UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One) 
RQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  
 For the quarterly period ended JuneSeptember 30, 2016
  
 or
  
oTransition 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)

Delaware38-0549190
(State of incorporation)(I.R.S. Employer Identification No.)
  
One American Road, Dearborn, Michigan48126
(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 Exchange Act). Yes o   No  R
 
As of July 21,October 20, 2016, Ford had outstanding 3,902,388,7933,902,862,547 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 JuneSeptember 30, 2016
 Table of Contents Page
 Part I - Financial Information  
Item 1Financial Statements 
 Consolidated Income Statement 
 Consolidated Statement of Comprehensive Income 
 Consolidated Balance Sheet 
 Condensed Consolidated Statement of Cash Flows 
 Consolidated Statement of Equity 
 Notes to the Financial Statements 
 Report of Independent Registered Public Accounting Firm 
Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations 
 Overview 
 Results of Operations 
 Liquidity and Capital Resources 
 Credit Ratings 
 Production Volumes 
 Outlook 
 GAAP Reconciliations of Non-GAAP Financial Measures 
 Risk Factors 
 Accounting Standards Issued But Not Yet Adopted 
 Other Financial Information 
Item 3Quantitative and Qualitative Disclosures About Market Risk 
 Automotive 
 Financial Services 
Item 4Controls and Procedures 
    
 Part II - Other Information  
Item 1ARisk Factors
Item 6Exhibits 
 Signature 
 Exhibit Index 

i


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(in millions, except per share amounts)
For the periods ended June 30,For the periods ended September 30,
2016 2015 2016 20152016 2015 2016 2015
Second Quarter First HalfThird Quarter First Nine Months
(unaudited)(unaudited)
Revenues              
Automotive$36,932
 $35,105
 $72,189
 $66,905
$33,331
 $35,818
 $105,520
 $102,723
Financial Services2,553
 2,158
 5,014
 4,258
2,612
 2,326
 7,626
 6,584
Total revenues39,485
 37,263
 77,203
 71,163
35,943
 38,144
 113,146
 109,307
              
Costs and expenses 
  
     
  
    
Cost of sales32,348
 30,326
 62,629
 58,798
30,446
 31,213
 93,075
 90,011
Selling, administrative, and other expenses2,661
 2,544
 5,223
 5,016
2,535
 2,386
 7,758
 7,402
Financial Services interest, operating, and other expenses2,258
 1,745
 4,318
 3,458
2,200
 1,905
 6,518
 5,363
Total costs and expenses37,267
 34,615
 72,170
 67,272
35,181
 35,504
 107,351
 102,776
              
Interest expense on Automotive debt212
 190
 412
 355
238
 206
 650
 561
              
Non-Financial Services interest income and
other income/(loss), net (Note 13)
389
 272
 793
 462
328
 446
 1,121
 908
Financial Services other income/(loss), net (Note 13)82
 70
 173
 144
132
 97
 305
 241
Equity in net income of affiliated companies398
 486
 939
 923
403
 314
 1,342
 1,237
Income before income taxes2,875
 3,286

6,526

5,065
1,387
 3,291

7,913

8,356
Provision for/(Benefit from) income taxes903
 1,125
 2,099
 1,750
426
 1,099
 2,525
 2,849
Net income1,972
 2,161
 4,427
 3,315
961
 2,192
 5,388
 5,507
Less: Income/(Loss) attributable to noncontrolling interests2
 1
 5
 2
4
 
 9
 2
Net income attributable to Ford Motor Company$1,970
 $2,160
 $4,422
 $3,313
$957
 $2,192
 $5,379
 $5,505
              
EARNINGS PER SHARE ATTRIBUTABLE TO FORD MOTOR COMPANY COMMON AND CLASS B STOCK (Note 15)
Basic income$0.50
 $0.54
 $1.11
 $0.83
$0.24
 $0.55
 $1.35
 $1.39
Diluted income0.49
 0.54
 1.11
 0.83
0.24
 0.55
 1.35
 1.38
              
Cash dividends declared0.15
 0.15
 0.55
 0.30
0.15
 0.15
 0.70
 0.45


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
For the periods ended June 30,For the periods ended September 30,
2016 2015 2016 20152016 2015 2016 2015
Second Quarter First HalfThird Quarter First Nine Months
(unaudited)(unaudited)
Net income$1,972
 $2,161
 $4,427
 $3,315
$961
 $2,192
 $5,388
 $5,507
Other comprehensive income/(loss), net of tax (Note 12)              
Foreign currency translation(58) (37) (122) 66
(184) (882) (306) (816)
Marketable securities
 
 6
 

 
 6
 
Derivative instruments111
 (76) 357
 (166)99
 374
 456
 208
Pension and other postretirement benefits17
 16
 39
 (132)14
 133
 53
 1
Total other comprehensive income/(loss), net of tax70
 (97) 280
 (232)(71) (375) 209
 (607)
Comprehensive income2,042
 2,064
 4,707
 3,083
890
 1,817
 5,597
 4,900
Less: Comprehensive income/(loss) attributable to noncontrolling interests2
 
 4
 1
3
 1
 7
 2
Comprehensive income attributable to Ford Motor Company$2,040
 $2,064
 $4,703
 $3,082
$887
 $1,816
 $5,590
 $4,898

The accompanying notes are part of the financial statements.
Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
June 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
(unaudited)(unaudited)
ASSETS      
Cash and cash equivalents (Note 4)$17,063
 $14,272
$13,340
 $14,272
Marketable securities (Note 4)22,234
 20,904
20,825
 20,904
Financial Services finance receivables, net (Note 5)47,860
 45,137
45,550
 45,137
Trade and other receivables, less allowances of $366 and $37210,728
 11,042
Trade and other receivables, less allowances of $359 and $37210,029
 11,042
Inventories (Note 7)9,829
 8,319
10,219
 8,319
Other assets3,053
 2,913
3,552
 2,913
Total current assets110,767
 102,587
103,515
 102,587
      
Financial Services finance receivables, net (Note 5)47,427
 45,554
49,614
 45,554
Net investment in operating leases29,468
 27,093
29,196
 27,093
Net property31,940
 30,163
32,257
 30,163
Equity in net assets of affiliated companies3,349
 3,224
3,795
 3,224
Deferred income taxes9,822
 11,509
9,475
 11,509
Other assets6,905
 4,795
7,111
 4,795
Total assets$239,678
 $224,925
$234,963
 $224,925
      
LIABILITIES 
  
 
  
Payables$23,084
 $20,272
$22,384
 $20,272
Other liabilities and deferred revenue (Note 8)21,463
 19,089
19,531
 19,089
Automotive debt payable within one year (Note 10)2,417
 1,779
2,472
 1,779
Financial Services debt payable within one year (Note 10)42,444
 41,196
44,801
 41,196
Total current liabilities89,408
 82,336
89,188
 82,336
      
Other liabilities and deferred revenue (Note 8)23,416
 23,457
23,652
 23,457
Automotive long-term debt (Note 10)10,654
 11,060
10,675
 11,060
Financial Services long-term debt (Note 10)84,399
 78,819
79,276
 78,819
Deferred income taxes552
 502
577
 502
Total liabilities208,429
 196,174
203,368
 196,174
      
Redeemable noncontrolling interest95
 94
96
 94
      
EQUITY 
  
 
  
Common Stock, par value $.01 per share (3,975 million shares issued of 6 billion authorized)40
 40
Common Stock, par value $.01 per share (3,976 million shares issued of 6 billion authorized)40
 40
Class B Stock, par value $.01 per share (71 million shares issued of 530 million authorized)1
 1
1
 1
Capital in excess of par value of stock21,546
 21,421
21,598
 21,421
Retained earnings16,652
 14,414
17,013
 14,414
Accumulated other comprehensive income/(loss)(5,976) (6,257)
Accumulated other comprehensive income/(loss) (Note 12)(6,046) (6,257)
Treasury stock(1,122) (977)(1,122) (977)
Total equity attributable to Ford Motor Company31,141
 28,642
31,484
 28,642
Equity attributable to noncontrolling interests13
 15
15
 15
Total equity31,154
 28,657
31,499
 28,657
Total liabilities and equity$239,678
 $224,925
$234,963
 $224,925

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.
June 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
(unaudited)(unaudited)
ASSETS      
Cash and cash equivalents$2,418
 $3,949
$2,318
 $3,949
Financial Services finance receivables, net49,844
 45,902
47,627
 45,902
Net investment in operating leases11,714
 13,309
9,951
 13,309
Other assets2
 85
7
 85
LIABILITIES      
Other liabilities and deferred revenue$25
 $19
$10
 $19
Debt41,515
 43,086
39,123
 43,086
The accompanying notes are part of the financial statements.
Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
For the periods ended June 30,For the periods ended September 30,
2016 20152016 2015
First HalfFirst Nine Months
(unaudited)(unaudited)
Cash flows from operating activities      
Net cash provided by/(used in) operating activities$11,834
 $7,623
$16,994
 $14,078
      
Cash flows from investing activities      
Capital spending(3,206) (3,533)(4,912) (5,358)
Acquisitions of finance receivables and operating leases(27,501) (26,505)(43,746) (43,762)
Collections of finance receivables and operating leases19,732
 18,844
30,254
 28,632
Purchases of equity and debt securities(16,757) (21,282)(22,049) (29,493)
Sales and maturities of equity and debt securities15,491
 23,222
22,022
 32,874
Settlements of derivatives111
 192
330
 26
Other21
 112
43
 417
Net cash provided by/(used in) investing activities(12,109) (8,950)(18,058) (16,664)
      
Cash flows from financing activities 
  
 
  
Cash dividends(2,184) (1,190)(2,780) (1,785)
Purchases of Common Stock(145) (91)(145) (129)
Net changes in short-term debt934
 176
1,200
 844
Proceeds from issuance of other debt25,574
 24,912
31,956
 35,876
Principal payments on other debt(21,104) (19,787)(30,019) (27,366)
Other(30) (279)(44) (303)
Net cash provided by/(used in) financing activities3,045
 3,741
168
 7,137
      
Effect of exchange rate changes on cash and cash equivalents21
 (274)(36) (622)
      
Net increase/(decrease) in cash and cash equivalents$2,791
 $2,140
$(932) $3,929
      
Cash and cash equivalents at January 1$14,272
 $10,757
$14,272
 $10,757
Net increase/(decrease) in cash and cash equivalents2,791
 2,140
(932) 3,929
Cash and cash equivalents at June 30$17,063
 $12,897
Cash and cash equivalents at September 30$13,340
 $14,686

The accompanying notes are part of the financial statements.


Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
(in millions, unaudited)
Equity Attributable to Ford Motor Company    Equity Attributable to Ford Motor Company    
Capital Stock 
Cap. in
Excess of
Par Value 
of Stock
 Retained Earnings Accumulated Other Comprehensive Income/(Loss) (Note 12) Treasury Stock Total 
Equity
Attributable
to Non-controlling Interests
 
Total
Equity
Capital Stock 
Cap. in
Excess of
Par Value 
of Stock
 Retained Earnings Accumulated Other Comprehensive Income/(Loss) (Note 12) Treasury Stock Total 
Equity
Attributable
to Non-controlling Interests
 
Total
Equity
Balance at December 31, 2015$41
 $21,421
 $14,414
 $(6,257) $(977) $28,642
 $15
 $28,657
$41
 $21,421
 $14,414
 $(6,257) $(977) $28,642
 $15
 $28,657
Net income
 
 4,422
 
 
 4,422
 5
 4,427

 
 5,379
 
 
 5,379
 9
 5,388
Other comprehensive income/(loss), net of tax
 
 
 281
 
 281
 (1) 280

 
 
 211
 
 211
 (2) 209
Common stock issued (including share-based compensation impacts)
 125
 
 
 
 125
 
 125

 177
 
 
 
 177
 
 177
Treasury stock/other
 
 
 
 (145) (145) (1) (146)
 
 
 
 (145) (145) (2) (147)
Cash dividends declared
 
 (2,184) 
 
 (2,184) (5) (2,189)
 
 (2,780) 
 
 (2,780) (5) (2,785)
Balance at June 30, 2016$41
 $21,546
 $16,652
 $(5,976) $(1,122) $31,141
 $13
 $31,154
Balance at September 30, 2016$41
 $21,598
 $17,013
 $(6,046) $(1,122) $31,484
 $15
 $31,499
                              
Balance at December 31, 2014$40
 $21,089
 $9,422
 $(5,265) $(848) $24,438
 $27
 $24,465
$40
 $21,089
 $9,422
 $(5,265) $(848) $24,438
 $27
 $24,465
Net income
 
 3,313
 
 
 3,313
 2
 3,315

 
 5,505
 
 
 5,505
 2
 5,507
Other comprehensive income/(loss), net of tax
 
 
 (231) 
 (231) (1) (232)
 
 
 (607) 
 (607) 
 (607)
Common stock issued (including share-based compensation impacts)1
 228
 
 
 
 229
 
 229
1
 265
 
 
 
 266
 
 266
Treasury stock/other
 
 
 
 (91) (91) (1) (92)
 
 
 
 (129) (129) (4) (133)
Cash dividends declared
 
 (1,190) 
 
 (1,190) (6) (1,196)
 
 (1,785) 
 
 (1,785) (6) (1,791)
Balance at June 30, 2015$41
 $21,317
 $11,545
 $(5,496) $(939) $26,468
 $21
 $26,489
Balance at September 30, 2015$41
 $21,354
 $13,142
 $(5,872) $(977) $27,688
 $19
 $27,707

The accompanying notes are part of the financial statements.



Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

Table of Contents
Footnote Page
Note 1Presentation
Note 2New Accounting Standards
Note 3Segment Information
Note 4Cash, Cash Equivalents, and Marketable Securities
Note 5Financial Services Finance Receivables
Note 6Financial Services Allowance for Credit Losses
Note 7Inventories
Note 8Other Liabilities and Deferred Revenue
Note 9Retirement Benefits
Note 10Debt
Note 11Derivative Financial Instruments and Hedging Activities
Note 12Accumulated Other Comprehensive Income/(Loss)
Note 13Other Income/(Loss)
Note 14Income Taxes
Note 15Capital Stock and Earnings Per Share
Note 16Commitments and Contingencies


Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  PRESENTATION

For purposes of this report, “Ford,” the “Company,” “we,” “our,” “us” or similar references mean Ford Motor Company, our consolidated subsidiaries, and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise.

Our financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, instructions to Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X.

In the opinion of management, these unaudited financial statements reflect a fair statement of our results of operations and financial condition for the periods, and at the dates, presented.  The 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, 2015 (“2015 Form 10-K Report”).   

Change in presentation. Our core Automotive business includes the designing, manufacturing, marketing, and servicing of a full line of Ford cars, trucks, SUVs, and electrified vehicles, as well as Lincoln luxury vehicles. We provide vehicle-related financing and leasing activities through our Ford Motor Credit operation.Company LLC (“Ford Credit”). At the same time, we are pursuing emerging opportunities in connectivity, mobility, autonomous vehicles, the customer experience, and data and analytics.
Prior to the second quarter of 2016, we presented our financial statements on both a consolidated basis and on a “sector” basis for our Automotive and Financial Services sectors. With our expansion into mobility services, including the formation in March 2016 of the Ford Smart Mobility LLC subsidiary, we have reevaluated our disclosures and concluded we should eliminate our two-sector financial presentation and, reflecting the manner in which our Chief Operating Decision Maker now manages our business, changechanged our segment presentation beginning with the second quarter of 2016 to be Automotive, Financial Services, and All Other. See Note 3 for a description of our new segment presentation.
In addition, as a result of the elimination of our two-sector financial presentation, at June 30,201630, 2016 we changed the presentation of our consolidated balance sheet and certain notes to the consolidated financial statements to classify our assets and liabilities as current or non-current. We reclassified certain prior year amounts in our consolidated financial statements to conform to the current year presentation.

NOTE 2. NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

Accounting Standard Update (“ASU”) 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes. On April 1, 2016, we retrospectively adopted the new accounting standard which requires deferred tax assets and liabilities to be classified as non-current in the consolidated balance sheet. The impact of the change resulted in the classification of all deferred taxes as non-current.
We also adopted the following standards during 2016, none of which have a material impact to our financial statements or financial statement disclosures:
Standard Effective Date
2015-16Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments January 1, 2016
2015-09Insurance - Disclosures about Short-Duration Contracts January 1, 2016
2015-05Internal-Use Software - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement January 1, 2016
2015-02Consolidation - Amendments to the Consolidation Analysis January 1, 2016
2015-01Extraordinary and Unusual Items - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items January 1, 2016
2014-12Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period January 1, 2016

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 2. NEW ACCOUNTING STANDARDS (Continued)

Accounting Standards Issued But Not Yet Adopted

ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which replaces the current incurred loss impairment methodologymethod with a methodologymethod that reflects expected credit losses. The new standard is effective as of January 1, 2020, and early adoption is permitted as of January 1, 2019. We are assessing the potential impact to our financial statements and disclosures.

ASU 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting. In March 2016, the FASB issued a new accounting standard which simplifies accounting for share-based payment transactions, including income tax consequences and the classification of the tax impact on the statement of cash flows. The newWe will adopt the standard is effective as of January 1, 2017 by recognizing a one-time adjustment to retained earnings and early adoption is permitted.deferred tax assets related to cumulative excess tax benefits previously unrecognized. We are assessingwill also change classification of tax-related items on the potential impact to our financial statements and disclosures.consolidated statement of cash flows.

ASU 2016-02, Leases.  In February 2016, the FASB issued a new accounting standard which provides guidance on the recognition, measurement, presentation, and disclosure of leases. The new standard supersedes present U.S. GAAP guidance on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease liabilities, as well as additional disclosures. The new standard is effective as of January 1, 2019, and early adoption is permitted.  We are assessing the potential impact to our financial statements and disclosures.

ASU 2014-09, Revenue - Revenue from Contracts with Customers. In May 2014, the FASB issued a new accounting standard that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. It also requires additional disclosures. We plan to adopt the new revenue guidance effective January 1, 2017 andby recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity. We do not expect a material impact to our financial statements or disclosures. Under the new standard, the income statement classification for certain performance obligations will change.

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. SEGMENT INFORMATION

In conjunction with our expanded business model to become an automotive, financial services, and mobility company, beginning with the second quarter of 2016, we have changed our reportable segment disclosures. Reflecting the manner in which our Chief Operating Decision Maker manages our businesses, including resource allocation and performance assessment, we have four operating segments that represent the primary businesses reported in our consolidated financial statements. These operating segments are: Automotive, Financial Services, Ford Smart Mobility LLC, and Central Treasury Operations.

Automotive and Financial Services comprise separate reportable segments. Ford Smart Mobility LLC and Central Treasury Operations did not meet the quantitative thresholds in this reporting period to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as All Other. Prior-period amounts have beenwere adjusted retrospectively to reflect the change to our reportable segments.
Below is a description of our reportable segments and the business activities included in All Other.

Automotive Segment

Our Automotive segment primarily includes the sale of Ford and Lincoln brand vehicles, service parts, and accessories worldwide, together with the associated costs to develop, manufacture, distribute, and service the vehicles, parts, and accessories. The segment includes 5 regional business units:  North America, South America, Europe, Middle East & Africa, and Asia Pacific.
Financial Services Segment

The Financial Services segment primarily includes our vehicle-related financing and leasing activities at Ford Credit.

All Other

All Other is a combination of operating segments that did not meet the quantitative thresholds in this reporting period to qualify as reportable segments. All Other consists of our Central Treasury Operations (formerly Other Automotive) and Ford Smart Mobility LLC. The Central Treasury Operations segment is primarily engaged in decision making for investments, risk management activities, and providing financing for the Automotive segment. Interest income (excluding interest earned on our extended service contract portfolio that is included in our Automotive segment), interest expense, gains and losses on cash equivalents and marketable securities, and foreign exchange derivatives associated with intercompany lending, are included in the results of Central Treasury Operations. The underlying assets and liabilities, primarily cash and cash equivalents, marketable securities, debt, and derivatives, remain with the Automotive segment.

Ford Smart Mobility LLC is a new subsidiary formed to design, build, grow, and invest in emerging mobility services. Designed to compete like a start-up company, Ford Smart Mobility LLC will design and build mobility services on its own, and collaborate with start-ups and tech companies.

Special Items

In addition, our results include Special Items that consist of (i) pension and other postretirement employee benefits (“OPEB”) remeasurement gains and losses, (ii) significant personnel and dealer-related costs stemming from our efforts to match production capacity and cost structure to market demand and changing model mix, and (iii) certain infrequent significant items that we generally do not consider to be indicative of our ongoing operating activities. Our management excludes these items from its review of the results of the operating segments for purposes of measuring segment profitability and allocating resources. Special items are presented as a separate reconciling item.

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. SEGMENT INFORMATION (Continued)

Key operating data for our business segments for the periods ended or at JuneSeptember 30 were as follows (in millions):

Automotive 
Financial
Services
 All Other 
Special
Items
 Adjustments TotalAutomotive 
Financial
Services
 All Other 
Special
Items
 Adjustments Total
Second Quarter 2016 
  
  
    
  
Third Quarter 2016 
  
  
    
  
Revenues$36,932
 $2,553
 $
 $
 $
 $39,485
$33,331
 $2,612
 $
 $
 $
 $35,943
Pre-tax results - income/(loss)2,832
 385
 (224) (118) 
 2,875
1,084
 552
 (223) (26) 
 1,387
Equity in net income/(loss) of affiliated companies395
 8
 
 
 
 403
Cash, cash equivalents, and marketable securities27,210
 12,087
 
 
 
 39,297
24,300
 9,855
 10
 
 
 34,165
Total assets99,272
 145,303
 6
 
 (4,903)(a)239,678
97,269
 142,979
 67
 
 (5,352)(a)234,963
Debt13,071
 126,843
 
 
 
 139,914
13,147
 124,077
 
 
 
 137,224
Operating cash flows4,144
 2,283
 
 
 1,315
(b)7,742
(1,954) 5,953
 
 
 1,161
(b)5,160
                      
Second Quarter 2015 
  
  
    
  
Third Quarter 2015 
  
  
    
  
Revenues$35,105
 $2,158
 $
 $
 $
 $37,263
$35,818
 $2,326
 $
 $
 $
 $38,144
Pre-tax results - income/(loss)2,962
 491
 (167) 
 
 3,286
2,762
 526
 (163) 166
 
 3,291
Equity in net income/(loss) of affiliated companies306
 8
 
 
 
 314
Cash, cash equivalents, and marketable securities20,729
 10,573
 
 
 
 31,302
22,177
 9,670
 
 
 
 31,847
Total assets92,610
 126,383
 
 
 (2,866)(a)216,127
92,873
 130,626
 
 
 (3,921)(a)219,578
Debt13,713
 109,813
 
 
 
 123,526
12,798
 113,627
 
 
 
 126,425
Operating cash flows1,887
 1,755
 
 
 1,568
(b)5,210
2,787
 2,167
 
 
 1,501
(b)6,455
                      
Automotive 
Financial
Services
 All Other 
Special
Items
 Adjustments TotalAutomotive 
Financial
Services
 All Other 
Special
Items
 Adjustments Total
First Half 2016 
  
  
    
  
First Nine Months 2016 
  
  
    
  
Revenues$72,189
 $5,014
 $
 $
 $
 $77,203
$105,520
 $7,626
 $
 $
 $
 $113,146
Pre-tax results - income/(loss)6,296
 884
 (350) (304) 
 6,526
7,380
 1,436
 (573) (330) 
 7,913
Equity in net income/(loss) of affiliated companies1,319
 23
 
 
 
 1,342
Operating cash flows6,871
 2,808
 
 
 2,155
(b)11,834
4,917
 8,761
 
 
 3,316
(b)16,994
                      
First Half 2015 
  
  
    
  
First Nine Months 2015 
  
  
    
  
Revenues$66,905
 $4,258
 $
 $
 $
 $71,163
$102,723
 $6,584
 $
 $
 $
 $109,307
Pre-tax results - income/(loss)4,484
 960
 (379) 
 
 5,065
7,246
 1,486
 (542) 166
 
 8,356
Equity in net income/(loss) of affiliated companies1,213
 24
 
 
 
 1,237
Operating cash flows2,412
 3,162
 
 
 2,049
(b)7,623
5,199
 5,329
 
 
 3,550
(b)14,078
__________
(a)Includes eliminations of intersegment transactions occurring in the ordinary course of business and deferred tax netting.
(b)
We measure and evaluate our Automotive segment operating cash flow on a different basis than Net cash provided by/(used in) operating activities in our consolidated statement of cash flows. Automotive segment operating cash flow includes additional elements management considers to be related to our Automotive operating activities, primarily capital spending and non-designated derivatives, and excludes outflows for funded pension contributions, and separation payments, and other items that are considered operating cash flows under U.S. GAAP. The table below quantifies these reconciling adjustments to Net cash provided by/(used in) operating activities for the periods ended JuneSeptember 30 (in millions):
  Second Quarter First Half
  2016 2015 2016 2015
 Automotive capital spending$1,686
 $1,719
 $3,183
 $3,505
 Separation payments(148) (109) (158) (510)
 Funded pension contributions(221) (91) (589) (853)
 Other(2) 49
 (281) (93)
 Total operating cash flow adjustments$1,315
 $1,568
 $2,155
 $2,049

  Third Quarter First Nine Months
  2016 2015 2016 2015
 Automotive capital spending$1,696
 $1,819
 $4,879
 $5,324
 Net cash flows from non-designated derivatives(246) 119
 (322) 90
 Funded pension contributions(246) (89) (835) (942)
 Separation payments(40) (90) (198) (600)
 Other(3) (258) (208) (322)
 Total operating cash flow adjustments$1,161
 $1,501
 $3,316
 $3,550

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

The following tables categorize the fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis on our balance sheet (in millions):
   September 30, 2016
 
Fair Value
 Level
 Automotive Financial Services 
All
Other
 Consolidated
Cash and cash equivalents         
U.S. government1 $599
 $
 $
 $599
U.S. government agencies2 
 4
 
 4
Non-U.S. government and agencies2 551
 280
 
 831
Corporate debt2 60
 50
 
 110
Total marketable securities classified as cash equivalents  1,210
 334
 
 1,544
Cash, time deposits, and money market funds  6,445
 5,341
 10
 11,796
Total cash and cash equivalents  $7,655
 $5,675
 $10
 $13,340
          
Marketable securities         
U.S. government1 $3,982
 $1,724
 $
 $5,706
U.S. government agencies2 3,284
 1,354
 
 4,638
Non-U.S. government and agencies2 5,423
 520
 
 5,943
Corporate debt2 3,709
 540
 
 4,249
Equities1 198
 
 
 198
Other marketable securities2 49
 42
 
 91
Total marketable securities  $16,645
 $4,180
 $
 $20,825
          
   December 31, 2015
 
Fair Value
 Level
 Automotive Financial Services 
All
Other
 Consolidated
Cash and cash equivalents         
U.S. government1 $115
 $
 $
 $115
U.S. government agencies2 22
 
 
 22
Non-U.S. government and agencies2 173
 266
 
 439
Corporate debt2 20
 
 
 20
Total marketable securities classified as cash equivalents  330
 266
 
 596
Cash, time deposits, and money market funds  5,056
 8,620
 
 13,676
Total cash and cash equivalents  $5,386
 $8,886
 $
 $14,272
          
Marketable securities         
U.S. government1 $1,623
 $298
 $
 $1,921
U.S. government agencies2 5,240
 1,169
 
 6,409
Non-U.S. government and agencies2 7,451
 832
 
 8,283
Corporate debt2 3,279
 384
 
 3,663
Equities1 240
 
 
 240
Other marketable securities2 348
 40
 
 388
Total marketable securities  $18,181
 $2,723
 $
 $20,904

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES (Continued)

The following tables present cash equivalents and marketable securities accounted for as available-for-sale (“AFS”) securities on our balance sheet (in millions):
  June 30, 2016 December 31, 2015September 30, 2016
Fair Value
 Level
 Automotive Financial Services Consolidated Automotive Financial Services Consolidated        
Fair Value of Securities with
Contractual Maturities:
             Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Less than 1 Year 1-5 Years
Cash and cash equivalents             
Automotive           
U.S. government1 $699
 $974
 $1,673
 $115
 $
 $115
$447
 $
 $
 $447
 $
 $447
U.S. government agencies2 400
 55
 455
 22
 
 22
100
 
 
 100
 
 100
Non-U.S. government and agencies2 924
 353
 1,277
 173
 266
 439
77
 
 
 77
 
 77
Corporate debt2 125
 65
 190
 20
 
 20
337
 
 
 337
 247
 90
Total marketable securities classified as cash equivalents 2,148
 1,447
 3,595
 330
 266
 596
Cash, time deposits, and money market funds 7,345
 6,123
 13,468
 5,056
 8,620
 13,676
Total cash and cash equivalents $9,493
 $7,570
 $17,063
 $5,386
 $8,886
 $14,272
Total$961
 $
 $
 $961
 $247
 $714
                    
    
Marketable securities            
December 31, 2015
        
Fair Value of Securities with
Contractual Maturities:
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Less than 1 Year 1-5 Years
Automotive           
U.S. government1 $3,366
 $1,888
 $5,254
 $1,623
 $298
 $1,921
$
 $
 $
 $
 $
 $
U.S. government agencies2 4,228
 1,556
 5,784
 5,240
 1,169
 6,409

 
 
 
 
 
Non-U.S. government and agencies2 6,296
 739
 7,035
 7,451
 832
 8,283
82
 
 (12) 70
 
 70
Corporate debt2 3,573
 290
 3,863
 3,279
 384
 3,663

 
 
 
 
 
Equities1 207
 
 207
 240
 
 240
Other marketable securities2 47
 44
 91
 348
 40
 388
Total marketable securities $17,717
 $4,517
 $22,234
 $18,181
 $2,723
 $20,904
Total$82
 $
 $(12) $70
 $
 $70

Sales proceeds for investments classified as AFS and sold prior to maturity were $69 million and $0 for the nine months ended September 30, 2016 and 2015, respectively. Gross realized gains from the sale of AFS securities were $1 million and $0 for the nine months ended September 30, 2016 and 2015, respectively. There were no gross realized losses from the sale of AFS securities for the nine months ended September 30, 2016 and 2015.

We determine other-than-temporary impairments on cash equivalents and marketable securities using a specific identification method. During the nine months ended September 30, 2016 and 2015, we did not recognize any other-than-temporary impairment loss.
Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. FINANCIAL SERVICES FINANCE RECEIVABLES

Our Financial Services, primarily Ford Credit, manages finance receivables as “consumer” and “non-consumer” portfolios.  The receivables are generally secured by the vehicles, inventory, or other property being financed.

Finance receivables, net were as follows (in millions):
June 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
Consumer      
Retail financing, gross$64,601
 $62,068
$67,894
 $62,068
Unearned interest supplements(2,416) (2,119)(2,785) (2,119)
Consumer finance receivables62,185
 59,949
65,109
 59,949
Non-Consumer 
  
 
  
Dealer financing33,551
 31,115
30,533
 31,115
Non-Consumer finance receivables33,551
 31,115
30,533
 31,115
Total recorded investment$95,736
 $91,064
$95,642
 $91,064
      
Recorded investment in finance receivables$95,736
 $91,064
$95,642
 $91,064
Allowance for credit losses(449) (373)(478) (373)
Finance receivables, net$95,287
 $90,691
$95,164
 $90,691
      
Current portion$47,860
 $45,137
$45,550
 $45,137
Non-current portion47,427
 45,554
49,614
 45,554
Finance receivables, net$95,287
 $90,691
$95,164
 $90,691
      
Net finance receivables subject to fair value (a)$93,234
 $88,876
$93,033
 $88,876
Fair value94,720
 90,048
94,327
 90,048
__________
(a)
At JuneSeptember 30, 2016 and December 31, 2015, excludes $2.1 billion and $1.8 billion, respectively, of certain receivables (primarily direct financing leases) that are not subject to fair value disclosure requirements. The fair value of finance receivables is categorized within Level 3 of the fair value hierarchy.

Excluded from finance receivables at JuneSeptember 30, 2016 and December 31, 2015, was $213206 million and $209 million, respectively, of accrued uncollected interest, which are reported as Other assets in the current assets section of our consolidated balance sheet.

Included in the recorded investment in finance receivables at JuneSeptember 30, 2016 and December 31, 2015 were consumer receivables of $30.829.9 billion and $27.6 billion, respectively, and non-consumer receivables of $25.723.3 billion and $26.1 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. FINANCIAL SERVICES FINANCE RECEIVABLES (Continued)
Aging

For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date. The recorded investment of consumer receivables greater than 90 days past due and still accruing interest was $20$24 million and $16 million at JuneSeptember 30, 2016 and December 31, 2015, respectively. The recorded investment of non-consumer receivables greater than 90 days past due and still accruing interest was $3 millionde minimis and $1 million at JuneSeptember 30, 2016 and December 31, 2015, respectively.

The aging analysis of our finance receivables balances were as follows (in millions):
June 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
Consumer      
31-60 days past due$633
 $708
$652
 $708
61-90 days past due107
 108
112
 108
91-120 days past due30
 27
36
 27
Greater than 120 days past due40
 38
39
 38
Total past due810
 881
839
 881
Current61,375
 59,068
64,270
 59,068
Consumer finance receivables62,185
 59,949
65,109
 59,949
      
Non-Consumer      
Total past due91
 116
71
 116
Current33,460
 30,999
30,462
 30,999
Non-Consumer finance receivables33,551
 31,115
30,533
 31,115
Total recorded investment$95,736
 $91,064
$95,642
 $91,064

Credit Quality

Consumer Portfolio. Credit quality ratings for consumer receivables are based on aging. Refer to the aging table above.

Consumer receivables credit quality ratings are as follows:

Pass – current to 60 days past due
Special Mention – 61 to 120 days past due and in intensified collection status
Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral less costs to sell

Non-Consumer Portfolio. Dealers are assigned to one of four groups according to risk ratings as follows:

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

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. FINANCIAL SERVICES FINANCE RECEIVABLES (Continued)
The credit quality analysis of our dealer financing receivables was as follows (in millions):
June 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
Dealer Financing      
Group I$24,853
 $22,146
$23,162
 $22,146
Group II6,849
 7,175
5,847
 7,175
Group III1,739
 1,683
1,399
 1,683
Group IV110
 111
125
 111
Total recorded investment$33,551
 $31,115
$30,533
 $31,115

Impaired Receivables

Impaired consumer receivables include accounts that have been rewritten 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. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer financing that has been modified in TDRs. The recorded investment of consumer receivables that were impaired at JuneSeptember 30, 2016 and December 31, 2015 was $366 million, or 0.6% of consumer receivables, and $375 million, or 0.6% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at JuneSeptember 30, 2016 and December 31, 2015 was $126140 million, or 0.4%0.5% of non-consumer receivables, and $134 million, or 0.4% of non-consumer receivables, respectively. Impaired finance receivables are evaluated both collectively and specifically.

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. FINANCIAL SERVICES ALLOWANCE FOR CREDIT LOSSES

An analysis of the allowance for credit losses related to finance receivables for the periods ended JuneSeptember 30 was as follows (in millions):
Second Quarter 2016 First Half 2016Third Quarter 2016 First Nine Months 2016
Consumer Non-Consumer Total Consumer Non-Consumer TotalConsumer Non-Consumer Total Consumer Non-Consumer Total
Allowance for credit losses                      
Beginning balance$390
 $20
 $410
 $357
 $16
 $373
$432
 $17
 $449
 $357
 $16
 $373
Charge-offs(94) (3) (97) (196) (2) (198)(108) (5) (113) (304) (7) (311)
Recoveries31
 2
 33
 60
 3
 63
29
 1
 30
 89
 4
 93
Provision for credit losses109
 (1) 108
 211
 
 211
112
 1
 113
 323
 1
 324
Other (a)(4) (1) (5) 
 
 
(1) 
 (1) (1) 
 (1)
Ending balance (b)$432
 $17
 $449
 $432
 $17
 $449
$464
 $14
 $478
 $464
 $14
 $478
                      
Analysis of ending balance of allowance for credit losses
Collective impairment allowance      $414
 $13
 $427
      $445
 $12
 $457
Specific impairment allowance      18
 4
 22
      19
 2
 21
Ending balance (b)      432
 17
 449
      464
 14
 478
                      
Analysis of ending balance of finance receivablesAnalysis of ending balance of finance receivables      Analysis of ending balance of finance receivables      
Collectively evaluated for impairment      61,819
 33,425
 95,244
      64,743
 30,393
 95,136
Specifically evaluated for impairment      366
 126
 492
      366
 140
 506
Recorded investment      62,185
 33,551
 95,736
      65,109
 30,533
 95,642
                      
Ending balance, net of allowance for credit lossesEnding balance, net of allowance for credit losses   $61,753
 $33,534
 $95,287
Ending balance, net of allowance for credit losses   $64,645
 $30,519
 $95,164
__________
(a)Primarily represents amounts related to translation adjustments.
(b)Total allowance, including reserves for operating leases, was $512$541 million.
Second Quarter 2015 First Half 2015Third Quarter 2015 First Nine Months 2015
Consumer Non-Consumer Total Consumer Non-Consumer TotalConsumer Non-Consumer Total Consumer Non-Consumer Total
Allowance for credit losses                      
Beginning balance$301
 $13
 $314
 $305
 $16
 $321
$322
 $13
 $335
 $305
 $16
 $321
Charge-offs(70) (2) (72) (150) (1) (151)(85) (2) (87) (235) (3) (238)
Recoveries31
 1
 32
 61
 3
 64
29
 1
 30
 90
 4
 94
Provision for credit losses57
 
 57
 110
 (4) 106
80
 2
 82
 190
 (2) 188
Other (a)3
 1
 4
 (4) (1) (5)(4) 
 (4) (8) (1) (9)
Ending balance (b)$322
 $13
 $335
 $322
 $13
 $335
$342
 $14
 $356
 $342
 $14
 $356
                      
Analysis of ending balance of allowance for credit losses
Collective impairment allowance      $303
 $13
 $316
      $323
 $12
 $335
Specific impairment allowance      19
 
 19
      19
 2
 21
Ending balance (b)      322
 13
 335
      342
 14
 356
                      
Analysis of ending balance of finance receivablesAnalysis of ending balance of finance receivables      Analysis of ending balance of finance receivables      
Collectively evaluated for impairment      55,527
 27,123
 82,650
      58,749
 26,311
 85,060
Specifically evaluated for impairment      380
 126
 506
      375
 129
 504
Recorded investment      55,907
 27,249
 83,156
      59,124
 26,440
 85,564
                      
Ending balance, net of allowance for credit lossesEnding balance, net of allowance for credit losses $55,585
 $27,236
 $82,821
Ending balance, net of allowance for credit losses $58,782
 $26,426
 $85,208
__________
(a)Primarily represents amounts related to translation adjustments.
(b)Total allowance, including reserves for operating leases, was $380$403 million.

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 and net realizable value. Cost for a substantial portion of U.S. inventories is determined on a last-in, first-out (“LIFO”) basis. LIFO was used for 33%32% and 27% of total inventories at JuneSeptember 30, 2016 and December 31, 2015, 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,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
Raw materials, work-in-process, and supplies$4,186
 $4,005
$4,335
 $4,005
Finished products6,571
 5,254
6,823
 5,254
Total inventories under FIFO10,757
 9,259
11,158
 9,259
LIFO adjustment(928) (940)(939) (940)
Total inventories$9,829
 $8,319
$10,219
 $8,319

NOTE 8. OTHER LIABILITIES AND DEFERRED REVENUE

Other liabilities and deferred revenue were as follows (in millions):
June 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
Current      
Dealer and dealers’ customer allowances and claims$9,632
 $8,122
$9,050
 $8,122
Deferred revenue5,639
 4,662
4,715
 4,675
Employee benefit plans1,482
 1,562
1,505
 1,562
Accrued interest946
 840
761
 840
OPEB358
 354
357
 354
Pension (a)266
 249
268
 249
Other3,140
 3,300
2,875
 3,287
Total current other liabilities and deferred revenue$21,463
 $19,089
$19,531
 $19,089
Non-current 
  
 
  
Pension (a)$9,190
 $9,543
$9,024
 $9,543
OPEB5,392
 5,347
5,362
 5,347
Dealer and dealers’ customer allowances and claims2,782
 2,731
3,146
 2,731
Deferred revenue3,499
 3,265
3,639
 3,285
Employee benefit plans1,112
 1,041
1,112
 1,041
Other1,441
 1,530
1,369
 1,510
Total non-current other liabilities and deferred revenue$23,416
 $23,457
$23,652
 $23,457
__________
(a)
Balances at JuneSeptember 30, 2016 reflect pension liabilities at December 31, 2015, updated for 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 2015. Included in Other assets are pension assets of $2.1$2.3 billion and $1.6 billion at JuneSeptember 30, 2016 and December 31, 2015, respectively.


Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. RETIREMENT BENEFITS

Defined Benefit Plans - Expense

The pre-tax expense for our defined benefit pension and OPEB plans for the periods ended JuneSeptember 30 was as follows (in millions):
Second QuarterThird Quarter
Pension Benefits    Pension Benefits    
U.S. Plans Non-U.S. Plans Worldwide OPEBU.S. Plans Non-U.S. Plans Worldwide OPEB
2016 2015 2016 2015 2016 20152016 2015 2016 2015 2016 2015
Service cost$127
 $146
 $124
 $133
 $12
 $15
$128
 $147
 $116
 $133
 $13
 $15
Interest cost381
 455
 202
 232
 49
 59
381
 454
 190
 236
 49
 59
Expected return on assets(674) (732) (350) (369) 
 
(673) (732) (329) (372) 
 
Amortization of prior service costs/(credits)43
 39
 9
 11
 (36) (52)43
 38
 9
 13
 (35) (51)
Net remeasurement (gain)/loss
 
 11
 
 
 

 
 
 
 
 
Separation programs/other3
 
 65
 12
 
 1
6
 4
 16
 11
 (1) 
Net periodic benefit cost/(income)$(120) $(92) $61
 $19
 $25
 $23
$(115) $(89) $2
 $21
 $26
 $23
First HalfFirst Nine Months
Pension Benefits    Pension Benefits    
U.S. Plans Non-U.S. Plans Worldwide OPEBU.S. Plans Non-U.S. Plans Worldwide OPEB
2016 2015 2016 2015 2016 20152016 2015 2016 2015 2016 2015
Service cost$255
 $293
 $242
 $268
 $24
 $30
$383
 $440
 $358
 $401
 $37
 $45
Interest cost762
 909
 397
 471
 97
 119
1,143
 1,363
 587
 707
 146
 178
Expected return on assets(1,347) (1,464) (689) (744) 
 
(2,020) (2,196) (1,018) (1,116) 
 
Amortization of prior service costs/(credits)85
 78
 19
 23
 (71) (103)128
 116
 28
 36
 (106) (154)
Net remeasurement (gain)/loss
 
 11
 
 
 

 
 11
 
 
 
Separation programs/other3
 2
 72
 19
 
 1
9
 6
 88
 30
 (1) 1
Net periodic benefit cost/(income)$(242) $(182) $52
 $37
 $50
 $47
$(357) $(271) $54
 $58
 $76
 $70

Beginning in 2016, we changed the method used to estimate the service and interest costs for pension and OPEB plans that utilize a yield curve approach. We now apply the specific spot rates along the yield curve to the relevant cash flows instead of using a single effective discount rate. Service and interest costs in the secondthird quarter and first halfnine months were about $145 million lower and about $290$435 million lower, respectively, with the new method than they would have been under the prior method.

Pension Plan Contributions

During 2016, we expect to contribute about $1.51.2 billion from cash and cash equivalents to our worldwide funded pension plans (including discretionary contributions of about $400$100 million), down about $300 million from our previous plan due to recalendarization of contributions into 2017, and to make about $300 million of benefit payments to participants in unfunded plans, for a total of about $1.81.5 billion. In the first halfnine months of 2016, we contributed about $600800 million to our worldwide funded pension plans and made about $150200 million of benefit payments to participants in unfunded plans.


Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. DEBT

The carrying value of Automotive and Financial Services debt was as follows (in millions):
AutomotiveJune 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
Debt payable within one year      
Short-term$1,126
 $818
$1,169
 $818
Long-term payable within one year 
  
 
  
U.S. Department of Energy (“DOE”) Advanced Technology Vehicles Manufacturing (“ATVM”) Incentive Program591
 591
591
 591
Other debt752
 370
765
 370
Unamortized (discount)/premium(52) 
(53) 
Total debt payable within one year2,417
 1,779
2,472
 1,779
Long-term debt payable after one year 
  
 
  
Public unsecured debt securities6,594
 6,594
6,594
 6,594
DOE ATVM Incentive Program2,947
 3,242
2,799
 3,242
Other debt1,530
 1,696
1,678
 1,696
Adjustments      
Unamortized (discount)/premium(358) (412)(338) (412)
Unamortized issuance costs(59) (60)(58) (60)
Total long-term debt payable after one year10,654
 11,060
10,675
 11,060
Total Automotive$13,071
 $12,839
$13,147
 $12,839
      
Fair value of Automotive debt (a)$15,151
 $14,199
$15,158
 $14,199
      
Financial Services 
  
 
  
Debt payable within one year 
  
 
  
Short-term$12,734
 $12,123
$12,953
 $12,123
Long-term payable within one year 
  
 
  
Unsecured debt10,382
 10,241
12,586
 10,241
Asset-backed debt19,349
 18,855
19,263
 18,855
Adjustments      
Unamortized (discount)/premium(3) (5)(4) (5)
Unamortized issuance costs(18) (18)(20) (18)
Fair value adjustments (b)23
 
Total debt payable within one year42,444
 41,196
44,801
 41,196
Long-term debt payable after one year      
Unsecured debt55,927
 49,193
53,985
 49,193
Asset-backed debt27,420
 29,390
24,477
 29,390
Adjustments      
Unamortized (discount)/premium(15) (24)(5) (24)
Unamortized issuance costs(227) (198)(213) (198)
Fair value adjustments (b)1,294
 458
1,032
 458
Total long-term debt payable after one year84,399
 78,819
79,276
 78,819
Total Financial Services$126,843
 $120,015
$124,077
 $120,015
      
Fair value of Financial Services debt (a)$128,982
 $121,170
$126,175
 $121,170
__________
(a)
The fair value of debt includes $869941 million and $560 million of Automotive short-term debt and $12.112.5 billion and $10.3 billion of Financial Services short-term debt at JuneSeptember 30, 2016 and December 31, 2015, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
(b)Adjustments related to designated fair value hedges of unsecured debt.
Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates, certain commodity prices, and interest rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, recorded in income for the periods ended JuneSeptember 30 were as follows (in millions):
Second Quarter First HalfThird Quarter First Nine Months
2016 2015 2016 20152016 2015 2016 2015
Cash flow hedges (a)              
Reclassified from AOCI to net income$46
 $(90) $133
 $(136)$202
 $(60) $335
 $(196)
Fair value hedges              
Interest rate contracts              
Net interest settlements and accruals excluded from the assessment of hedge effectiveness98
 89
 197
 177
95
 94
 292
 271
Ineffectiveness (b)5
 (10) 22
 (4)(1) 10
 21
 6
Derivatives not designated as hedging instruments              
Foreign currency exchange contracts171
 (181) 32
 145
29
 65
 61
 210
Cross-currency interest rate swap contracts140
 (77) 335
 12
128
 63
 463
 75
Interest rate contracts(43) (18) (91) (61)21
 (22) (70) (83)
Commodity contracts9
 (15) 4
 (25)3
 (22) 7
 (47)
Total$426
 $(302) $632
 $108
$477
 $128
 $1,109
 $236
__________
(a)
For the secondthird quarter and first halfnine months of 2016, a $184$340 million gain and a $547$887 million gain, respectively, were recorded in Other comprehensive income. For the secondthird quarter and first halfnine months of 2015, a $217$453 million lossgain and a $367$86 million loss,gain, respectively, were recorded in Other comprehensive income.
(b)
For the secondthird quarter and first halfnine months of 2016, hedge ineffectiveness reflects the net change in fair value on derivatives of $273228 million gainloss and $883$655 million gain, respectively, and a change in value on hedged debt attributable to the change in benchmark interest rates of $268$227 million lossgain and $861$634 million loss, respectively. For the secondthird quarter and first halfnine months of 2015, hedge ineffectiveness reflects the net change in fair value on derivatives of $249$373 million lossgain and $28$345 million loss,gain, respectively, and a change in value on hedged debt attributable to the change in benchmark interest rates of $239$363 million gainloss and $24$339 million gain,loss, respectively.
Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are recorded on the balance sheet at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement.

The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions):
June 30, 2016 December 31, 2015September 30, 2016 December 31, 2015
Notional 
Fair Value of
Assets
 
Fair Value of
Liabilities
 Notional 
Fair Value of
Assets
 
Fair Value of
Liabilities
Notional 
Fair Value of
Assets
 
Fair Value of
Liabilities
 Notional 
Fair Value of
Assets
 
Fair Value of
Liabilities
Cash flow hedges                      
Foreign currency exchange and commodity contracts$14,801
 $740
 $207
 $12,593
 $522
 $366
$16,775
 $818
 $136
 $12,593
 $522
 $366
Fair value hedges 
  
  
       
  
  
      
Interest rate contracts35,581
 1,572
 
 28,964
 670
 16
36,215
 1,217
 
 28,964
 670
 16
Derivatives not designated as hedging instrumentsDerivatives not designated as hedging instruments          Derivatives not designated as hedging instruments          
Foreign currency exchange contracts17,904
 505
 254
 21,108
 426
 242
17,267
 352
 129
 21,108
 426
 242
Cross-currency interest rate swap contracts3,550
 258
 15
 3,137
 73
 111
3,765
 383
 
 3,137
 73
 111
Interest rate contracts62,637
 173
 185
 62,638
 159
 112
61,650
 142
 122
 62,638
 159
 112
Commodity contracts548
 15
 6
 643
 2
 26
525
 10
 4
 643
 2
 26
Total derivative financial instruments, gross (a) (b)$135,021
 3,263
 667
 $129,083
 1,852
 873
$136,197
 $2,922
 $391
 $129,083
 $1,852
 $873
Counterparty netting

 (589) (589) 

 (733) (733)
Total derivative financial instruments, net $2,674
 $78
 

 $1,119
 $140
           
Current portion  $1,395
 $297
   $1,209
 $692
Non-current portion  1,527
 94
   643
 181
Total derivative financial instruments, gross  $2,922
 $391
   $1,852
 $873
__________
(a)At JuneSeptember 30, 2016 and December 31, 2015, the pledgednet obligation to return cash collateral was $2$13 million and $0, respectively.
(b)
At September 30, 2016 and December 31, 2015, the fair value of assets and liabilities available for counterparty netting was $347 million and $733 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.



Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

The changes in the balances for each component of accumulated other comprehensive income/(loss) attributable to Ford Motor Company for the periods ended JuneSeptember 30 were as follows (in millions):
Second Quarter First HalfThird Quarter First Nine Months
2016 2015 2016 20152016 2015 2016 2015
Foreign currency translation              
Beginning balance$(3,633) $(2,335) $(3,570) $(2,438)$(3,691) $(2,371) $(3,570) $(2,438)
Gains/(Losses) on foreign currency translation(58) (36) (88) 67
(183) (883) (271) (816)
Less: Tax/(Tax benefit)
 
 
 

 
 
 
Net gains/(losses) on foreign currency translation(58) (36) (88) 67
(183) (883) (271) (816)
(Gains)/Losses reclassified from AOCI to net income (a)
 
 (33) 

 
 (33) 
Other comprehensive income/(loss), net of tax(58) (36) (121) 67
(183) (883) (304) (816)
Ending balance$(3,691) $(2,371) $(3,691) $(2,371)$(3,874) $(3,254) $(3,874) $(3,254)
              
Marketable securities              
Beginning balance$
 $
 $(6) $
$
 $
 $(6) $
Gains/(Losses) on available for sale securities
 
 11
 

 
 11
 
Less: Tax/(Tax benefit)
 
 
 

 
 
 
Net gains/(losses) on available for sale securities
 
 11
 

 
 11
 
(Gains)/Losses reclassified from AOCI to net income
 
 (1) 

 
 (1) 
Less: Tax/(Tax benefit)
 
 4
 

 
 4
 
Net (gains)/losses reclassified from AOCI to net income
 
 (5) 

 
 (5) 
Other comprehensive income/(loss), net of tax
 
 6
 

 
 6
 
Ending balance$
 $
 $
 $
$
 $
 $
 $
              
Derivative instruments              
Beginning balance$310
 $(253) $64
 $(163)$421
 $(329) $64
 $(163)
Gains/(Losses) on derivative instruments184
 (217) 547
 (367)340
 453
 887
 86
Less: Tax/(Tax benefit)35
 (78) 94
 (110)87
 196
 181
 86
Net gains/(losses) on derivative instruments149
 (139) 453
 (257)253
 257
 706
 
(Gains)/Losses reclassified from AOCI to net income(46) 90
 (133) 136
(202) 60
 (335) 196
Less: Tax/(Tax benefit)(8) 27
 (37) 45
(48) (57) (85) (12)
Net (gains)/losses reclassified from AOCI to net income (b)(38) 63
 (96) 91
(154) 117
 (250) 208
Other comprehensive income/(loss), net of tax111
 (76) 357
 (166)99
 374
 456
 208
Ending balance$421
 $(329) $421
 $(329)$520
 $45
 $520
 $45
              
Pension and other postretirement benefits              
Beginning balance$(2,723) $(2,812) $(2,745) $(2,664)$(2,706) $(2,796) $(2,745) $(2,664)
Amortization and recognition of prior service costs/(credits) (c)16
 (2) 33
 (2)17
 
 50
 (2)
Less: Tax/(Tax benefit)7
 (2) 10
 77
7
 (86) 17
 (9)
Net prior service costs/(credits) reclassified from AOCI to net income9
 
 23
 (79)10
 86
 33
 7
Translation impact on non-U.S. plans8
 16
 16
 (53)4
 47
 20
 (6)
Other comprehensive income/(loss), net of tax17
 16
 39
 (132)14
 133
 53
 1
Ending balance$(2,706) $(2,796) $(2,706) $(2,796)$(2,692) $(2,663) $(2,692) $(2,663)
              
Total AOCI ending balance at June 30$(5,976) $(5,496) $(5,976) $(5,496)
Total AOCI ending balance at September 30$(6,046) $(5,872) $(6,046) $(5,872)
__________
(a)
Reclassified to Non-Financial Services interest income and other income/(loss), net.
(b)
Reclassified to Cost of sales. During the next twelve months we expect to reclassify existing net gains on cash flow hedges of $465548 million. See Note 11 for additional information.
(c)
Amortization and recognition of prior service costs/(credits) is included in the computation of net periodic pension cost. See Note 9 for additional information.


Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 13. OTHER INCOME/(LOSS)

Non-Financial Services

The amounts included in Non-Financial Services interest income and other income/(loss), net for the periods ended JuneSeptember 30 were as follows (in millions):
Second Quarter First HalfThird Quarter First Nine Months
2016 2015 2016 20152016 2015 2016 2015
Investment-related interest income$52
 $56
 $113
 $101
$50
 $60
 $163
 $161
Interest income/(expense) on income taxes1
 10
 (1) 1
9
 
 8
 1
Realized and unrealized gains/(losses) on cash equivalents and marketable securities(7) (16) 65
 (43)(13) 189
 52
 146
Gains/(Losses) on changes in investments in affiliates147
 18
 181
 18
(1) 
 180
 18
Royalty income137
 157
 320
 299
174
 149
 494
 448
Other59
 47
 115
 86
109
 48
 224
 134
Total$389
 $272
 $793
 $462
$328
 $446
 $1,121
 $908

Financial Services

The amounts included in Financial Services other income/(loss), net for the periods ended JuneSeptember 30 were as follows (in millions):
Second Quarter First HalfThird Quarter First Nine Months
2016 2015 2016 20152016 2015 2016 2015
Investment-related interest income$20
 $20
 $39
 $39
$18
 $19
 $57
 $58
Interest income/(expense) on income taxes15
 (3) 13
 (6)(2) (3) 11
 (9)
Insurance premiums earned41
 34
 80
 65
38
 32
 118
 97
Other6
 19
 41
 46
78
 49
 119
 95
Total$82
 $70
 $173
 $144
$132
 $97
 $305
 $241

NOTE 14. 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 infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

NOTE 15. CAPITAL STOCK AND EARNINGS PER SHARE

Earnings Per Share Attributable to Ford Motor Company Common and Class B Stock

Basic and diluted income per share were calculated using the following (in millions):
Second Quarter First HalfThird Quarter First Nine Months
2016 2015 2016 20152016 2015 2016 2015
Basic and Diluted Income Attributable to Ford Motor Company              
Basic income$1,970
 $2,160
 $4,422
 $3,313
$957
 $2,192
 $5,379
 $5,505
Diluted income1,970
 2,160
 4,422
 3,313
957
 2,192
 5,379
 5,505
              
Basic and Diluted Shares 
  
     
  
    
Basic shares (average shares outstanding)3,973
 3,974
 3,972
 3,968
3,974
 3,969
 3,972
 3,968
Net dilutive options and unvested restricted stock units24
 33
 24
 35
26
 30
 25
 34
Diluted shares3,997
 4,007
 3,996
 4,003
4,000
 3,999
 3,997
 4,002

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 16. COMMITMENTS AND CONTINGENCIES

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

Guarantees and Indemnifications

Guarantees and indemnifications are recorded at fair value at their inception. We regularly review our performance risk under these arrangements, and in the event it becomes probable we will be required to perform under guarantee or indemnity, the amount of probable payment is recorded.

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 2033, and guarantees will terminate on payment and/or cancellation of the underlying obligation. A payment by us would be triggered by failure of the joint venture or other third party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from a third party amounts paid by us under the guarantee. 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.

In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction, such as the sale of a business. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax, and shareholder matters; intellectual property rights; power generation contracts; governmental regulations and employment-related matters; dealer, supplier, and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of terms of the contract or by a third-party claim. While some of these indemnifications are limited in nature, many of them do not limit potential payment. Therefore, we are unable to estimate a maximum amount of future payments that could result from claims made under these unlimited indemnities.

The maximum potential payments and the carrying value of recorded liabilities related to guarantees and limited indemnities were as follows (in millions):
June 30,
2016
 December 31,
2015
September 30,
2016
 December 31,
2015
Maximum potential payments$200
 $284
$227
 $284
Carrying value of recorded liabilities related to guarantees and limited indemnities23
 23
23
 23

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 claims for compensatory, punitive, or antitrust or other treble damages in very large amounts, or demands for field service actions, environmental remediation programs, sanctions, loss of government incentives, assessments, or other relief, which, if granted, would require very large expenditures.

The extent of our financial exposure to these matters is difficult to estimate. Many matters do not specify a dollar amount for damages, and many others specify only a jurisdictional minimum. To the extent an amount is asserted, our historical experience suggests that in most instances the amount asserted is not a reliable indicator of the ultimate outcome.

We accrue for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood that we will prevail, and the severity of any potential loss. We reevaluate and update our accruals as matters progress over time.

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS

NOTE 16. COMMITMENTS AND CONTINGENCIES (Continued)

For the majority of matters, which generally arise out of alleged defects in our products, we establish an accrual based on our extensive historical experience with similar matters. We do not believe there is a reasonably possible outcome materially in excess of our accrual for these matters.

For the remaining matters, where our historical experience with similar matters is of more limited value (i.e., “non-pattern matters”), we evaluate the matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of a material loss in excess of any accrual that can be estimated. Our estimate of reasonably possible loss in excess of our accruals for all material matters currently reflects indirect tax and customs matters, for which we estimate the aggregate risk to be a range of up to about $2.8 billion.

As noted, the litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. Our assessments are based on our knowledge and experience, but the ultimate outcome of any matter could require payment substantially in excess of the amount that we have accrued and/or disclosed.

Warranty and Field Service Actions

We accrue obligations for warranty costs and field service actions (i.e., safety recalls, emission recalls, and other product campaigns) at the time of sale using a patterned estimation model that includes historical information regarding the nature, frequency, and average cost of claims for each vehicle line by model year. Warranty and field service action obligations are reported in Other liabilities and deferred revenue. We reevaluate the adequacy of our accruals on a regular basis.

We recognize the benefit from a recovery of the costs associated with our warranty and field service actions when specifics of the recovery have been agreed with our supplier and the amount of the recovery is virtually certain. Recoveries are reported in ReceivablesTrade and other receivables and Other assets.

The estimate of our future warranty and field service action costs, net of supplier recoveries, for the periods ended JuneSeptember 30 were as follows (in millions):
First HalfFirst Nine Months
2016 20152016 2015
Beginning balance$4,558
 $4,785
$4,558
 $4,785
Payments made during the period(1,593) (1,229)(2,464) (2,036)
Changes in accrual related to warranties issued during the period1,179
 1,005
1,704
 1,523
Changes in accrual related to pre-existing warranties279
 212
1,088
 495
Foreign currency translation and other45
 (68)42
 (192)
Ending balance$4,468
 $4,705
$4,928
 $4,575

Revisions to our estimated costs are reported as Changes in accrual related to pre-existing warranties in the table above.



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 JuneSeptember 30, 2016, and the related consolidated statements of income and comprehensive income for the three-month and six-monthnine-month periods ended JuneSeptember 30, 2016 and 2015 and the condensed consolidated statement of cash flows and the consolidated statement of equity for the six-monthnine-month periods ended JuneSeptember 30, 2016 and 2015. These interim financial statements are the responsibility of the Company’s management.

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, 2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein), and in our report dated
February 11, 2016 (which included an explanatory paragraph with respect to the Company’s change in the manner in which it accounts for defined benefit pension and other postretirement employee benefit plans), we expressed an unqualified opinion on those consolidated financial statements. As discussed in Note 1 to the accompanying consolidated interim financial statements, the Company changed its presentation of the consolidated balance sheet to classify assets and liabilities as current or non-current. The accompanying December 31, 2015 consolidated balance sheet reflects this change.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Detroit, Michigan
July 28,October 27, 2016



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

OVERVIEW

Our core Automotive business includes the designing, manufacturing, marketing, and servicing of a full line of Ford cars, trucks, SUVs, and electrified vehicles,SUVs, as well as Lincoln luxury vehicles. We provide vehicle-related financing and leasing activities throughTo expand our Ford Credit operation. At the same time,business model, we are aggressively pursuing emerging opportunities with investments in connectivity, mobility, autonomous vehicles, the customer experience,electrification, autonomy, and data and analytics.mobility. We provide financial services through Ford Credit.
In conjunction with our expanded business model to become an automotive, financial services, and mobility company, beginning with the second quarter of 2016, we have changed our reportable segments. Prior-period amounts have been adjusted retrospectively to reflect the reportable segment change. See Note 3 of the Notes to the Financial Statements for additional information.

Non-GAAP Financial Measures That Supplement GAAP Measures

We use both generally accepted accounting principles (“GAAP”) and non-GAAP financial measures for operational and financial decision making, and to assess Company and segment business performance. The non-GAAP measures listed below are intended to be considered by users as supplemental information to their equivalent GAAP measures, to aid investors in better understanding our financial results. We believe that these non-GAAP measures provide useful perspective on underlying business results and trends, and a means to assess our period-over-period results. These non-GAAP measures should not be considered as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. These non-GAAP measures may not be the same as similarly titled measures used by other companies due to possible differences in method and in items or events being adjusted.

Total Company Adjusted Pre-tax Profit (Most Comparable GAAP Measure: Net Income Attributable to Ford) – The non-GAAP measure is useful to management and investors because it allows users to evaluate our pre-tax results excluding pre-tax special items. Pre-tax special items consist of (i) pension and other postretirement employee benefits (“OPEB”) remeasurement gains and losses that are not reflective of our underlying business results, (ii) significant restructuring actions related to our efforts to match production capacity and cost structure to market demand and changing model mix, and (iii) other items that we do not necessarily consider to be indicative of earnings from ongoing operating activities. 

Adjusted Earnings Per Share (Most Comparable GAAP Measure: Earnings Per Share) – Measure of Company’s diluted net earnings per share adjusted for impact of pre-tax special items (described above), and tax special items. The measure provides investors with useful information to evaluate performance of our business excluding items not indicative of the underlying run rate of our business.

Adjusted Effective Tax Rate (Most Comparable GAAP Measure: Effective Tax Rate) – Measure of Company’s tax rate excluding pre-tax special items (described above) and tax special items. The measure provides an ongoing effective rate which investors find useful for historical comparisons and for forecasting.

Ford Credit Managed Receivables (Most Comparable GAAP Measure: Net Finance Receivables plus Net Investment in Operating Leases) – Measure of Ford Credit’s total net receivables, excluding unearned interest supplements and residual support, allowance for credit losses, and other (primarily accumulated supplemental depreciation). The measure is useful to management and investors as it closely approximates the customer’s outstanding balance on the receivables, which is the basis for earning revenue.

Ford Credit Managed Leverage (Most Comparable GAAP Measure: Financial Statement Leverage) – Ford Credit’s debt-to-equity ratio adjusted (i) to exclude cash, cash equivalents, and marketable securities (other than marketable securitiesamounts related to insurance activities), and (ii) for derivative accounting. The measure is useful to investors because it reflects the way Ford Credit manages its business. Cash, cash equivalents, and marketable securities are deducted because they generally correspond to excess debt beyond the amount required to support operations and on-balance sheet securitization transactions. Derivative accounting adjustments are made to asset, debt, and equity positions to reflect the impact of interest rate instruments used with Ford Credit’s term-debt issuances and securitization transactions. Ford Credit generally repays its debt obligations as they mature, so the interim effects of changes in market interest rates are excluded in the calculation of managed leverage.

See “GAAP Reconciliations ofto Non-GAAP Financial Measures” section in this Item 2.

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

RESULTS OF OPERATIONS

Total Company

Net income attributable to Ford. The chart below shows our secondthird quarter 2016 net income attributable to Ford.

q32016netincome7.jpg

Net income attributable to Ford in the secondthird quarter of 2016 was $2 billion$957 million or $0.49$0.24 earnings per share of Common and Class B Stock, a decrease of $190 million$1.2 billion or $0.05$0.31 per share from the secondthird quarter a year ago. Secondof 2015. Third quarter 2016 pre-tax results of our Automotive segment, Financial Services segment, All Other, Special Items, and Taxes are discussed in the following sections in “Results of Operations.”

Revenue. Company revenue in the secondthird quarter of 2016 was $39.5$35.9 billion, $2.2 billion higherlower than a year ago.

Equity. At JuneSeptember 30, 2016, total equity attributable to Ford was $31.1$31.5 billion, an increase of $2.5$2.9 billion compared with December 31, 2015. The detail for this change is shown below (in billions):

Higher/(Lower)Higher/(Lower)
Net income$4.4
$5.4
Dividends(2.2)(2.8)
Other comprehensive income0.3
0.2
Compensation-related equity issuances0.1
0.2
Treasury stock share repurchases(0.1)(0.1)
Total$2.5
$2.9

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

The chart below shows our secondthird quarter 2016 total Company adjusted pre-tax results and pre-tax results of our Automotive segment by regional business unit, our Financial Services segment, and All Other, which is mainly net interest expense.

q32016totcowaterfall7.jpg
TotalOur total Company adjusted pre-tax profit was $1.4 billion in the secondthird quarter of 2016, was $3 billion or $0.52higher than our guidance of adjusted earnings per shareabout $1 billion. This reflects favorable calendarization of Commonmarketing accruals in the United States and Class B Stock.cost performance, all of which will be offset in the fourth quarter of 2016. Automotive segment pre-tax results were driven by North America, Europe, and Europe. In total, our operations outside of North America delivered a record third quarter pre-tax profit of $129 million, about the same as a year ago.in Asia Pacific.

Financial Services segment pre-tax profit of $385$552 million in the second quarter of 2016 included another solidstrong performance at Ford Credit, which earned a pre-tax profit of $400$567 million.

TheAs shown below the chart, our Automotive andsegment results were $1.7 billion lower than a year ago while our Financial Services segments pre-tax profits were lower than the same period insegment improved slightly compared to 2015.


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

AUTOMOTIVE SEGMENT

In general, we measure year-over-year change in Automotive segment pre-tax results using the causal factors listed below, with net pricing 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 contribution 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, special lease offers, and stock adjustments on dealer inventory

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

Structural Costs – primarily measures profit variance driven by absolute change in cost categories that typically do not have a directly proportionate relationship to production volume. Structural costs include the following cost categories:
Manufacturing, Including Volume Related consists primarily of costs for hourly and salaried manufacturing personnel, plant overhead (such as utilities and taxes), and new product launch expense. These costs could be affected by volume for operating pattern actions such as overtime, line-speed, and shift schedules
Engineering consists primarily of costs for engineering personnel, prototype materials, testing, 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) transactions denominated in currencies other than the functional currencies of the relevant entities, (ii) effects of converting functional currency income to U.S. dollars, (iii) effects of remeasuring monetary assets and liabilities of the relevant entities in currencies other than their functional currency, or (iv) results of our foreign currency hedging

Other includes a variety of items, such as parts and services profits, royalties, government incentives and compensation-related changes

In addition, definitions and calculations used in this report include:

Wholesales and Revenue – wholesale unit volumes include all Ford and Lincoln badged units (whether produced by Ford or by an unconsolidated affiliate) that are sold to dealerships, units manufactured by Ford that are sold to other manufacturers, units distributed by Ford for other manufacturers, and local brand units produced by our China joint venture, Jiangling Motors Corporation, Ltd. (“JMC”), that are sold to dealerships. Vehicles sold to daily rental car companies that are subject to a guaranteed repurchase option (i.e., rental repurchase), as well as other sales of finished vehicles for which the recognition of revenue is deferred (e.g., consignments), also are included in wholesale unit volumes. Revenue from certain vehicles in wholesale unit volumes (specifically, Ford badged vehicles produced and distributed by our unconsolidated affiliates, as well as JMC brand vehicles) are not included in our revenue

Automotive Segment Operating Margin – defined as Automotive segment pre-tax profit divided by Automotive segment revenue

Industry Volume and Market Share – based, in part, on estimated vehicle registrations; includes medium and heavy duty trucks
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 

SAAR – seasonally adjusted annual rate

Automotive Cash – includes cash, cash equivalents, and marketable securities

The charts on the following pages detail secondthird quarter 2016 key metrics and the change in secondthird quarter 2016 pre-tax results compared with the secondthird quarter of 2015 by causal factor for our Automotive segment by business unit.

References to Automotive segment and business unit records are since at least 2000.

q32016autometrics7.jpg

Shown above are the key market factors and financial metrics for our Automotive segment in the secondthird quarter of 2016, which were mixedall declined from a year ago.ago, consistent with expectations. The changes were driven by North America. Wholesale volumes were flat whiledown 4%, more than explained by reductions in dealer stocks this year in North America and Europe versus increases a year ago. Automotive revenue was up 5%.down 7% due to the lower volume.

GlobalOur global market share, at 7.5%, was down three-tenthsone-tenth of a percentage point compared to a year ago driven by lower market shares in North America, South America, and Middle East & Africa. Market share was flat in all regions, excluding North America. Europe and higher in Asia Pacific.

Global industry volume, at anSAAR in the quarter was estimated SAAR of 91.2to be 90.1 million units, was up 5.4an increase of 2.9 million units or 6% from3% compared with a year ago; thisthe increase was driven by Asia Pacific and Europe.

Automotive segment operating margin and pre-tax profit, at 7.7%3.3% and $2.8$1.1 billion, respectively, were both strong butsignificantly lower than a year ago. First half 2016

As shown below the chart, the Automotive key metrics alsoin the first nine months of 2016 were strong, with all metrics, except global market share, higher than 2015.about the same as last year.

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

q32016autowaterfall7.jpg

As shownShown above our secondare the factors that contributed to the $1.7 billion decline in third quarter Automotive segment pre-tax profit. The lower profit was down $130 million fromis explained by lower volume, mainly the unfavorable changes in dealer stocks in North America and Europe, as well as higher warranty costs related to a year ago, driven by unfavorable exchange and market factors; improved cost performance was a partial offset. Mixrecall. Net pricing was favorable, in all regions, except South America, reflecting the strength of our portfolio and the success of new product introductions and higher series offerings. Other primarily was a gain on the sale of an equity investmentmainly in North America.

Cost of sales and Selling, administrative, and other expenses for the secondthird quarter of 2016 and 2015 were $35was $33 billion and $32.9$33.6 billion, respectively, a differencedecrease of $2.1 billion.$600 million. Cost of sales and Selling, administrative, and other expenses for the first halfnine months of 2016 and 2015 were $67.8was $100.8 billion and $63.8$97.4 billion, respectively, a differencean increase of $4$3.4 billion. The detail for the secondthird quarter and first halfnine months of 2016 change is shown below (in billions):
 2016 Lower/(Higher) 2015
 
Second
Quarter
 
First
Half
Volume and mix, exchange, and other$(2.1) $(4.2)
Contribution costs   
Material excluding commodities0.1
 0.5
Commodities0.4
 0.9
Warranty(0.2) (0.2)
Freight and other0.1
 0.1
Structural costs(0.3) (0.8)
Special items(0.1) (0.3)
Total$(2.1) $(4.0)



 2016 Lower/(Higher) 2015
 
Third
Quarter
 
First
Nine Months
Volume and mix, exchange, and other$1.8
 $(2.5)
Contribution costs   
Material excluding commodities(0.3) 0.2
Commodities0.1
 1.0
Warranty(0.6) (0.8)
Other0.1
 0.3
Structural costs(0.5) (1.3)
Special items
 (0.3)
Total$0.6
 $(3.4)


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

q32016nametrics7.jpg

Shown above are the secondthird quarter 2016 key metrics for the North America business unit, which were strong but mixedlower in the quarter compared withto a year ago.

For the second quarter of 2016,The top line declined with wholesale volume was flat whiledown 11% and revenue was up 2%down 8% from a year ago. Lower wholesales were driven by dealer stock reductions this year compared to an increase last year for F-150 following the Kansas City Assembly Plant launch, the launch effect of the all-new Super Duty, and aligning car production with demand.

Our North America market share was flatdown five-tenths of a percentage point, with our U.S. share increasingdown by three-tenthsseven-tenths of a percentage point to 15.3%14%. The improvementdecrease was driven by stronglower retail sales of cars and utilities, as well as lower fleet sales, mainly SUVs and Transit, along with strong F-seriesrental. F-Series retail performance.

share was flat from a year ago. North America SAAR, at 21.5 million units, was up 400,000 units compared with the second quarter of 2015. U.S. SAAR, at 17.521.8 million units, was down 100,000200,000 units; U.S. SAAR, at 17.8 million units, was down 500,000 units. While the U.S. industry remains at healthy levels overall, the competitive environment has increased as growth has slowed and the retail industry demand has weakened. This has resulted in higher industry incentives, with a retail industry sales rate that has declined in three out of the last four months. We have seen a tougher pricing environment in the second quarter, with the car segment the most impacted as various competitors look to protect share.

Our operatingOperating margin was strong at 11.3%5.8%, though down nine-tenths of a percentage pointsharply from last year. Pre-taxyear, and pre-tax profit also was strong at $2.7$1.3 billion, but down $135 million from 2015.$1.6 billion.

As shown below the chart, each of North America’s key metrics improved in the first halfnine months of 2016 were strong, though mixed from a year ago with record first half pre-tax profit and operating margin.

ago.


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

q32016nawaterfall7.jpg

Unfavorable market factors,As shown above, our third quarter 2016 pre-tax profit was $1.6 billion lower than a year ago, driven by higher Fordthe launch impact of our all-new Super Duty, the dealer stock reduction of F-150 versus the increase a year ago and industry incentives, explain North America’s lower pre-tax profitnormalization of series mix for F-150, and the previously announced door latch recall.

Net pricing was favorable for the second quarter offirst time in 2016. The lower net pricing reflects an increase in incentives for us that was generally in line with the industry change.

While net pricing was lower in the second quarter of 2016, mix remained strong, driving our averageAverage U.S. retail transaction prices (ATPs)were $1,300 per vehicle higher compared to a year ago; this was $550 per vehicle aboveago, almost double the industry average.average increase.

Improved cost performance includes favorable commodities, offset partially by higher warranty costs which includes the impact of the safety recall issued in the second quarter of 2016 concerning Takata airbag inflators. Material cost reductions in the second quarter offset product cost increases.

Other includes the sale of the majority of our equity stake in OEConnection LLC.

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

q32016sametrics7.jpg

In South America, our results were negatively impacted by the continued difficult external conditions, particularlyincluding high inflation and unfavorable exchange in Brazil where the economy continued to contractArgentina, and lower industry volume in the second quarter of 2016 declined 22% compared to prior year.Brazil.

All of our key metrics deteriorated in the second quarter of 2016 compared to 2015. The top line was lower with wholesales down 15%13% and revenue down 17% – almost all of this was driven by15%, reflecting lower industry and market share, and weaker exchange.local currencies.

Our market share for the region, at 9.4%, was down eight-tenths of a percentage point due to Fiesta in Brazil. Industry SAAR for the region, at 3.6 million units, was 600,000400,000 units lower than in the second quarter of 2015, mostlya year ago, due to Brazil. Our market share for the region, at 8.7%, was down 1.3 percentage points, as we continued to focus on optimizing more profitable share amid high industry discounting.

In the second quarter of 2016, our operatingOperating margin and pre-tax results for the region were both lower than a year ago.

As shown below the chart, each of South America’s key metrics in the first half werenine months of 2016 was lower than a year ago.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)


As shown above, the higher loss in South America in the second quarter of 2016 was more than explained by high local inflation and weaker local currencies, net of higher pricing. This was offset partially by our continued efforts to reduce costs, including actions we have taken to reduce our personnel and overhead costs as well as the elimination of the third crew at our Camacari plant in March of 2016. Our team is continuing its work to further improve the cost structure of the business and identify further revenue opportunities.

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


Shown above are the key metrics for Europe, where our Transformation Strategy continued to deliver. All metrics, excluding market share, improved sharply in the second quarter of 2016. Top-line growth was strong, with wholesale volume up 11% and revenue up 16%. Our market share in Europe, at 7.5%, was down one-tenth of a percentage point in the second quarter of 2016, reflecting market mix, with stronger industry growth in southern Europe and continued focus on profitable share as we chose not to participate in the growth of lower-margin demonstrator and fleet channels.

Europe SAAR, at 19.7 million units, was 4% higher than the second quarter of 2015.

Our operating margin at 5.8% and pre-tax profits at $467 million both improved significantly from a year ago.

As shown below the chart, each of Europe’s key metrics in the first half of 2016 improved, except market share which was flat; operating margin and pre-tax profit were up significantly.



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

q32016sawaterfall7.jpg

As shown above, the higher loss in South America in the third quarter of 2016 was more than explained by the unfavorable effects of high local inflation and weaker local currencies exceeding higher net pricing. This was offset partially by continued progress in reducing costs, including further workforce reductions as we optimized our second quarter 2016 pre-tax profit in Europe nearly tripled compared to a year ago.

Favorable market factors, including strong mix and improved cost performance reflecting material cost reductions drove Europe’s improved profit. On mix, we have seen strong consumer acceptance of our new products, including the all-new S-Max and Galaxy, and increasing demand for our higher trim series across all major vehicle lines.

Unfavorable exchange, reflecting the balance sheet impact of the weak sterling due to Brexit, was a partial offset.manufacturing plant operating patterns.

Our operationsteam is continuing its work to further improve the cost structure of the business and identify revenue opportunities. Importantly, we are now seeing some key economic indicators beginning to improve, although still in Russia also contributed meaningfully to Europe’s improved results innegative territory, suggesting we may have passed the second quarter.trough of the current economic cycle.

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

q32016eurmetrics7.jpg

Shown above are the third quarter 2016 key metrics for Europe, where we delivered our best third quarter pre-tax profit since 2007, with pre-tax profit and operating margin up sharply from a year ago. The top-line declined from a year ago with wholesale volume down 15% and revenue down 10%, driven by lower volume.

Our market share, at 7.9%, was flat from a year ago. Ford remained Europe’s best selling commercial vehicle brand in the third quarter of 2016 with improved share from a year ago. Europe SAAR, at 20.1 million units, was 4% higher than in the third quarter of 2015.

Our operating margin, at 2.2%, was up 2.1 percentage points from a year ago, and pre-tax profit was $138 million, up $129 million.

As shown below the chart, each of Europe’s key metrics in the first nine months of 2016 improved except market share which was flat, with pre-tax profit exceeding $1 billion and operating margin at 4.9%.

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

q32016eurwaterfall7.jpg

As shown above, we delivered our sixth consecutive profitable quarter, with pre-tax profit $129 million higher in the third quarter of 2016 compared to a year ago, driven by improved cost performance, strong mix, and favorable balance sheet exchange.

We delivered our fourth consecutive quarter of year-over-year cost performance improvement, reflecting our continued focus on material cost reductions. Mix remains strong, driven by the strength of our products, including Ranger, Mustang, and Kuga, and increasing demand for our higher trim series across all major vehicle lines. Lower volume was a partial offset, reflecting a reduction in dealer stocks compared to an increase a year ago as we took actions to align production to expected demand following Brexit.

Although not shown above, our operations in Russia contributed meaningfully to Europe’s improved results in the third quarter of 2016.

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

q32016meametrics7.jpg

Shown above are key metrics for the Middle East & Africa region wherefor the business was impacted adversely by low oil prices, weak local currencies, and political strife. Revenue was flat in the secondthird quarter of 2016, where our key metrics were down compared to a year ago, while all other key metrics were down.reflecting lower industry and market performance in the Middle East.

The top line in the third quarter of 2016 was down 14% from a year ago, driven primarily by lower wholesale volume. The decline in volume largely reflects stock adjustments in Saudi Arabia for lower industry and market performance. We are working with our distributor to improve our performance.

SAAR for the region, at 3.93.7 million units, was down 300,000500,000 units from the secondthird quarter of 2015. Within this, the closedmarkets where we participate declined 500,000 units. The markets where we do not participate, with Iran being the largest, grew by 300,000 units.were about the same as a year ago. Our market share for the region was 4.4%4.1%, down two-tenthsthree-tenths of a percentage point due to industry growth in Iran.unfavorable market mix. In markets where we participate, our market share was up six-tenth of a percentage point, reflecting the strength of our products, including Taurus, EcoSport, and Ranger.flat.

Middle East & Africa operating margin in the second quarter of 2016 was negative 7.2%19%, down 2.1 percentage pointssharply from 2015,a year ago, reflecting lower industry volume and unfavorable exchange, primarily the South African rand.

As shown below the chart, each of the key metrics in the first halfnine months of 2016 except market share, declinedwas lower compared with a year ago.

Our team inago, reflecting the region has focused on achieving cost efficiencies across the business to offset, in part, the deteriorating conditions in the region.impact of adverse external conditions.

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

q32016apmetrics7.jpg

In Asia Pacific, our secondwe delivered a record third quarter loss was driven mainly by market performance in China, higher costs to support future growth, and the weaker yuan. Allpre-tax profit with all key metrics excluding revenue, deteriorated in the second quarter of 2016improved compared to a year ago. Wholesale volume declined 6% reflecting the planned eight-week shutdown at our Chongqing #1 plant in China for facility upgrades, resulting in 40,000 units of lost production, as well as the non-repeat of dealer stock increases a year ago. Revenueincreased 30% and revenue from consolidated operations improved 17%.16%, reflecting higher industry volume and strong performance from new products.

Asia Pacific second quarter 2016 SAAR was 42.540.9 million units, up 5.33.2 million units from the third quarter of 2015, mostly explained by a 4.62.8 million unit increase in China SAAR, estimated at 26.624.9 million unitsunits. This was driven by the government purchase tax incentive for the second quarter.

vehicles with engine displacements of 1.6 liters or smaller. Asia Pacific market share was 3.6%4.0%, down three-tenthsup five-tenths of a percentage point, more than explainedwith China share increasing five-tenths of a percentage point to 5.1%. The improvement in share was driven by China.strong C-car sales and new product introductions, including Taurus, the locally built Edge, Lincoln MKX, and Lincoln MKZ.

Asia Pacific operating margin was negative 0.3%4.3%, down 8.2up 3.5 percentage points from 2015,a year ago, and the pre-tax lossprofit was $8$131 million, down $202up $109 million. Our China joint ventures contributed $296$320 million to pre-tax profit, reflecting our equity share of the JVs’joint ventures’ after-tax earnings, whichearnings; this was $115$67 million lowerhigher than last year.a year ago. The joint ventures’ net income margin at our China joint ventures was 16.1%13.4%, down 1.2up seven-tenths of a percentage points.point.

As shown below the chart, all of our key metrics in the first nine months of 2016 year-to-date metrics were mixed.improved compared with a year ago, except for operating margin.


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

q32016apwaterfall7.jpg

As shown above, China market share in the secondour third quarter of 2016 was 4.4%, down nine-tenths of a percentage point from 2015. This decline was driven by industry mix, higher passenger and lower commercial vehicles, and adverse segmentation.

Additionally, our performance in the market was worse, reflecting intensified competition from domestic car manufacturers in the C-car and small SUV segments, offset partially by our continued strong performance in the medium and larger car and SUV segments. Our mix of these more profitable segments now account for about 40% of our sales, up 5 percentage points compared with last year.

Our share improved each month within the second quarter as we implemented recovery actions. We expect further improvement in the balance of the year, particularly in the fourth quarter which should benefit from important new product launches – Taurus 1.5L, Kuga, Mondeo, MKZ, and Continental.


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


As shown above, mostrecord profit drivers in Asia Pacific were unfavorablewas up sharply compared with 2015. Volume and mix were down slightly as lowerwas up reflecting higher market share, favorable industry and the non-repeat of a dealer stock increasereductions in China a year ago were mostly offset by higher industry volume. The planned eight-week shutdown of Chongqing #1 was a factor in the overall volume decline.ago.

TheLower net pricing compared to a year ago reflects continued negative pricing trends in China. In the quarter, the rate of negative pricing in China continued to slow since the fourth quarter of 2015, but we now2015. We continue to expect 2016 full-yearfull year negative pricing for us and the industry to be about 6% — at the high end of our previous assumption of 5% - 6%.industry.

Unfavorable cost performance was driven by cost increases to support higher volumes and continued investment for future growthproduct and regulatory actions; it includes the carry-over impact of plant launches during the second half of 2015. The investments in structural cost were offset partially by our 2015 plant launches. continued focus on material cost efficiencies.

Unfavorable exchange reflects mainly the impact of the weaker yuan. TheChinese yuan; the Company has a substantial net revenue exposure to yuan.this currency.



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

FINANCIAL SERVICES SEGMENT

In general, we measure year-over-year changes in Ford Credit’s pre-tax results using the causal factors listed below:

Volume and Mix:
Volume primarily measures changes in net financing margin driven by changes in average managed receivables at prior period financing margin yield (defined below in financing margin) at prior period exchange rates. 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
Mix primarily measures changes in net financing margin driven by period over period changes in the composition of Ford Credit’s average managed receivables by product and by country or region

Financing Margin:
Financing margin variance is the period-to-period change in financing margin yield multiplied by the present period average managed receivables at prior period exchange rates. This calculation is performed at the product and country level and then aggregated. Financing margin yield equals revenue, less interest expense and scheduled depreciation for the period, divided by average managed 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 is the change in the provision for credit losses at prior period exchange rates. For analysis purposes, management splits the provision for credit losses 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 2015 Form 10-K Report

Lease Residual:
Lease residual measures changes to residual performance at prior period exchange rates. 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 (which includes both base and accumulated supplemental depreciation) of the vehicles sold. Changes in accumulated supplemental depreciation are primarily driven by changes in Ford Credit’s estimate of the expected auction value at the end of the lease term, and changes in the 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.sold. 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 2015 Form 10-K Report

Exchange:
Reflects changes in pre-tax results driven by the effects of converting functional currency income to U.S. dollars

Other:
Primarily includes operating expenses, other revenue, and insurance expenses at prior period exchange rates
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
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 

Ford Credit. The chart below details the key metrics for Ford Credit for secondthird quarter of 2016.

q32016fcmetrics7.jpg

In the secondthird quarter of 2016, Ford Credit’s pre-tax profit remained solid but lowerwas strong – the best quarterly profit since 2011 – and receivables were higher than a year ago. Receivables were up from last year, as the portfolio continued to growago, in line with expectations. Portfolio performance remained robust. FICO scores remained consistent. The over-60-day delinquency ratio of 1216 basis points in the secondthird quarter of 2016 continued at the low end of Ford Credit’s historical experience. The loss-to-receivables ratio of 3745 basis points was up 1511 basis points, also below, but approaching, Ford Credit’s historical experience. Originations, servicing, and collections practices remained disciplined and consistent.

As shown below the chart, each of Ford Credit’s first-halfyear-to-date key metrics were unfavorable compared with a year ago.


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

q32016fcwaterfall8.jpg

As shown above, Ford Credit's lower secondprofit improvement of $26 million in the third quarter profit of $400 million reflects2016 is explained primarily by favorable volume, mix, and market valuation adjustments to derivatives. Partial offsets include unfavorable lease residual performance and higher provision for credit losses, and other factors. Volumelosses. The favorable volume and mix were partial offsets as Ford Credit continues to grow around the world.was driven by growth in all products globally.

Lease residual performance primarily reflects higher depreciation expense on smaller vehiclesin North America related to expected lower auction values in the North America lease portfolio. Ford Credit records depreciation expense on leased vehicles over the life of the contracts and depreciates them to projected lease-end auction values. We assess auction values quarterly and adjust depreciation accordingly. Against the backdrop of lower fuel prices and more vehicles coming off lease across the industry, our auction value outlook for smaller vehicles is lower.

Credit loss performance primarily reflects higher charge-offs as a result of higher defaults and an increaseseverities in the credit loss reserve. Higher charge-offs resulted from higher default rates and higher loss severities. The increase in reserves reflects these factors as well as growth in receivables.North America. Credit losses have been at historically low levels for quite some time, and we are startingcontinued to see credit losses increase toward more normal levels.

Other primarily reflects higher storm-related insurance losses and unfavorable derivative market valuation following the Brexit vote.

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

q32016fcfintrends7.jpg

Ford Credit and Ford continueLeasing is a great trade cycle management product, but lease share must be managed carefully to work together under a One Ford leaseprotect residuals. Our leasing strategy that considers many factors including share, term, model mix, and geography to optimize sales, share, profits, and other factors. Ford Credit continues to expect full-yearresiduals.

Over the last several years, we have seen industry lease share grow with rising industry volumes. As a result, the supply of off-lease vehicles is higher and will continue to begrow for the next several years. The increased supply of used vehicles, along with higher new vehicle incentives, is resulting in lower thanauction values, particularly in smaller, more fuel efficient vehicles given low fuel prices. We expect this trend to continue, and we are planning for lower auction values going forward.

Given significant industry growth in leasing and higher new vehicle incentives, we lowered our projection on residual values which makes the firstrelative cost of leasing higher. As a result, Ford Credit’s lease share and lease placement volume in the third quarter of 2016 reflecting the parameters of our strategy.were lower compared to a year ago.

Ford Credit’s usedoff-lease vehicle auction values in the secondthird quarter of 2016 were lower than a year ago and about flat versusslightly lower than the prior quarter. Although Manheim reported increases in used vehicle prices in the quarter, with 36-month off-lease auction values about $600 lower year-over-year. Ford Credit’s results reflect a larger mix of two-auction performance has been consistent with the industry when comparing similar vehicle age and three-year-old smaller vehicles which have had lower auction values.segment.

On longer-term financing, Ford Credit’s average retail term remains largely consistent with recent periodsunchanged from last year, and lower than the industry. Retailretail contracts of 73 months and longer continued to be a relatively small part of Ford Credit’s business.

Finally, the average placement FICO score was up from first quarter and remained consistent with recent periods.the second quarter and the same period last year, reflecting Ford Credit uses proprietary credit scoring models, withCredit's consistent underwriting practices that have been consistent for years.  Higher risk business, as classified at contract inception, consistently represents 5% - 6% of Ford Credit’s portfolio and has been stable for over 10 years.practices.


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

ALL OTHER

All Other is a combination of operating segments that did not meet the quantitative thresholds in this reporting period to qualify as reportable segments. All Other consists of our Central Treasury Operations (formerly Other Automotive) and Ford Smart Mobility LLC.

The Central Treasury Operations segment is primarily engaged in decision making for investments, risk management activities, and providing financing for the Automotive segment. Interest income (excluding interest earned on our extended service contract portfolio that is included in our Automotive segment), interest expense, gains and losses on cash equivalents and marketable securities, and foreign exchange derivatives associated with intercompany lending are included in the results of Central Treasury Operations. The underlying assets and liabilities, primarily cash and cash equivalents, marketable securities, debt, and derivatives, remain with the Automotive segment.

Ford Smart Mobility LLC is a new subsidiary formed to design, build, grow, and invest in emerging mobility services. Designed to compete like a start-up company, Ford Smart Mobility LLC will design and build mobility services on its own, and collaborate with start-ups and tech companies.

Our secondthird quarter 2016 All Other pre-tax results were a loss of $224$223 million, a $57$60 million highergreater loss compared with a year ago. This increase primarily reflectsis more than explained by higher net interest expense.expense and net losses on cash equivalents and marketable securities.

SPECIAL ITEMS

As detailed in Note 3 of the Notes to the Financial Statements, we allocate special items toare reflected as a separate reconciling item, as opposed to allocating them among the Automotive segment, Financial Services segment, and All Other. This reflects the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources.

Our pre-tax and tax special items were as follows:

q32016specials7.jpg


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

TAXES

Our tax provision in the secondthird quarter and first halfnine months of 2016 was $903$426 million and $2.1$2.5 billion, respectively, resulting in a GAAPan effective tax rate of 31.4%30.7% and 32.2%31.9%, respectively.

Our secondthird quarter and first halfnine months 2016 adjusted effective tax rate, which excludes special items, was 30.1%25.9% and 29.8%29.1%, respectively, 4.17.4 and 4.85 percentage points lower than a year ago. The lower adjusted effective tax rates through the first halfnine months of 2016 reflect tax benefits from legislation enacted December 18, 2015 making permanent the U.S. research and development tax credit.

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

LIQUIDITY AND CAPITAL RESOURCES

q32016bssummary7a.jpg

Automotive Segment

Our Automotive liquidity strategy includes ensuringLiquidity. One of our key priorities is to finance our plan and maintain a strong balance sheet, while at the same time having resources available to grow our core business and invest in emerging opportunities. Based on our planning assumptions, we believe that we have sufficient liquidity and capital resources to continue to invest in new products and services that customers want and value, transform and grow our business, pay our debts and obligations as and when they come due, pay a sustainable dividend, and provide protection within an uncertain global economic environment.

Our key balance sheet metrics include cash, cash equivalents, and marketable securities (collectively, “Automotive cash”), Automotive liquidity, which includes Automotive cash and total available with a high degreecommitted credit lines, and cash net of certainty throughoutdebt.
At September 30, 2016, we had $24.3 billion of Automotive cash, of which 85% was held by consolidated entities domiciled in the business cycle by generating cash from operations and maintaining access to other sources of funding.United States. We target to have an average ongoing Automotive 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 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 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 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 2015 Form 10-K Report, as well as Note 16 of the Notes to the Financial Statements, regarding commitments and contingencies that could impact our liquidity.

Our key liquidity metrics are Automotive cash Automotive liquidity, and operating cash flow (which best represents the ability of our Automotive operations to generate cash).

Automotive cash is detailed below as of the dates shown (in billions):
 
June 30,
2016
 March 31,
2016
 
December 31,
2015
 
June 30,
2015
Cash and cash equivalents$9.5
 $5.6
 $5.4
 $6.1
Marketable securities17.7
 18.7
 18.2
 14.6
Automotive cash$27.2
 $24.3
 $23.6
 $20.7

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 Automotive cash levels and average maturity on a daily basis. At June 30, 2016, consolidated entities domiciled in the United States held 80% of our total Automotive cash.

Automotive cash and liquidity as of the dates shown were as follows (in billions):
 June 30,
2016
 
December 31,
2015
 
June 30,
2015
Automotive cash$27.2
 $23.6
 $20.7
Available credit lines   
  
Revolving credit facility, unutilized portion10.3
 10.3
 10.4
Local lines available to foreign affiliates, unutilized portion0.7
 0.6
 0.6
Automotive liquidity$38.2
 $34.5
 $31.7

In managing our business, we classify changes in Automotive cash into operating 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 other segments, dividends paid to shareholders, and other—primarily financing-related).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 

In addition to our target Automotive cash balance, we also target to maintain a corporate credit facility for our Automotive business of about $10 billion to protect against exogenous shocks. Our corporate credit facility is discussed below. We assess the appropriate long-term target for total Automotive liquidity, comprised of Automotive cash and the corporate 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. At September 30, 2016, we had $35.2 billion of Automotive liquidity. Our Automotive cash and Automotive liquidity targets could be reduced over time based on improved operating performance and changes in our risk profile.
Changes in Automotive Cash.Changes in Automotive cash are summarized below (in billions):

q32016autocashflow7.jpg

In managing our Automotive business, we classify changes in Automotive cash into operating, and other items. Operating items include: Automotive segment pre-tax profits, capital spending, which we report as an operating cash flow as it is a key contributor to our Automotive segment financial results, depreciation and tooling amortization, changes in working capital, and All Other and timing differences. Other items include: separation payments, transactions with other segments, acquisitions and divestitures, changes in Automotive debt, contributions to funded pension plans, and dividends paid to shareholders.

Third quarter 2016 Automotive operating cash flow was $2 billion negative, primarily reflecting the impact of lower production and dealer stocks on working capital and timing differences. First nine months 2016 Automotive operating cash flow was a strong $4.9 billion positive, more than explained by Automotive segment pre-tax profit.

Third quarter 2016 capital spending was $1.7 billion, and first nine months 2016 capital spending was $4.9 billion. Full year 2016 capital spending is expected to be about $7 billion. Based on expected cash flows and the identification of additional opportunities for profitable growth, the ongoing amount of capital spending to support product development, growth, restructuring, and infrastructure is expected to increase to about $9 billion annually by 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
        
 Second Quarter First Half
 2016 2015 2016 2015
Cash at end of period$27.2
 $20.7
 $27.2
 $20.7
Cash at beginning of period24.3
 19.5
 23.6
 21.7
Change in cash$2.9
 $1.2
 $3.6
 $(1.0)
        
Automotive segment pre-tax profits$2.8
 $3.0
 $6.3
 $4.5
Capital spending(1.7) (1.7) (3.2) (3.5)
Depreciation and tooling amortization1.1
 1.0
 2.2
 2.1
Changes in working capital (a)1.3
 (0.6) 1.3
 0.2
All Other and timing differences (b)0.7
 0.2
 0.3
 (0.9)
Automotive operating cash flows4.2
 1.9
 6.9
 2.4
        
Separation payments(0.2) (0.1) (0.2) (0.5)
Net receipts from other segments (c)
 
 
 
Other, including acquisitions and divestitures(0.2) 
 
 (0.3)
Cash flow before other actions3.8
 1.8
 6.7
 1.6
        
Changes in debt(0.1) 0.2
 (0.2) (0.4)
Funded pension contributions(0.2) (0.1) (0.6) (0.9)
Dividends/Other items(0.6) (0.7) (2.3) (1.3)
Change in cash$2.9
 $1.2
 $3.6
 $(1.0)
________
(a)Working capital is 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 Financial Services.
(c)Primarily distributions from Ford Holdings (Ford Credit’s parent) and tax payments received from Ford Credit.

With respect to “Changes in working capital,” in general we carry relatively low Automotive segment 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. 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. 

Available Credit AgreementLines. Our Third AmendedTotal committed Automotive credit lines at September 30, 2016 were $11.9 billion, consisting of $10.4 billion of our corporate credit facility and Restated Credit Agreement dated as$1.5 billion of Aprillocal credit facilities available to non-U.S. Automotive affiliates. At September 30, 20152016, the utilized portion of the corporate credit facility was amended asabout $40 million, representing amounts utilized for letters of April 29,credit. At September 30, 2016, (the “revolvingthe utilized portion of local credit facility”) to extend the maturities by one year. facilities was about $1 billion.

Lenders under the revolvingour corporate credit facility have commitments to us totaling $13.4 billion, with 75% of the commitments maturing on April 30, 2021 and 25% of the commitments maturing on April 30, 2019. We have allocated $3 billion of commitments to Ford Credit on an irrevocable and exclusive basis to support its growth and liquidity. Any borrowings by Ford Credit under the revolvingcorporate credit facility would be guaranteed by us.

The revolvingcorporate credit facility is unsecured and free of material adverse change conditions to borrowing, restrictive financial covenants (for example, interest or fixed charge coverage ratio, debt-to-equity ratio, and minimum net worth requirements), and credit rating triggers that could limit our ability to obtain funding. The revolvingcorporate credit facility contains a liquidity covenant that requires us to maintain a minimum of $4 billion in aggregate of domestic cash, cash equivalents, and loaned and marketable securities and/or availability under the revolving credit facility. If our senior, unsecured, long-term debt does not maintain at least two investment grade ratings from Fitch, Moody’s, and S&P (each as defined under “Credit Ratings” below), the guarantees of certain subsidiaries will be required.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

At June 30, 2016, the utilized portion of the revolving credit facility was about $40 million, representing amounts utilized for letters of credit.

Other Automotive Credit Facilities.Debt. At June 30, 2016, we had about $1.6 billion of local credit facilities available to non-U.S. Automotive affiliates, of which about $900 million had been utilized.

Net Cash. Our Automotive net cash calculation as of the dates shown was as follows (in billions):
 
June 30,
2016
 December 31, 2015
Automotive cash$27.2
 $23.6
Less: 
  
Long-term debt10.7
 11.0
Debt payable within one year2.4
 1.8
Total debt13.1
 12.8
Net cash$14.1
 $10.8

Total Automotive debt at JuneSeptember 30, 2016 was $13.1 billion, which is about $300 million higher than it was at December 31, 2015. The increase primarily reflects local funding in international markets and foreign currency exchange, offset partially by debt repayments.

Pension Plans. Our pension underfunded status as of the dates shown was as follows (in billions):
 
June 30,
2016
 December 31, 2015
U.S. pension$3.3
 $3.7
Non-U.S. pension4.1
 4.5
Total global pension$7.4
 $8.2
Memo:   
Total unfunded OPEB$5.8
 $5.7

The balances shown for June 30, 2016 reflect the net underfunded balances for December 31, 2015 updated for 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 2015, and the reported number does not reflect the impact from the recent decline in interest rates.   

As a result of our pension de-risking strategy, the sensitivity of our funded status to changes in interest rates has been significantly reduced, especially in the United States.  Based on our planning assumptions for asset returns, discount rates, and contributions we do not presently expect a significant change in our year-end 2016 funded status.

Leverage. We manage Automotive debt levels with a leverage framework to maintain strong, investment grade credit ratings through a normal business cycle.  The leverage framework includes a ratio of Automotive debt, underfunded pension liabilities, operating leases, and other adjustments, divided by Automotive income before income tax, adjusted for depreciation, amortization, interest expense on Automotive debt, and other adjustments. Ford Credit’s leverage is calculated as a separate business as described in the Liquidity - Financial Services section of Item 2.  Ford Credit is self-funding and its debt, which is used to fund its operations, is separate from our Automotive debt.

Liquidity Sufficiency. One of our key priorities is to finance our plan and maintain a strong balance sheet, while at the same time having resources available to grow our business. Based on our planning assumptions, we believe that we have sufficient liquidity and capital resources to continue to invest in new products and services that customers want and value, transform and grow our business, pay our debts and obligations as and when they come due, pay a sustainable dividend, and provide protection within an uncertain global economic environment.

Based on expected cash flows and the identification of additional opportunities for profitable growth, the ongoing amount of capital spending to support product development, growth, restructuring, and infrastructure is expected to increase to about $9 billion annually by 2020. Our capital spending was $7.1 billion and $7.4 billion in 2015 and 2014, respectively, and is now expected to be about $7 billion in 2016.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 

Financial Services Segment

Ford Credit

Funding Overview. Ford Credit’s primary funding and liquidity objective is to maintain a strong investment grade balance sheet with ample liquidity to support its financing activities and growth under a variety of market conditions, including short-term and long-term market disruptions. 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 profile continues to be diverse, robust, and focused on maintaining liquidity levels that meet its business and funding requirements. Ford Credit regularly stress tests its balance sheet and liquidity to ensure that it continues to meet its financial obligations through economic cycles.

The following chart shows the trends in funding for Ford Credit’s managed receivables:

q32016fcfundingstructure1.jpg

Ford Credit’s managed receivables of $134 billion at the end of the secondthird quarter of 2016 were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 35%33%.

Ford Credit expects the mix of securitized funding to trend lower over time. The calendarization of the funding plan may result in quarterly fluctuations of the securitized funding percentage. Ford Credit expects this mix to be higher in the fourth quarter.



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

Public Term Funding Plan. The following tablechart shows Ford Credit’s issuances for full-year 2014 and 2015, planned issuances for full-year 2016, and its global public term funding issuances through July 27,October 26, 2016, full-year 2015, and full-year 2014 (in billions), excluding short-term funding programs:

 Public Term Funding Plan
 2016    
 
Full-Year
Forecast
 
Through
July 27
 
Full-Year
2015
 
Full-Year
2014
Unsecured$ 15-19 $13
 $17
 $13
Securitizations (a)12-14 9
 13
 15
Total$ 27-33 $22
 $30
 $28
q32016fcfundingplan3.jpg
__________
(a)Includes Rule 144A offerings.

For 2016, Ford Credit now projects full-year public term funding in the range of $27$26 billion to $33$29 billion. Both the amount and composition of Ford Credit’s full-year funding plan are consistent with its issuance in 2015. Through July 27,October 26, 2016, Ford Credit has completed $22$26 billion of public term issuance.

Liquidity. The following chart shows Ford Credit’s liquidity sources and utilization:


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

Liquidity. The following chart shows Ford Credit’s liquidity sources and utilization:
q32016fcliquidity3.jpg

Ford Credit’s liquidity available for use will fluctuate quarterly based on factors including near-term debt maturities, receivable growth, and timing of funding transactions. Ford Credit has a target of at least $25 billion. As of JuneSeptember 30, 2016, Ford Credit’s liquidity available for use was up $10.3$9.8 billion from year-end 2015 and down $1.3 billion$500 million from firstsecond quarter of 2016.

As of JuneSeptember 30, 2016, Ford Credit’s liquidity remained strong at $33.8$33.3 billion. Its sources of liquidity include cash, committed asset-backed facilities, unsecured credit facilities, and the corporate revolvercredit facility allocation. As of JuneSeptember 30, 2016, Ford Credit’s liquidity sources including cash totaled $53.3$50.2 billion, up $3.6 billion$500 million from year end.year-end.


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 finance receivable and operating lease financing, and assessing its capital structure.

The following chart shows the calculation of Ford Credit’s financial statement leverage and managed leverage (in billions, except for ratios):

q32016fcleverage3.jpg

Ford Credit plans its managed leverage by considering prevailing market conditions and the risk characteristics of its business. At JuneSeptember 30, 2016, financial statement leverage was 10.2:9.7:1, and managed leverage was 9.4:1. Ford Credit targets managed leverage in the range of 8:1 to 9:9.2:1. Managed leverage is above the targeted range reflecting recent growth in receivablesof 8:1 to 9:1, but continues to trend toward the target range.

Total Company

Pension Plans - Underfunded Balances. As of September 30, 2016, our total Company pension underfunded status reported on our balance sheet was $7 billion and reflects the net underfunded status at December 31, 2015 updated for 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 2015, and the continuedreported number does not reflect the impact from the decline in interest rates throughout 2016.

As a result of our pension de-risking strategy, the sensitivity of our funded status to changes in interest rates has been significantly reduced, especially in the United States.  In Europe, however, where our de-risking is less advanced, lower Eurozone and U.K. bond yields will negatively impact our funded status. Based on our planning assumptions for asset returns, discount rates, and contributions, we expect a strong U.S. dollar.modest deterioration in our funded status at year-end 2016 compared to year-end 2015.

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

Supplemental Financial Information

The tables below provide supplemental consolidating financial information. The data is presented by our reportable segments, Automotive and Financial Services. All Other and Adjustments include our operating segments that did not meet the quantitative threshold to qualify as a reportable segment, eliminations of intersegment transactions, deferred tax netting, and special items (if applicable). See Note 3 of the Notes to the Financial Statements for information regarding our segments.

Selected Balance Sheet Information. The following tables provide supplemental balance sheet information, by segment, at September 30, 2016 (in millions):
Assets Automotive 
Financial
Services
 All Other and Adjustments Consolidated
Cash and cash equivalents $7,655
 $5,675
 $10
 $13,340
Marketable securities 16,645
 4,180
 
 20,825
Financial Services finance receivables, net 
 45,550
 
 45,550
Trade and other receivables, less allowances 4,481
 5,548
 
 10,029
Inventories 10,219
 
 
 10,219
Other assets 2,372
 1,180
 
 3,552
Receivable from other segments 4
 589
 (593) 
   Total current assets 41,376
 62,722
 (583) 103,515
         
Financial Services finance receivables, net 
 49,614
 
 49,614
Net investment in operating leases 2,235
 26,961
 
 29,196
Net property 32,106
 151
 
 32,257
Equity in net assets of affiliated companies 3,633
 151
 11
 3,795
Deferred income taxes 13,125
 141
 (3,791) 9,475
Other assets 4,794
 2,271
 46
 7,111
Receivable from other segments 
 968
 (968) 
   Total assets $97,269
 $142,979
 $(5,285) $234,963

Liabilities Automotive 
Financial
Services
 All Other and Adjustments Consolidated
Payables $21,184
 $1,200
 $
 $22,384
Other liabilities and deferred revenue 18,550
 974
 7
 19,531
Automotive debt payable within one year 2,472
 
 
 2,472
Financial Services debt payable within one year 
 44,801
 
 44,801
Payable to other segments 589
 
 (589) 
   Total current liabilities 42,795
 46,975
 (582) 89,188
         
Other liabilities and deferred revenue 22,913
 739
 
 23,652
Automotive long-term debt 10,675
 
 
 10,675
Financial Services long-term debt 
 79,276
 
 79,276
Deferred income taxes 239
 4,129
 (3,791) 577
Payable to other segments 968
 
 (968) 
   Total liabilities $77,590
 $131,119
 $(5,341) $203,368

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

Selected Cash Flow Information. The following tables provide supplemental cash flow information, by segment, for the nine months ended September 30, 2016 (in millions):
Cash flows from operating activities Automotive 
Financial
Services
 All Other and Adjustments Consolidated
Net cash provided by /(used in) operating activities $8,233
 $8,761
 $
 $16,994
        

Reconciling Adjustments to Automotive Segment Operating Cash Flows*      

Automotive capital spending (4,879)     

Net cash flows from non-designated derivatives 322
      
Funded pension contributions 835
     

Separation payments 198
      
Other 208
     

Automotive Segment Operating Cash Flows $4,917
     

_________
*We measure and evaluate our Automotive segment operating cash flow on a different basis than Net cash provided by/(used in) operating activities in our consolidated statement of cash flows. Automotive segment operating cash flow includes additional elements management considers to be related to our Automotive operating activities, primarily capital spending and non-designated derivatives, and excludes outflows for funded pension contributions, separation payments, and other items that are considered operating cash flows under U.S. GAAP. The table above quantifies the reconciling adjustments to Net cash provided by/(used in) operating activities for the period ended September 30, 2016.

Cash flows from investing activities Automotive 
Financial
Services
 All Other and Adjustments Consolidated
Capital spending $(4,879) $(33) $
 $(4,912)
Acquisitions of finance receivables and operating leases 
 (43,746) 
 (43,746)
Collections of finance receivables and operating leases 
 30,254
 
 30,254
Purchases of equity and debt securities (16,249) (5,794) (6) (22,049)
Sales and maturities of equity and debt securities 17,654
 4,368
 
 22,022
Settlements of derivatives 322
 8
 
 330
Other 148
 (61) (44) 43
Investing activity (to)/from other segments 63
 
 (63) 
Net cash provided by/(used in) investing activities $(2,941) $(15,004) $(113) $(18,058)

Cash flows from financing activities Automotive 
Financial
Services
 All Other and Adjustments Consolidated
Cash dividends $(2,780) $
 $
 $(2,780)
Purchases of Common Stock (145) 
 
 (145)
Net changes in short-term debt 252
 948
 
 1,200
Proceeds from issuance of other debt 330
 31,626
 
 31,956
Principal payments on other debt (764) (29,255) 
 (30,019)
Other 46
 (90) 
 (44)
Financing activity to/(from) other segments 
 (123) 123
 
Net cash provided by/(used in) financing activities $(3,061) $3,106
 $123
 $168
         
Effect of exchange rate changes on cash and cash equivalents$38
 $(74) $
 $(36)


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

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 McGraw Hill Financial (“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 assigned to us from all of the NRSROs are closely associated with their opinions on Ford. 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.

The followingThere have been no rating actions have been taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016:

On May 27, 2016, Fitch upgraded Ford and Ford Credit’s long-term ratings to BBB from BBB- and short-term ratings from F2 from F3, with a stable outlook.June 30, 2016.

The following chart summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:
 NRSRO RATINGS
 Ford Ford Credit NRSROs
 
Issuer
Default /
Corporate /
Issuer Rating
 Long-Term Senior Unsecured Outlook / Trend Long-Term Senior Unsecured 
Short-Term
Unsecured
 Outlook / Trend Minimum Long-Term Investment Grade Rating
DBRSBBB BBB Stable BBB R-2M Stable BBB (low)
FitchBBB BBB Stable BBB F2 Stable BBB-
Moody’sN/A Baa2 Stable Baa2 P-2 Stable Baa3
S&PBBB BBB Stable BBB A-2 Stable BBB-

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

PRODUCTION VOLUMES (a)

Our second quarter 2016 production volumes andThe third quarter 2016 projectedactual and fourth quarter 2016 forecast production volumes for our Automotive business units are as follows (in thousands):follows:

  2016
  
Second Quarter
Actual
 
Third Quarter
Forecast
  Units O/(U) 2015 Units O/(U) 2015
North America 843
 28
 690
 (102)
South America 79
 (15) 87
 2
Europe 432
 29
 295
 (82)
Middle East & Africa 18
 (5) 28
 6
Asia Pacific 342
 (20) 420
 79
  Total 1,714
 17
 1,520
 (97)
q32016prodvolume7.jpg
_________
(a)Includes Ford brand and JMC brand vehicles produced by our unconsolidated affiliates.
Production volumes above include Ford brand and JMC brand vehicles produced by our unconsolidated affiliates.


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

OUTLOOK

Business Environment

Looking atOur view of the global business environment elevated economic uncertainty is restraining business investment, with downside risk to global growth. Financial markets continue to assess the outcome of Brexit, with the sterling and euro facing downward pressure and global interest rates reverting to recent lows. U.S. growth is improving after a weak start to the year but with signs of a maturing recovery. We expect continued growth in China – supported by government stimulus measures, but with some increased pressure on margins. While conditions in Brazil remain difficult, Russia is showing some signs of stabilization.as follows:

Global growth outlook for 2016 remains modest at just under 3%
The risks we are facing in the second half of 2016 are generally around lower pricing or higher incentives than expected in the United States and China; a softer, though still strong, U.S. retail industry; the effects of Brexit on our operations in Europe; a more difficult external environment across many of the markets in which we participate in the Middle East & Africa; a weaker yuan; and lower-than-expected auction values for smaller vehicles leased in the United States.
Full year GDP outlook reduced for United States on weak first half data; consumer spending remains solid with vehicle sales at high plateau

Europe growth steady; U.K. data improving after initial Brexit shock but tone heading into formal exit negotiations is driving a weaker sterling

China growth still supported by consumer and services sector strength, with vehicle purchase tax reduction in place through year end

Russia and Brazil economies show signs of bottoming out

2016 Planning Assumptions and Key Metrics

Based on the current economic environment, our industry and GDP planning assumptions for 2016 include the following:

q32016gdpplanassump7.jpg

Expectations for full-year industry sales have been adjusted forAll in all, we see some risks to global GDP growth as policy uncertainty, including Brexit negotiations, adds to existing weakness in global trade flows and business investment spending. This is offset partially by a steady consumer sector in most major markets, reflecting year-to-date performance. Inmarkets. We are updating our global GDP guidance to 2.9%, the United States, first-half sales remained at high levels, but were below our expectations, notably on the retail side. First-half sales in Brazil were also in the lowerlow end of our range, which has been adjusted downward.prior range. For industry volumes, we are providing upward adjustments for China and Europe, with a small downward adjustment for Brazil.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

2016 Business Unit and Total Company Guidance

q32016buguidance7.jpg

We continue to expect healthy returns from North America in 2016, with an operating margin in the 9% to 9.5% range. Excluding the door latch recall, the margin would exceed 9.5%, consistent with our original guidance for 2016. We continue to expect South America’s loss to be greater in 2016 than in 2015. In Europe, the change reflects strong year-to-date sales across the region, despite expected weaker conditions in the United Kingdom following Brexit. China saleswe continue to expect a significantly higher profit in 2016 compared to last year. In Middle East & Africa, we continue to expect a loss in 2016 compared to the small profit we earned last year. In Asia Pacific, we continue to expect a lower profit in 2016 than last year, driven by adverse China industry pricing and unfavorable exchange. For the full year, we continue to expect Ford Credit’s pre-tax profit to be supported by the purchase tax reduction on small engines.about $1.8 billion.

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

Full-Year Outlook and Guidance

The following chart shows a comparison of first half of 2016 versus second half.


We see a weaker-than-normal 2016 second half total Company adjusted pre-tax profit, with the third quarter being particularly weak this year. Much of this was anticipated in our full year 2016 Company guidance. This includes the launch of Super Duty – the first all-new Super Duty in 19 years and one that will sustain and drive our leadership position in the over 8,500 lbs segment over the next decade. This will have a material impact on the third quarter of 2016 due to the major nature of the launch and will carry on, to some extent, into the balance of the year, including lower – though still very high – contribution margins.

We also will see higher than normal product-related investment, mainly engineering and supporting activities, as we ramp up our efforts over the next several years in both our core business to support major all-new platforms and regulatory-related actions, but also emerging opportunities. This includes electrification, connectivity, mobility solutions, autonomous vehicles, and data and analytics.

We also expect to see headwinds from commodities net of exchange, along with the effects of the Brexit vote. In addition, we had several one-time gains in the first half of 2016 that will not repeat, and in the case of portfolio gains on our treasury portfolio, a portion of these are expected to reverse. Finally, we see risks, mainly due to market factors in the United States and China that we have already been working to offset and will continue to do so in the second half of 2016.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)



The two charts above show 2016 full-year outlook and guidance for our Automotive segment business units and Ford Credit. In the United States, we already have seen our incentives slowly increase in line with the same trend across the industry. While pricing discipline continues to be fairly good, the plateauing of industry volume and the so-called car recession are having an effect on incentive levels overall that goes beyond what we had expected. This is combined with an overall industry level in the United States that we now believe will be lower than we had planned, driven by lower retail sales. As a result, we now expect to see lower industry volume in the second half of 2016 compared with 2015.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

In Middle East & Africa, we are countering the headwinds of large industry declines, weak currencies, political strife, and labor disruptions. These efforts are challenged, however, to offset the full adverse consequences of the changes in the external environment taking place across the markets in which we participate.

In China, we now anticipate negative pricing to be at the higher end of the planned range, combined with a weaker currency, in part due to adjustments China is making relative to a basket of currencies that has been affected by Brexit.

At Ford Credit, we have lowered our expectation of residual values, mainly for smaller lease vehicles. This is resulting in larger lease depreciation expense and higher credit losses. Our outlook for Ford Credit's pre-tax profit is now lower than last year, with second half results being about in line with first half.

Finally, while we see substantial upside opportunity for Europe compared to our original expectations, this is mitigated somewhat by Brexit effects.

These issues have put our Company full-year 2016 guidance at risk. We already have been working to mitigate these risks, achieving strongly favorable cost performance in the first half of the year versus our plan. But we need to do more, and we will.


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

q32016tocoguidance7.jpg

Shown above is our 2016 Company Guidance, including guidance for total Company adjusted pre-tax results.results, which is a non-GAAP financial measure. We do not provide guidance on our net income.income, the comparable GAAP financial measure. Full-year net income will include potentially significant special items that have not yet occurred and are difficult to quantifypredict with reasonable certainty prior to year end, specifically pension and OPEB remeasurement gains and losses.

For full-yearWe have had a strong first nine months of the year, and we continue to expect 2016 we expect another strong year of results. We remain committed to our full year guidance of total Company adjusted pre-tax profit and Automotive segment operating margin equal to or better than 2015, but we now see a number of risksbe about $10.2 billion – an outcome that are challenging us to achievewould be our guidance in the second half.

Profit Improvement Actions

We are finding improvement actions to mitigate these risks, leverage opportunities, and build on the record results we delivered last year. We have several profit improvement actions that are already under way, including the following:

Matching production to demand which will reduce manufacturing cost

Implementing an aggressive, company-wide attack plan on costs. We are building on the considerable cost progress we achieved in the first half of 2016, with $1.6 billion in cost improvements delivered versus our plan. We are looking at everything from material costs and marketing and selling efficiencies to freight and administrative cost reductions

Implementing improved go-to-market plans in the United States and China to deliver even more revenue and cost opportunities

Utilizing our data and analytics team to pinpoint immediate areas of improvement in market factors, including better volume, mix, and pricing, which will drive revenue

Challenging each team to deliver even more revenue and cost opportunities for a number of significant vehicle launches around the world this yearbest since 2000.


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

GAAP RECONCILIATIONS OFTO NON-GAAP FINANCIAL MEASURES

The following charts show GAAP reconciliations of our Non-GAAP financial measures for: Adjusted Pre-Tax Profit, Adjusted Earnings Per Share, Adjusted Effective Tax Rate, and Ford Credit Managed Receivables. The GAAP reconciliation for Ford Credit Managed Leverage can be found in the Financial Services Segment section of “Liquidity and Capital Resources.”

q32016netincrecon7.jpg

q32016epsrecon7.jpg
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 

q32016taxraterecon7.jpg

q32016manrecrecon7.jpg



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, Europe, or China, due to financial crisis, recession, geopolitical events, or other factors; 
Decline in Ford’s market share or failure to achieve growth;
Lower-than-anticipated market acceptance of Ford’s new or existing products or services;
Market shift away from sales of larger, more profitable vehicles beyond Ford’s current planning assumption, particularly in the United States;
An increase in or 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 resulting from economic, geopolitical, or other events;
Economic distress of suppliers that may require Ford to provide substantial financial support or take other measures to ensure supplies of components or materials and could increase costs, affect 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, production constraints or difficulties, or other factors);
Single-source supply of components or materials;
Labor or other constraints on Ford’s ability to maintain competitive cost structure;
Substantial pension and postretirement health care and life insurance liabilities impairing liquidity or financial condition;
Worse-than-assumed economic and demographic experience for 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, 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 products, perceived environmental impacts, or otherwise;
A change in requirements under long-term supply arrangements committing Ford 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 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 Ford, Ford Credit, or a third-party vendor or supplier;  
Failure of financial institutions to fulfill commitments under committed credit and liquidity 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, financial institutions, or other third parties seeking to increase their share of financing Ford vehicles; and
New or increased credit regulations, consumer or data protection regulations, 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, see “Item 1A. Risk Factors” in our 2015 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

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

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

The Financial Accounting Standards Board (“FASB”) has issued the following standards, which are not expected to have a material impact (with the exception of standards 2016-02, 2016-09, and 2016-13) to our financial statements or financial statement disclosures:
Standard Effective Date (a)
2014-15Going Concern - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern December 31, 2016
2016-09Stock Compensation - Improvements to Employee Share-Based Payment Accounting January 1, 2017 (b)
2016-07Equity Method and Joint Ventures - Simplifying the Transition to the Equity Method of Accounting January 1, 2017
2016-06Derivatives and Hedging - Contingent Put and Call Options in Debt Instruments January 1, 2017
2016-05Derivatives and Hedging - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships January 1, 2017
2016-16Income Taxes - Intra-Entity Transfers of Assets Other Than InventoryJanuary 1, 2018
2016-15Statement of Cash Flows - Classification of Certain Cash Receipts and Cash PaymentsJanuary 1, 2018
2016-04Extinguishments of Liabilities - Recognition of Breakage for Certain Prepaid Stored-Value Products January 1, 2018
2016-01Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities January 1, 2018
2014-09Revenue - Revenue from Contracts with Customers January 1, 2018 (b) (c)
2016-02Leases January 1, 2019 (b)
2016-13Credit Losses - Measurement of Credit Losses on Financial Instruments January 1, 2020 (b)
__________
(a)Early adoption for each of the standards, except standard 2016-01, is permitted.
(b)For additional information, see Note 2 of the Notes to the Financial Statements.
(c)The FASB has issued the following updates to the Revenue from Contracts with Customers standard: Accounting Standard Update (“ASU”) 2015-14 (Deferral of the Effective Date), ASU 2016-08 (Principal versus Agent Considerations (Reporting Revenue Gross versus Net)), ASU 2016-10 (Identifying Performance Obligations and Licensing), and ASU 2016-12 (Narrow-Scope Improvements and Practical Expedients). We plan to adopt the new revenue guidance effective January 1, 2017.

OTHER FINANCIAL INFORMATION

The interim financial information included in this Quarterly Report on Form 10-Q for the periods ended
JuneSeptember 30, 2016 and 2015 has not been audited by PricewaterhouseCoopers LLP (“PwC”). In reviewing such information, PwC has applied limited procedures in accordance with professional standards for reviews of interim financial information. Readers should restrict reliance on PwC’s reports on such information accordingly. PwC 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 PwC within the meaning of Sections 7 and 11 of the Securities Act of 1933.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

Automotive
 
Foreign Currency Risk. The net fair value of foreign exchange forward contracts (including adjustments for credit risk), as of JuneSeptember 30, 2016, was an asset of $701$791 million compared with an asset of $322 million as of December 31, 2015. The potential decrease in fair value from a 10% adverse change in the underlying exchange rates, in U.S. dollar terms, would be $2.4$2.7 billion at JuneSeptember 30, 2016, compared with $2.2 billion at December 31, 2015.

Commodity Price Risk. The net fair value of commodity forward contracts (including adjustments for credit risk) as of JuneSeptember 30, 2016 was an asset of $9$6 million, compared with a liability of $24 million as of December 31, 2015. The potential decrease in fair value from a 10% adverse change in the underlying commodity prices, in U.S. dollar terms, would be $56$53 million at JuneSeptember 30, 2016, compared with $62 million at December 31, 2015.


Financial Services
  
Interest Rate Risk. To provide a quantitative measure of the sensitivity of its 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. The differences in pre-tax cash flow between these scenarios and the base case over a 12-month period represent an estimate of the sensitivity of Ford Credit’s pre-tax cash flow. Under this model, Ford Credit estimates that at JuneSeptember 30, 2016, all else constant, such an increase in interest rates would increase its pre-tax cash flow by $53$5 million over the next 12 months, compared with an increase of $7 million at December 31, 2015. 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. Mark Fields, 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 JuneSeptember 30, 2016, 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 JuneSeptember 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. Risk Factors.

The risk factor “Adverse effects resulting from economic, geopolitical, or other events” included in Item 1A of our 2015 Form 10-K report is revised as follows:

Adverse effects resulting from economic, geopolitical, or other events.  With the increasing interconnectedness of global economic and financial systems, a financial crisis, natural disaster, geopolitical crisis, or other significant event in one area of the world can have an immediate and devastating impact on markets around the world.  For example, the financial crisis that began in the United States in 2008 quickly spread to other markets; natural disasters in Japan and Thailand during 2011 caused production interruptions and delays not just in Asia Pacific but other regions around the world; and episodes of increased geopolitical tensions or acts of terrorism have at times caused adverse reactions that may spread to economies around the globe. 

Concerns regarding the overall stability of the European Union, given the diverse economic and political circumstances of individual European currency area countries (“euro area”), have been exacerbated by the decision by the U.K. electorate on June 23, 2016 to leave the European Union.  The exit process and future relationship between the United Kingdom and the European Union, including trade relations, will have to be negotiated within a two-year window following an official declaration of intent to exit by the U.K. government. The U.K. vote to leave the European Union resulted in a weaker sterling versus U.S. dollar and euro. We have a sterling revenue exposure and a euro cost exposure; a sustained weakening of sterling against euro may have an adverse effect on our profitability. Further, the United Kingdom may be at risk of losing access to free trade agreements with the European Union and other countries, such as Turkey and South Africa, with which the European Union currently has free trade agreements. Such loss may result in increased tariffs on U.K. imports and exports, which could also have an adverse effect on our profitability.

In addition, these developments have introduced an elevated level of economic and policy uncertainty, which could cause financial and capital markets within and outside Europe to constrict, thereby negatively impacting our ability to finance our business.  It also could cause a substantial dip in consumer and business confidence and spending that could negatively impact sales of vehicles.  Any one of these impacts could have a substantial adverse effect on our financial condition and results of operations.

These recent events highlight potential longer-term risks regarding the sustainability of the euro area.  If a country within the euro area were to default on its debt or withdraw from the euro currency, or – in a more extreme circumstance – the euro currency were to be dissolved entirely, the impact on markets around the world, and on Ford’s global business, could be immediate and significant. 

In addition, we have operations in various markets with volatile economic or political environments and are pursuing growth opportunities in a number of newly developed and emerging markets.  These investments may expose us to heightened risks of economic, geopolitical, or other events, including governmental takeover (i.e., nationalization) of our manufacturing facilities or intellectual property, restrictive exchange or import controls, disruption of operations as a result of systemic political or economic instability, outbreak of war or expansion of hostilities, and acts of terrorism, each of which could have a substantial adverse effect on our financial condition and results of operations.  Further, the U.S. government, other governments, and international organizations could impose additional sanctions that could restrict us from doing business directly or indirectly in or with certain countries or parties, which could include affiliates.

ITEM 6. Exhibits.

Please see exhibit index below.


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FORD MOTOR COMPANY

By:/s/ John Lawler
 John Lawler, Vice President and Controller
 (principal accounting officer)
  
Date:July 28,October 27, 2016



EXHIBIT INDEX
Designation Description Method of Filing
Exhibit 12 Calculation of Ratio of Earnings to Fixed Charges. Filed with this Report.
Exhibit 15 Letter of PricewaterhouseCoopers LLP, dated July 28,October 27, 2016, 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. *
__________
* Submitted electronically with this Report in accordance with the provisions of Regulation S-T.




















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