News Column

FORD MOTOR CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

July 31, 2014

RESULTS OF OPERATIONS

Our second quarter and first half 2014 pre-tax results and net income were as follows: Second Quarter First Half Memo: Better/(Worse) Better/(Worse) Full Year 2014 2013 2014 2013 2013 (Mils.) (Mils.) (Mils.) (Mils.) (Mils.) Income Pre-tax results (excl. special items) $ 2,599 $ 44 $ 3,980 $ (721 ) $ 8,608 Special items (481 ) 255 (603 ) 156 (1,568 ) Pre-tax results (incl. special items) 2,118 299 3,377 (565 ) 7,040 (Provision for)/Benefit from income taxes (803 ) (218 ) (1,073 ) 23 135 Net income 1,315 81 2,304 (542 ) 7,175 Less: Income/(Loss) attributable to noncontrolling interests 4 3 4 2 (7 )



Net income attributable to Ford $ 1,311 $ 78 $ 2,300 $ (544 ) $ 7,182

Net income 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 20 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 pre-tax special items in each category: Memo: Second Quarter First Half Full Year 2014 2013 2014 2013 2013 (Mils.) (Mils.) (Mils.) (Mils.) (Mils.) Personnel and Dealer-Related Items Separation-related actions (a) $ (152 )$ (442 )$ (274 )$ (450 )$ (856 ) Other Items Ford Sollers equity impairment (329 ) - (329 ) - - U.S. pension lump-sum program - (294 ) - (294 ) (594 ) FCTA -- subsidiary liquidation - - - - (103 ) Ford Romania consolidation loss - - - (15 ) (15 ) Total Other Items (329 ) (294 ) (329 ) (309 ) (712 ) Total Special Items $ (481 )$ (736 )$ (603 )$ (759 )$ (1,568 ) __________



(a) Primarily related to separation costs for personnel at the Genk and U.K.

facilities. 40



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

Discussion of Automotive sector, Financial Services sector, and Company results of operations below is on a pre-tax basis and excludes special items unless otherwise specifically noted. References to records by Automotive segments are since at least 2000 when we began reporting specific segment results. The chart below shows second quarter 2014 pre-tax results by sector: [[Image Removed]] Both the Automotive and Financial Services sectors contributed to the Company's second quarter 2014 pre-tax profit of $2.6 billion. The year-over-year improvement is more than explained by the Automotive sector; all regions improved except South America. Compared with first quarter 2014, Company pre-tax profit was $1.2 billion higher, more than explained by the Automotive sector, largely reflecting the non-recurrence of several significant adverse factors that we highlighted last quarter. 41



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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 costs and

other postretirement 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, including currency transactions, (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



• Net Interest - primarily measures profit variance driven by changes in our

Automotive sector's centrally-managed net interest, which consists of interest expense, interest income, fair market value adjustments on our cash equivalents and marketable securities portfolio (excluding our investment in Mazda), and other adjustments



• Other - consists of fair market value adjustments to our investment in

Mazda, as well as other items not included in the causal factors defined

above 42



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

Total Automotive. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor. Automotive operating margin is defined as Automotive pre-tax results, excluding special items and Other Automotive, divided by Automotive revenue. [[Image Removed]] As shown above, wholesale volume in the second quarter decreased by 1% compared with a year ago, and Automotive revenue decreased by 2%. The lower volume is more than explained by lower market share in all regions except Asia Pacific. Global industry seasonally-adjusted annual rate or SAAR is estimated at 87.3 million units, up 3% from a year ago. Our global market share is estimated at 7.5%, down two-tenths of a percentage point. Operating margin was 6.6%, up two-tenths of a percentage point, and Automotive pre-tax profit was $2.2 billion, up $66 million.



As shown in the memo below the chart, first half volume was up 2% from a year ago while Automotive revenue was down 1%. Operating margin, at 5%, was down eight-tenths of a percentage point. Total Automotive pre-tax profit, at $3.1 billion, was down $658 million.

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

[[Image Removed]] The $66 million improvement in Automotive pre-tax profit for the second quarter of 2014, compared with second quarter of 2013, is more than explained by lower costs and favorable market factors; adverse exchange, driven by South America, was a partial offset. As shown in the memo, pre-tax profit was $1.3 billion higher than in the first quarter, more than explained by favorable volume and mix and the non-repeat of the significant adverse factors that we highlighted in the first quarter. Total costs and expenses. In the second quarter of 2014 and 2013, total costs and expenses, including special items, for our Automotive sector were $33.8 billion and $35 billion, respectively, a difference of $1.2 billion; for first half 2014 and 2013 these were $67.3 billion and $67.5 billion, respectively, a difference of $200 million. An explanation of these changes is shown below (in billions): 2014 Lower/(Higher) 2013 Second First Quarter Half Explanation of change: Volume and mix, exchange, and other $ 0.5$ 0.1 Contribution costs (a) Commodity costs (incl. hedging) - - Material costs excluding commodity costs 0.5 0.8 Warranty/Freight (0.2 ) (0.6 ) Other costs (a) Structural costs (0.2 ) (0.6 ) Other - - Special items 0.6 0.5 Total $ 1.2$ 0.2 _________



(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. 44



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

Results by Automotive Segment. Details by segment of pre-tax results for the second quarter of 2014 are shown below.

[[Image Removed]]



North America and Asia Pacific were strongly profitable, with the former reporting a record quarterly profit and the latter a record second quarter profit. Middle East & Africa and Europe also were profitable, while South America reported a loss.

Other Automotive primarily reflected net interest expense. For the full year, we continue to expect net interest expense to be about $700 million.

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

North America Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor. [[Image Removed]] North America's second quarter pre-tax profit continued to be driven by robust industry sales, our strong product line-up, continued discipline in matching production to demand, and a lean cost structure-even as we continue to invest for future growth. Wholesale volume and revenue declined 5% and 3%, respectively, from a year ago. The volume decrease is explained by lower market share and an unfavorable change in dealer stocks, offset partially by higher industry sales. The U.S. industry SAAR of 16.9 million units in the second quarter was 1.2 million units higher than a year ago. Our U.S. market share deteriorated 1.2 percentage points, to 15.3%, reflecting primarily a planned reduction in daily rental sales; lower F-Series share as we continue to balance share, transaction prices, and stocks as we prepare for the new F-150; and lower Edge and Focus share. Although not shown, U.S. retail market share of the retail industry was 12.9% in the second quarter, down eight-tenths of a percentage point from a year ago, explained primarily by lower F-Series, Edge, and Focus. The decline in revenue is more than explained by the lower wholesale volume and a weaker Canadian dollar, offset partially by favorable mix. North America operating margin was 11.6%, up 1 percentage point from last year, and pre-tax profit was a record $2.4 billion, up $119 million.



As shown in the memo below the chart, all first half metrics declined from a year ago. The adverse first quarter impact of $500 million associated with changes in warranty reserves and weather-related premium costs explains the majority of the lower profit and operating margin.

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

[[Image Removed]]



The second quarter 2014 improvement in pre-tax profit compared with the second quarter of 2013 is more than explained by lower costs and higher parts and accessories profit.

As shown in the memo, pre-tax profit was higher than first quarter, more than explained by favorable market factors and non-recurrence of the significant adverse factors experienced in the first quarter.

For the full year, we continue to expect North America's pre-tax profit to be lower than 2013, and operating margin to range from 8% to 9%. Our guidance includes 13 weeks of production downtime this year for the launch of the new F-150, including the summer shutdown at our Dearborn and Kansas City plants. Three weeks of downtime occurred in the first quarter, and at the Dearborn plant, eight consecutive weeks of downtime are planned beginning in late August. The Kansas City summer shutdown in July and a few individual down days in the second half make up the remainder of the downtime. 47



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

South America Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor. [[Image Removed]] In South America, we are continuing to execute our strategy of expanding our product lineup and progressively replacing legacy products with global One Ford offerings. We also are continuing to manage the effects of slowing GDP growth and lower industry volume in our larger markets, weaker currencies, high inflation, as well as policy uncertainty in some countries. In the second quarter, wholesale volume and revenue decreased from a year ago by 22% and 30%, respectively. The lower volume is primarily explained by an 800,000-unit decline from last year's SAAR of 6.1 million units. This includes the impact of the weakening economy in Brazil, import restrictions in Argentina, and lower production in Venezuela resulting from limited availability of U.S. dollars. South America market share, at 8.8%, was down three-tenths of a percentage point, more than explained by the model changeover of Ka and the phase out of Fiesta Classic. The revenue decline is explained primarily by lower volume and unfavorable exchange, offset partially by higher net pricing. Operating margin was negative 14%, down significantly from a year ago, and pre-tax loss was $295 million, a deterioration of $446 million.



As shown in the memo below the chart, all first half metrics deteriorated from a year ago.

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

[[Image Removed]] South America's second quarter pre-tax results declined from a year ago. All factors were unfavorable with the exception of pricing, which did not offset fully the adverse effects of weaker currencies and high local inflation. As shown in the memo, pre-tax results improved compared with first quarter, more than explained by favorable exchange, mainly non-repeat of adverse balance sheet exchange effects in Venezuela and Argentina. For the full year, we now expect South America to incur a larger loss than we previously guided. Although we continue to expect higher market share and positive net pricing in the second half as we launch the all-new Ka small car, we now expect the rest of the year to be about breakeven to a loss due to lower-than-expected industry volumes and weaker currencies. The volatility in the region, including the potential of currency devaluations, adds uncertainty to our short-term projections. 49



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

Europe Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor. [[Image Removed]]



In Europe, we continue to implement our transformation plan focused on product, brand, and cost and remain on track to achieve profitability in 2015.

Europe's wholesale volume was about unchanged from a year ago, while revenue improved 10%. Europe 20 industry SAAR was 14.4 million units, up 700,000 units from a year ago. This was offset partially by industry declines in Russia and Turkey. Europe 20 market share, at 7.9%, was down two-tenths of a percentage point from a year ago, reflecting primarily a reduction in rental and fleet share, as well as adverse industry segmentation in passenger car. Although not shown, our commercial vehicle share improved in the second quarter to 10.6%, up half a percentage point from a year ago to our highest second quarter share since 1997; this was driven by our refreshed and expanded range of Transit products. Also not shown, passenger car share of the retail segment of the five major European markets was 8.3% in the second quarter, down one-tenth of a percentage point from the same period last year, more than explained by adverse industry segmentation. The increase in revenue mainly reflects higher volume in the Europe 20 markets and favorable exchange, offset partially by unfavorable mix. Europe's operating margin was two-tenths of a percent, an improvement of 4.4 percentage points from a year ago, and pre-tax profit was $14 million, a $320 million improvement.



As shown in the memo below the chart, all first half metrics improved from a year ago.

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

[[Image Removed]] The improvement in second quarter pre-tax results is more than explained by lower costs and favorable exchange. Partial offsets include lower results and royalties from our joint ventures, primarily our Russia joint venture, along with lower parts and accessories profit. Restructuring costs were lower than a year ago, primarily due to a reserve release this quarter associated with our Cologne investment agreement and non-recurrence of a facility write-off in Genk last year.



As shown in the memo below the chart, pre-tax results improved compared with first quarter, more than explained by lower costs and favorable market factors.

We are very encouraged by Europe's first quarterly profit since 2011. This supports our unchanged full year guidance for the region, which is for results to improve compared with 2013. Consistent with the normal seasonality of sales and production, we expect our second half loss to be higher than the first half loss of $180 million. Lower second half wholesale volumes of about 100,000 units include the effect of summer shutdowns in the third quarter and year-end shutdowns in the fourth quarter. In addition, we expect higher restructuring-related costs in the second half, including the non-repeat of a reserve release, and higher launch-related costs with start of production of the all-new Mondeo and the new Focus. With regard to Russia, the current environment is difficult, but Russia remains a large and important market. We are working with our partner in Ford Sollers to develop actions to improve our business outlook. 51



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

Middle East & Africa Segment. The following chart details second quarter key metrics.

[[Image Removed]] Middle East & Africa, our newest business unit, was created to better serve customers and expand in this fast-growing region. We are intensifying our focus and targeting opportunities for growth in small, mid-size, and large vehicle segments. In the second quarter, we wholesaled 49,000 vehicles in the region, 3,000 fewer units than a year ago. Revenue, at $1.1 billion, was $100 million lower. The lower volume primarily reflects lower market share, driven by increased competitive pressures on Expedition in the Middle East. The lower revenue is explained by the lower volume and unfavorable exchange. Operating margin was 2%, up nine-tenths of a percentage point from a year ago, and pre-tax profit was $23 million, up $10 million.



As shown in the memo below the chart, first half volume and revenue deteriorated from a year ago, but operating margin and pre-tax profit improved.

Our full year guidance for Middle East & Africa remains unchanged-we expect results to be about breakeven with quarterly variability driven by factors such as the timing of production, mix of vehicles, and long shipping times.

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

Asia Pacific Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor.

[[Image Removed]]



Our strategy in Asia Pacific continues to be to grow aggressively with an expanding portfolio of One Ford products with manufacturing hubs in China, India, and ASEAN.

Second quarter wholesale volume was up 21% compared with a year ago, and net revenue-which excludes our China joint ventures-grew 9%. Our China wholesale volume, not shown, was up 26% in the quarter. The higher volume in the region primarily reflects higher market share and industry volume. We estimate second quarter SAAR for the region at 39.6 million units, up 2.2 million units from a year ago, explained by China. Our second quarter market share was 3.7%, four-tenths of a percentage point higher than a year ago. This was driven by China where our market share improved three-tenths of a percentage point to a record 4.6%, reflecting continued strong sales of Mondeo, Fiesta, and Kuga.



Asia Pacific's higher revenue is explained primarily by higher volume and favorable mix. Operating margin was 5.5%, up six-tenths of a percentage point from a year ago, and pre-tax profit was $159 million, up $29 million and a second quarter record.

As shown in the memo below the chart, all first half metrics improved substantially from a year earlier.

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

[[Image Removed]]



Second quarter 2014 pre-tax profits improved from a year ago, more than explained by favorable volume and mix.

As shown in the memo, Asia Pacific pre-tax results declined from first quarter, more than explained by higher costs. These cost increases include higher warranty costs and continued investment in growth, including costs associated with six plants-one that opened in China during the quarter and five plants still under construction in the region. For the full year, we continue to expect Asia Pacific to earn a higher pre-tax profit than a year ago. We expect full year results will be strong for the region, with each of third and fourth quarter results down from second quarter. Volume improvements will be more than offset by higher costs as we continue to invest for future growth, including the five plants under construction in China and India and the launch of Lincoln in China this fall. 54



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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 operations, North America and International.

In general, we measure period-to-period changes in Ford Credit's pre-tax results using the causal factors listed below:

• Volume:

• Volume primarily measures changes in net financing margin driven by

changes in average finance receivables and net investment in operating

leases at prior period financing margin yield (defined below in financing

margin).

• Volume changes are primarily driven by the volume of new and used vehicle

sales and leases, the extent to which Ford Credit purchases retail

installment sale and lease contracts, the extent to which Ford Credit

provides wholesale financing, the sales price of the vehicles financed,

the level of dealer inventories, Ford-sponsored special financing programs

available exclusively through Ford Credit, and the availability of cost-effective funding for the purchase of retail installment sale and lease contracts and to provide wholesale financing.



•Financing Margin: • Financing margin variance is the period-to-period change in financing

margin yield multiplied by the present period average receivables.

Financing margin yield equals revenue, less interest expense and scheduled

depreciation for the period, divided by average receivables for the same period.



• Financing margin changes are driven by changes in revenue and interest

expense. Changes in revenue are primarily driven by the level of market

interest rates, cost assumptions in pricing, mix of business, and

competitive environment. Changes in interest expense are primarily driven

by the level of market interest rates, borrowing spreads, and asset-liability management. • Credit Loss: • Credit loss measures changes in the provision for credit losses. For analysis purposes, management splits the provision for credit losses



primarily into net charge-offs and the change in the allowance for credit

losses. • Net charge-off changes are primarily driven by the number of repossessions, severity per repossession, and recoveries. Changes in the



allowance for credit losses are primarily driven by changes in historical

trends in credit losses and recoveries, changes in the composition and

size of Ford Credit's present portfolio, changes in trends in historical

used vehicle values, and changes in economic conditions. For additional

information on the allowance for credit losses, refer to the "Critical

Accounting Estimates - Allowance for Credit Losses" section of Item 7 of Part II of our 2013 Form 10-K Report. • Lease Residual:



• Lease residual measures changes to residual performance. For analysis

purposes, management splits residual performance primarily into residual

gains and losses, and the change in accumulated supplemental depreciation.

• Residual gain and loss changes are primarily driven by the number of

vehicles returned to Ford Credit and sold, and the difference between the

auction value and the depreciated value of the vehicles sold. Changes in

accumulated supplemental depreciation are primarily driven by changes in

Ford Credit's estimate of the number of vehicles that will be returned to

it and sold, and changes in the estimate of the expected auction value at

the end of the lease term. For additional information on accumulated

supplemental depreciation, refer to the "Critical Accounting Estimates -

Accumulated Depreciation on Vehicles Subject to Operating Leases" section

of Item 7 of Part II of our 2013 Form 10-K Report.

• Other:



• Primarily includes operating expenses, other revenue, and insurance expenses.

• Changes in operating expenses are primarily driven by salaried personnel

costs, facilities costs, and costs associated with the origination and servicing of customer contracts. • In general, other revenue changes are primarily driven by changes in



earnings related to market valuation adjustments to derivatives (primarily

related to movements in interest rates) and other miscellaneous items.

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

Ford Credit. The chart below details the change in second quarter of 2014 pre-tax results compared with second quarter of 2013 by causal factor.

[[Image Removed]]



Ford Credit is an integral part of our global growth and value creation strategy. Ford Credit provides world-class dealer and customer financial services, supported by a strong balance sheet, providing solid profits and distributions to Ford.

The lower pre-tax profit for the second quarter of 2014 compared to a year ago is more than explained by a higher level of insurance losses from storm damage to dealer inventory, included in other in the chart above. Volume was higher, reflecting increases in nearly all products: leasing in North America, and both consumer and non-consumer finance receivables in all geographic segments. The higher volume was offset largely by unfavorable lease residual performance related to expectations of lower auction values in the North America lease portfolio, and all of the other factors.



As shown in the memo, pre-tax profit was lower compared with the first quarter, more than explained by the insurance losses in the second quarter.

For the full year, we now expect Ford Credit's pre-tax profit to be higher than 2013, improved from about equal to or higher than 2013. We also now expect year-end managed receivables of $112 billion to $115 billion, up from our prior guidance of about $110 billion. We continue to expect Ford Credit's managed leverage to be in the range of 8:1 to 9:1, and distributions of about $250 million. 56



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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, were as follows (in billions):

June 30, December 31, 2014 2013 Net Receivables Finance receivables - North America Consumer - Retail financing $ 41.7$ 40.9 Non-Consumer Dealer financing (a) 23.4 22.1 Other 1.0 1.0 Total finance receivables - North America (b) 66.1



64.0

Finance receivables - International Consumer - Retail financing 11.8 10.8 Non-Consumer Dealer financing (a) 10.4 8.3 Other 0.3 0.4 Total finance receivables - International (b) 22.5 19.5 Unearned interest supplements (1.6 ) (1.5 ) Allowance for credit losses (0.3 ) (0.4 ) Finance receivables, net 86.7 81.6 Net investment in operating leases (b) 19.9 18.3 Total net receivables $ 106.6$ 99.9 Managed Receivables Total net receivables $ 106.6$ 99.9 Unearned interest supplements and residual support 3.5



3.1

Allowance for credit losses 0.4



0.4

Other, primarily accumulated supplemental depreciation 0.1 - Total managed receivables $ 110.6$ 103.4 __________



(a) Dealer financing primarily includes wholesale loans to dealers to finance the

purchase of vehicle inventory.

(b) At June 30, 2014 and December 31, 2013, includes consumer receivables before

allowance for credit losses of $26.7 billion and

$27.7 billion, respectively, and non-consumer receivables before allowance for credit losses of $23.5 billion and $23.9 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in Ford Credit's consolidated financial statements. In addition, at June 30, 2014 and December 31, 2013, includes net investment in operating leases before allowance for credit losses of $9 billion and $8.1 billion, respectively, that have been included in securitization transactions but continue to be reported in Ford Credit's financial statements. The receivables and net investment in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay 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 issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.



Managed receivables at June 30, 2014 increased from year-end 2013, primarily driven by increases in non-consumer and consumer finance receivables in all geographic segments and leasing in North America.

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

Credit Losses. The charts below detail (i) quarterly trends of charge-offs (credit losses, net of recoveries), (ii) loss-to-receivables ("LTR") ratios (charge-offs on an annualized basis divided by average end-of-period ("EOP") managed receivables), (iii) credit loss reserve, and (iv) Ford Credit's credit loss reserve as a percentage of EOP managed receivables: [[Image Removed]] Year-over-year charge-offs were largely unchanged. Quarter-over-quarter charge-offs were down $19 million, consistent with normal seasonality. The LTR ratio was two basis points lower than the same period a year ago, and eight basis points lower than the prior quarter. The LTR ratio of 12 basis points is well below the 10-year average of 54 basis points.



The credit loss reserve was $353 million, down $23 million from a year ago, reflecting the continuation of low losses.

In purchasing retail finance and operating lease contracts, Ford Credit uses a proprietary scoring system that classifies contracts using several factors, such as credit bureau information, consumer credit risk scores (e.g., FICO score), 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, 2014 and December 31, 2013, Ford Credit classified between 5% and 6% of the outstanding U.S. retail finance and operating lease contracts in its portfolio as high risk at contract inception. For additional information, see the "Critical Accounting Estimates - Allowance for Credit Losses" section of Item 7 of Part II of our 2013 Form 10-K Report. 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. Changes in expected residual values impact the depreciation expense, which is recognized on a straight-line basis over the life of the lease. For additional information, see the "Critical Accounting Estimates - Accumulated Depreciation on Vehicles Subject to Operating Leases" section of Item 7 of Part II of our 2013 Form 10-K Report. 58



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

U.S. Ford and Lincoln Brand Operating Lease Experience. The following charts show return volumes and auction values at constant second quarter 2014 vehicle mix for vehicles returned in the respective periods. The U.S. operating lease portfolio accounted for about 87% of Ford Credit's total net investment in operating leases at June 30, 2014. [[Image Removed]] Lease return volumes in the second quarter of 2014 were 23,000 units higher than the same period last year, primarily reflecting higher lease placements in 2011 and 2012 compared with prior years. The second quarter lease return rate was 75%, up seven percentage points compared with the same period last year, primarily reflecting a higher percent of vehicles with a lease-end purchase price above market value. In the second quarter of 2014, Ford Credit's auction values for 24-month contracts increased by about $100 while 36-month average auction values increased by about $1,000 compared to the same period last year, consistent with industry trends. The differences in Ford Credit's 24-month and 36-month auction value increases primarily reflect differences in vehicle content. Both Ford Credit's 24-month and 36-month auction values increased from the first quarter of 2014, consistent with industry trends. Ford Credit's worldwide net investment in operating leases was $19.9 billion at the end of the second quarter of 2014, up about $1.6 billion from year-end 2013, and up $3.7 billion from a year ago. 59



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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. We target to have an average ongoing Automotive gross cash balance of about $20 billion. We expect to have periods when we will be above or below this amount due to (i) future cash flow expectations such as for pension contributions, debt maturities, capital investments, or restructuring requirements, (ii) short-term timing differences, and (iii) changes in the global economic environment. In addition, we also target to maintain a revolving credit facility for our Automotive business of up to about $10 billion to protect against exogenous shocks. Our revolving credit facility is discussed below. We assess the appropriate long-term target for total Automotive liquidity, comprised of Automotive gross cash and the revolving credit facility, to be about $30 billion, which is an amount we believe is sufficient to support our business priorities and to protect our business. Our Automotive gross cash and Automotive liquidity targets could be reduced over time based on improved operating performance and changes in our risk profile. For a discussion of risks to our liquidity, see "Item 1A. Risk Factors" in our 2013 Form 10-K Report, as well as Note 20 of the Notes to the Financial Statements regarding commitments and contingencies that could impact our liquidity. Automotive Gross Cash. Automotive gross cash includes cash and cash equivalents and marketable securities, net of any securities-in-transit. Automotive gross cash is detailed below as of the dates shown (in billions): June 30, March 31, December 31, June 30, 2014 2014 2013 2013 Cash and cash equivalents $ 4.7$ 4.5$ 5.0$ 5.5 Marketable securities 21.1 20.7 20.1 20.2 Total cash and marketable securities 25.8 25.2 25.1 25.7 Securities-in-transit (a) - - (0.3 ) - Automotive gross cash $ 25.8$ 25.2$ 24.8$ 25.7 __________



(a) The purchase or sale of marketable securities for which the cash settlement

was not made by period-end and a payable or receivable was recorded on the

balance sheet. 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 about 90 days to up to about one year, and is adjusted based on market conditions and liquidity needs. We monitor our cash levels and average maturity on a daily basis. Of our total Automotive gross cash at June 30, 2014, 86% was held by consolidated entities domiciled in the United States. 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, December 31, June 30, 2014 2013 2013 Automotive gross cash $ 25.8$ 24.8$ 25.7 Available credit lines Revolving credit facility, unutilized portion 10.1 10.7 10.7 Local lines available to foreign affiliates, unutilized portion 0.8 0.7 0.7 Automotive liquidity $ 36.7$ 36.2$ 37.1 60



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

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 cash flow statement prepared in accordance with GAAP and differs from Net cash provided by/(used in) operating activities, the most directly comparable GAAP financial measure.



Changes in Automotive gross cash are summarized below (in billions):

Second Quarter



First Half

2014 2013 2014 2013 Automotive gross cash at end of period $ 25.8$ 25.7$ 25.8$ 25.7 Automotive gross cash at beginning of period 25.2 24.2 24.8 24.3 Change in Automotive gross cash $ 0.6$ 1.5 $



1.0 $ 1.4

Automotive income before income taxes (excluding special items) $ 2.2$ 2.1$ 3.1$ 3.7 Capital spending (1.9 ) (1.6 ) (3.4 ) (3.1 ) Depreciation and tooling amortization 1.0 1.1 2.0 2.1 Changes in working capital (a) (0.7 ) 0.5 1.0 0.9 Other/Timing differences (b) 2.0 1.2 1.1 0.4 Automotive operating-related cash flows 2.6 3.3 3.8 4.0 Separation payments (0.1 ) - (0.1 ) (0.1 ) Net receipts from Financial Services sector (c) - - 0.2 0.3 Other 0.1 (0.2 ) 0.1 - Cash flow before other actions 2.6 3.1 4.0 4.2 Changes in debt (0.4 ) (0.1 ) (0.4 ) 0.9 Funded pension contributions (0.3 ) (1.0 ) (0.8 ) (2.8 ) Dividends/Other items (d) (1.3 ) (0.5 ) (1.8 ) (0.9 ) Change in Automotive gross cash $ 0.6$ 1.5 $



1.0 $ 1.4

_________

(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, warranty, and timing differences between

unconsolidated affiliate profits and dividends received. Also includes other

factors, such as the impact of tax payments and vehicle financing activities

between Automotive and FSG sectors.

(c) Primarily distributions from Ford Holdings (Ford Credit's parent) and tax

payments received from Ford Credit.

(d) In the second quarter of 2014, we used about $850 million in cash to settle

repurchases of 52.2 million shares of Ford common stock; an additional 5.4

million shares were repurchased on or prior to June 30, 2014, but were settled after that date for about $90 million in cash. With respect to "Changes in working capital," in general we carry relatively low Automotive sector trade receivables compared with 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. 61



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