve growth;
Lower-than-anticipated market acceptance of new or existing products;
Market shift away from sales of larger, more profitable vehicles beyond our current planning assumption, particularly in the United States;
An increase in fuel prices, continued volatility of fuel prices, or reduced availability of fuel;
Continued or increased price competition resulting from industry excess capacity, currency fluctuations, or other factors;
Fluctuations in foreign currency exchange rates, commodity prices, and interest rates;
Adverse effects on our operations resulting from economic, geopolitical, or other events;
Economic distress of suppliers that may require us to provide substantial financial support or take other measures to ensure supplies of components or materials and could increase our costs, affect our liquidity, or cause production constraints or disruptions;
Work stoppages at Ford or supplier facilities or other limitations on production (whether as a result of labor disputes, natural or man-made disasters, tight credit markets or other financial distress, information technology issues, production constraints or difficulties, or other factors);
Single-source supply of components or materials;
Labor or other constraints on our ability to maintain competitive cost structure;
Substantial pension and postretirement health care and life insurance liabilities impairing our liquidity or financial condition;
Worse-than-assumed economic and demographic experience for our postretirement benefit plans (e.g., discount rates or investment returns);
Restriction on use of tax attributes from tax law "ownership change;"  
The discovery of defects in vehicles resulting in delays in new model launches, recall campaigns, reputational damage, or increased warranty costs;
Increased safety, emissions, fuel economy, or other regulations resulting in higher costs, cash expenditures, and/or sales restrictions;
Unusual or significant litigation, governmental investigations or adverse publicity arising out of alleged defects in our products, perceived environmental impacts, or otherwise;
A change in our requirements where we have long-term supply arrangements committing us to purchase minimum or fixed quantities of certain parts, or to pay a minimum amount to the seller ("take-or-pay" contracts);
Adverse effects on our results from a decrease in or cessation or clawback of government incentives related to investments;
Inherent limitations of internal controls impacting financial statements and safeguarding of assets;
Cybersecurity risks to operational systems, security systems, or infrastructure owned by us or a third-party vendor, or at a supplier facility;  
Failure of financial institutions to fulfill commitments under committed credit facilities;
Inability of Ford Credit to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts, due to credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors;
Higher-than-expected credit losses, lower-than-anticipated residual values or higher-than-expected return volumes for leased vehicles;
Increased competition from banks or other financial institutions seeking to increase their share of financing Ford vehicles; and
New or increased credit, consumer, or data protection or other regulations resulting in higher costs and/or additional financing restrictions.

We cannot be certain that any expectation, forecast, or assumption made in preparing forward-looking statements will prove accurate, or that any projection will be realized. It is to be expected that there may be differences between projected and actual results. Our forward-looking statements speak only as of the date of their initial issuance, and we do not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise. For additional discussion of these risks, see "Item 1A. Risk Factors" in our 2011 Form 10-K Report.

74

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

For information on accounting standards issued but not yet adopted, see Note 2 of the Notes to the Financial Statements.

OTHER FINANCIAL INFORMATION

The interim financial information included in this Quarterly Report on Form 10-Q for the periods ended
June 30, 2012 and 2011 has not been audited by PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"). In reviewing such information, PricewaterhouseCoopers has applied limited procedures in accordance with professional standards for reviews of interim financial information. Readers should restrict reliance on PricewaterhouseCoopers' reports on such information accordingly. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its reports on interim financial information, because such reports do not constitute "reports" or "parts" of registration statements prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Securities Act of 1933.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

Automotive Sector
 
Foreign Currency Risk. The net fair value of foreign exchange forward contracts (including adjustments for credit risk) as of June 30, 2012 was a liability of $447 million, compared with a liability of $236 million as of December 31, 2011. The potential decrease in fair value from a 10% adverse change in the underlying exchange rates, in U.S. dollar terms, would be $1.8 billion at June 30, 2012, compared with a decrease of $1.7 billion as of December 31, 2011.

Commodity Price Risk. The net fair value of commodity forward and option contracts (including adjustments for credit risk) as of June 30, 2012 was a liability of $332 million, compared with a liability of $370 million as of December 31, 2011. The potential decrease in fair value from a 10% adverse change in the underlying commodity prices, in U.S. dollar terms, would be $159 million at June 30, 2012, compared with a decrease of $203 million at December 31, 2011.

Financial Services Sector
  
Interest Rate Risk. To provide a quantitative measure of the sensitivity of Ford Credit's pre-tax cash flow to changes in interest rates, Ford Credit uses interest rate scenarios that assume a hypothetical, instantaneous increase or decrease of one percentage point in all interest rates across all maturities (a "parallel shift"), as well as a base case that assumes that all interest rates remain constant at existing levels. These interest rate scenarios are purely hypothetical and do not represent Ford Credit's view of future interest rate movements. The differences in pre-tax cash flow between these scenarios and the base case over a twelve-month period represent an estimate of the sensitivity of Ford Credit's pre-tax cash flow. Under this model, Ford Credit estimates that at June 30, 2012, all else constant, such an increase in interest rates would increase its pre-tax cash flow by $69 million over the next twelve months, compared with an increase of $60 million at December 31, 2011. The sensitivity analysis presented above assumes a one-percentage point interest rate change to the yield curve that is both instantaneous and parallel. In reality, interest rate changes are rarely instantaneous or parallel and rates could move more or less than the one percentage point assumed in Ford Credit's analysis. As a result, the actual impact to pre-tax cash flow could be higher or lower than the results detailed above. 
 
ITEM 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Alan Mulally, our Chief Executive Officer ("CEO"), and Bob Shanks, our Chief Financial Officer ("CFO"), have performed an evaluation of the Company's disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of June 30, 2012, and each has concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by SEC rules and forms, and that such information is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting. There were no changes in internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

75



PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

OTHER MATTERS

Brazilian State Tax Matters (as previously reported on page 27 of our 2011 Form 10-K Report). As previously disclosed, two Brazilian states levied tax assessments against Ford Brazil, claiming that certain state tax incentives from the state of Bahia did not receive formal approval from the organization of Brazilian state treasury offices. On June 15, 2012, we received a tax assessment from a third state, as anticipated, and we are challenging the assessment. Within each of these state systems, we have appealed the state's tax assessment to the administrative level; if we do not prevail at the administrative level, we plan to appeal to the relevant state court, which likely would require us to post significant cash or other collateral in order to proceed. On July 21, 2012, the administrative stage in one state became final; we began preparing for our appeal to the relevant state court, which we expect to commence later this year or early in 2013.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

As previously reported, we commenced a modest anti-dilutive share repurchase program during the first quarter of 2012, which authorizes repurchase of our Common Stock in an amount up to an estimated $150 million, to offset the dilutive effect of share-based compensation. During the second quarter of 2012, we repurchased shares of Ford Common Stock as follows:
 
 
 
 
Period
 
Total Number
of Shares
Purchased (a)
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased as
Part of Publicly-
Announced
Plans or
Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
April 1, 2012 through April 30, 2012
 

 
$

 

 
$123 million

May 1, 2012 through May 31, 2012
 
1,740,000

 
10.52

 
1,740,000

 
$105 million

June 1, 2012 through June 30, 2012
 
1,305,000

 
10.44

 
1,305,000

 
$91 million

Total/Average
 
3,045,000

 
$
10.49

 
3,045,000

 

__________
(a)
This quarter, includes no shares acquired from our employees or directors in accordance with our various compensation plans as a result of share withholdings to pay:  (i) income tax related to the lapse of restrictions on restricted stock or the issuance of unrestricted stock; and (ii) the exercise price and related income taxes with respect to certain exercises of stock options.
 

ITEM 6. Exhibits.

Please see exhibit index below.


76





SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Ford has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
FORD MOTOR COMPANY


By:
/s/ Stuart Rowley
 
Stuart Rowley, Vice President and Controller
 
(chief accounting officer)
 
 
Date:
August 3, 2012


77



EXHIBIT INDEX
Designation
 
Description
 
Method of Filing
Exhibit 12
 
Calculation of Ratio of Earnings to Combined Fixed Charges.
 
Filed with this Report.
Exhibit 15
 
Letter from PricewaterhouseCoopers LLP dated August 3, 2012 relating to financial information.
 
Filed with this Report.
Exhibit 31.1
 
Rule 15d-14(a) Certification of CEO.
 
Filed with this Report.
Exhibit 31.2
 
Rule 15d-14(a) Certification of CFO.
 
Filed with this Report.
Exhibit 32.1
 
Section 1350 Certification of CEO.
 
Furnished with this Report.
Exhibit 32.2
 
Section 1350 Certification of CFO.
 
Furnished with this Report.
Exhibit 101.INS
 
XBRL Instance Document.
 
**
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
**
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
**
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
**
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
**
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
**
__________
* Management contract or compensatory plan or arrangement.
** Submitted electronically with this Report in accordance with the provisions of Regulation S-T.



78