Ford Motor Credit Earnings 2020-12-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

fmcc-20201231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10-K

(Mark One)


☑			Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2020


☐			Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the transition period from ____________________ to ____________________

Commission file number 1-6368

Ford Motor Credit Company LLC

(Exact name of registrant as specified in its charter)

Delaware

38-1612444

(State of organization)

(I.R.S. employer identification no.)

One American Road

Dearborn,

Michigan

48126

(Address of principal executive offices)

(Zip code)

(313) 322-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each Exchange on which registered

0.623% Notes due June 28, 2023*

F/23E

New York Stock Exchange

1.355% Notes due February 7, 2025*

F/25I

New York Stock Exchange

4.125% Notes due on June 20, 2024*

F/24O

New York Stock Exchange

3.021% Notes due March 6, 2024*

F/24M

New York Stock Exchange

4.535% Notes due March 6, 2025*

F/25K

New York Stock Exchange

3.350% Notes due Nine Months or More from the Date of Issue due August 20, 2026

F/26N

New York Stock Exchange

1.514% Notes due February 17, 2023*

F/23G

New York Stock Exchange

2.386% Notes due February 17, 2026*

F/26AB

New York Stock Exchange

1.744% Notes due July 19, 2024*

F/24R

New York Stock Exchange

2.330% Notes due on November 25, 2025*

F/25L

New York Stock Exchange

3.683% Notes due on December 3, 2024*

F/24Q

New York Stock Exchange

3.250% Notes due September 15, 2025*

F/25M

New York Stock Exchange

2.748% Notes due on June 14, 2024*

F/24S

New York Stock Exchange

Floating Rate Notes due May 14, 2021*

F/21C

New York Stock Exchange

Floating Rate Notes due December 1, 2021*

F/21AQ

New York Stock Exchange

Floating Rate Notes due December 7, 2022*

F/22T

New York Stock Exchange

Floating Rate Notes due November 15, 2023*

F/23D

New York Stock Exchange

Floating Rate Notes due December 1, 2024*

F/24L

New York Stock Exchange

*Issued under Euro Medium Term Notes due Nine Months or More from The Date of Issue Program

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark whether 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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated Filer

Smaller reporting
company

☐

Emerging growth
company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of

the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.

7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

☐ Yes þ No

All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.

REDUCED DISCLOSURE FORMAT

The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.


Exhibit Index begins on page 58

FORD MOTOR CREDIT COMPANY LLC

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2020



	Table of Contents	Page

	Part I
Item 1	Business	1
	Overview	1
	Consumer Financing	3
	Non-Consumer Financing	5
	Marketing and Special Programs	5
	Servicing	6
	Insurance	8
	Human Capital Resources	8
	Governmental Regulations	10
	Certain Agreements with Ford and Affiliates	12
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	22
Item 2	Properties	22
Item 3	Legal Proceedings	23
Item 4	Mine Safety Disclosures	23
	Part II
Item 5	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	24
Item 6	Selected Financial Data	24
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Overview	24
	Definitions and Information Regarding Causal Factors	26
	Results of Operations	28
	Financing Shares and Contract Placement Volume	32
	Financial Condition	33
	Credit Risk	34
	Residual Risk	36
	Credit Ratings	37
	Funding and Liquidity	38
	Securitization Transactions	44
	On-Balance Sheet Arrangements	46
	Leverage	47
	Aggregate Contractual Obligations	48
	Critical Accounting Estimates	48
	Accounting Standards Issued But Not Yet Adopted	50
	Outlook	50
	Cautionary Note on Forward-Looking Statements	51
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	52
	Overview	52
	Market Risk	52


	Table of Contents (Continued)	Page
	Counterparty Risk	54
	Operating Risk	54
Item 8	Financial Statements and Supplementary Data	54
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55
Item 9A	Controls and Procedures	55
Item 9B	Other Information	55
	Part III
Item 10	Directors, Executive Officers and Corporate Governance	56
Item 11	Executive Compensation	56
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	56
Item 13	Certain Relationships and Related Transactions, and Director Independence	56
Item 14	Principal Accounting Fees and Services	56
	Part IV
Item 15	Exhibits and Financial Statement Schedules	57
Item 16	Form 10-K Summary	59
	Signatures	60
	Ford Motor Credit Company LLC and Subsidiaries Financial Statements
	Report of Independent Registered Public Accounting Firm	61
	Consolidated Income Statements	63
	Consolidated Statements of Comprehensive Income	63
	Consolidated Balance Sheets	64
	Consolidated Statements of Shareholder’s Interest	65
	Consolidated Statements of Cash Flows	66
	Notes to the Financial Statements	67

PART I

ITEM 1. Business.

Overview

Ford Motor Credit Company LLC was incorporated in Delaware in 1959 and converted to a limited liability company in 2007. We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”). Our principal executive offices are located at One American Road, Dearborn, Michigan 48126, and our telephone number is (313) 322-3000.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge through our website located at www.fordcredit.com/investor-center. These reports can also be found on the SEC’s website located at www.sec.gov.

Our website and its content are not deemed to be incorporated by reference into this Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K Report” or “Report”) nor filed with the SEC.

Products and Services. We offer a wide variety of automotive financing products to and through automotive dealers throughout the world. The predominant share of our business consists of financing Ford and Lincoln vehicles and supporting the dealers of those brands. We earn our revenue primarily from:

•Payments made under retail installment sale and finance lease (retail financing) and operating lease contracts that we originate and purchase;

•Interest rate supplements and other support payments from Ford and affiliated companies; and

•Payments made under dealer financing programs.

As a result of our financing activities, we have a large portfolio of finance receivables and operating leases which we classify into two portfolios – “consumer” and “non-consumer”.

Finance receivables and operating leases in the consumer portfolio include products offered to individuals and businesses that finance the acquisition of Ford and Lincoln vehicles from dealers for personal and commercial use. Retail financing includes retail installment sale contracts for new and used vehicles and finance leases (comprised of sales-type and direct financing leases) for new vehicles to retail and commercial customers, including leasing companies, government entities, daily rental companies, and fleet customers.

Finance receivables in the non-consumer portfolio include products offered to automotive dealers and receivables related to Ford and its affiliates. We make wholesale loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital and improvements to dealership facilities, finance the purchase of dealership real estate, and finance other dealer vehicle programs. We also purchase receivables from Ford and its affiliates, primarily related to the sale of parts and accessories to dealers and certain used vehicles from daily rental fleet companies. In addition, we provide financing to Ford for vehicles that Ford leases to its employees.

We also service the finance receivables and operating leases we originate and purchase, make loans to Ford affiliates, and provide insurance services related to our financing programs.

Geographic Scope of Operations and Segment Information. We conduct our financing operations directly and indirectly through our subsidiaries and affiliates. We offer substantially similar products and services throughout many different regions, subject to local legal restrictions and market conditions. We segment our business based on geographic regions: the United States and Canada, Europe, and All Other. Items excluded in assessing segment performance because they are managed at the corporate level, i.e., market valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions, are reflected in Unallocated Other. For additional financial information regarding our operations by business segment and operations by geographic region, see Note 14 of our Notes to the Financial Statements.

Item 1. Business (Continued)

United States and Canada Segment

Our United States and Canada segment represented 79% and 80% of total managed receivables at year-end 2019 and 2020, respectively. Our United States operations accounted for 87% of the United States and Canada segment total managed receivables at both year-end 2019 and 2020. For additional information on how we review our business performance, including on a managed basis, refer to the “Overview” section of Item 7. Managed receivables are defined further in the “Financial Condition” section of Item 7.

Under the Ford Credit and Lincoln Automotive Financial Services brand names, we provide financing services to and through dealers of Ford and Lincoln vehicles. Operations in some markets may also include joint ventures with local financial institutions and other third parties. In addition, other private label operations and alternative business arrangements exist in some markets.

Europe Segment

Our operations in Europe are managed primarily through a United Kingdom-based subsidiary, FCE Bank plc (“FCE”). This segment represented 18% and 17% of total managed receivables at year-end 2019 and 2020, respectively. FCE operates in the United Kingdom, has branches in eight other European countries, and has operating subsidiaries in Germany, Switzerland, the Czech Republic, and Hungary that provide a variety of retail and dealer financing. The United Kingdom and Germany are our largest markets in Europe, representing 61% and 62% of Europe segment managed receivables at year-end 2019 and 2020, respectively. Customers and dealers in Italy, France, and Spain were 23% and 27% of Europe segment managed receivables at year-end 2019 and 2020, respectively. FCE, through its Worldwide Trade Financing (“WWTF”) division, provides financing to distributors and importers in about 70 countries where Ford has no national sales company presence. In addition, other private label operations and alternative business arrangements exist in some markets.

All Other Segment

Our All Other segment includes operations in Mexico, Brazil, Argentina, China, India, and a joint venture in South Africa. This segment represented 3% of total managed receivables at both year-end 2019 and 2020. In addition, other private label operations and alternative business arrangements exist in some markets.

Dependence on Ford

The predominant share of our business consists of financing Ford and Lincoln vehicles and supporting Ford and Lincoln dealers. Any extended reduction or suspension of Ford’s production or sale of vehicles due to a decline in consumer demand, work stoppage, governmental action, negative publicity, or other event, or significant changes to marketing programs sponsored by Ford, would have an adverse effect on our business. Additional information about Ford’s business, operations, production, sales, and risks can be found in Ford’s Annual Report on Form 10-K for the year ended December 31, 2020 (“Ford’s 2020 Form 10-K Report”), filed separately with the SEC.

Ford has sponsored special financing programs available only through us. Under these programs, Ford makes interest supplements or other support payments to us. These programs increase our financing volume and share of financing sales and operating leases of Ford and Lincoln vehicles. Similar programs may be offered in the future. For additional information regarding interest supplements and other support costs received from affiliated companies, see Notes 4 and 5 of our Notes to the Financial Statements.

Competition

The automotive financing business is highly competitive, due in part to credit aggregation systems that permit dealers to send credit applications to multiple finance sources to evaluate financing options offered by these finance sources. Our principal competitors are:

•Banks;

•Independent finance companies;

•Credit unions;

•Leasing companies; and

•Other automobile manufacturers’ affiliated finance companies.

Item 1. Business (Continued)

We compete mainly on the basis of service and financing rate programs, including those sponsored by Ford. A key foundation of our service is providing broad and consistent purchasing policies for retail financing and operating lease contracts, and consistent support for dealer financing requirements across economic cycles. These policies have helped us build strong relationships with Ford’s dealer network that enhance our competitiveness. Our ability to provide competitive financing rates depends on effectively and efficiently originating, purchasing, and servicing our receivables, and efficiently accessing the capital markets. We routinely monitor the capital markets and develop funding plans to optimize our competitive position. Ford-sponsored special financing programs available only through us give us a competitive advantage in providing financing to Ford dealers and their customers.

Seasonal Variations

As a finance company, we own and manage a large portfolio of receivables that are generated throughout the year and are collected over a number of years, primarily in fixed monthly payments. As a result, our overall financing revenues do not exhibit seasonal variations.

Consumer Financing

Overview and Purchasing Process

We provide financing services to customers for personal and commercial use through automotive dealers that have established relationships with us. Our primary business consists of originating and purchasing retail financing and operating lease contracts for new and used vehicles from Ford and Lincoln dealers. We report in our financial statements the receivables from customers under retail financing contracts as finance receivables. We report in our financial statements most of our retail leases as net investment in operating leases with the capitalized cost of the vehicles recorded as depreciable assets.

In general, we purchase from dealers retail financing and operating lease contracts that meet our purchase standards. These contracts primarily relate to the purchase or lease of new vehicles, but some are for used vehicles. Dealers typically submit customer applications electronically. We automatically obtain information on the applicant including a credit bureau score, if available. We use a proprietary scoring system that measures credit quality using information in the credit application, proposed contract terms, credit bureau data, and other information. After a proprietary risk score is generated, we decide whether to purchase a contract using a decision process based on a judgmental evaluation of the applicant, the credit application, the proposed contract terms, credit bureau information (e.g., FICO score), proprietary risk score, and other information. Our evaluation emphasizes the applicant’s ability to pay and creditworthiness focusing on payment, affordability, applicant credit history, and stability as key considerations. Purchase decisions are made within a framework of Ford Credit’s purchase quality and risk factor guidelines. Credit applications are typically evaluated by our electronic decisioning process, which may approve or reject applications.

Retail Financing

The amount we pay for a retail installment sale contract is based on a negotiated vehicle purchase price agreed to between the dealer and the retail customer, less vehicle trade-in allowance or down payment from the customer and special marketing cash payments offered by Ford Credit and Ford, plus any additional products, such as insurance and extended service plans, that are included in the contract. The net purchase price owed by the customer typically is paid over a specified number of months with interest at a fixed rate negotiated between the dealer and the retail customer. The dealer may retain a limited portion of the finance charge.

Item 1. Business (Continued)

We offer a variety of retail installment sale financing products. The average original term of our retail installment sale contracts in the United States was 65 months and 68 months for contracts purchased in 2019 and 2020, respectively. The increase is explained by marketing campaigns, primarily in the second quarter of 2020 that offered 0% financing for 84 months in response to COVID-19. Longer term contracts returned to historical levels in the second half of 2020. A small portion of our retail installment sale contracts have non-uniform payment periods and payment amounts to accommodate special cash flow situations.

In most markets, we hold a security interest in the vehicles purchased through retail installment sale contracts. This security interest provides us certain rights and protections. As a result, if our collection efforts fail to bring a delinquent customer’s payments current, we generally can repossess the customer’s vehicle, after satisfying local legal requirements, and sell it at auction. The customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses. We generally require retail customers to carry fire, theft, and collision insurance on financed vehicles.

We offer vehicle-financing programs to retail and commercial customers including leasing companies, government entities, daily rental companies, and fleet customers through sales-type and direct financing leases. These financings include primarily lease plans for terms of 24 to 60 months. We hold a security interest in financed vehicles in almost all instances. At the end of the finance term, a lease customer may be required to pay any shortfall between the fair market value and the specified end of term value of the vehicle. If the fair market value of the vehicle at the end of the finance term exceeds the specified end of term value, the lease customer may be paid the excess amount. These financings are included in our consumer segment and reported as retail financing. We also offer a retail balloon product in Europe under which the retail customer may finance a vehicle with an installment sale contract with a series of monthly payments followed by paying the amount remaining in a single balloon payment. The customer can satisfy the balloon payment obligation by payment in full of the amount owed, by refinancing the amount owed, or by returning the vehicle and paying any contractually agreed additional charges for excess mileage or excess wear and use. Generally, we sell vehicles returned to us to Ford dealers and non-Ford dealers through auctions.

Net Investment in Operating Leases

We offer leasing plans to retail customers through our dealers. Our highest volume retail-leasing plan is called Red Carpet Lease, which is offered in the United States and Canada through dealers of Ford and Lincoln brands. Under these plans, dealers originate the leases and offer them to us for purchase. Upon our purchase of a lease, we take ownership of the lease and title to the leased vehicle from the dealer. After we purchase a lease from a dealer, the dealer generally has no further obligation to us in connection with the lease. The customer is responsible for properly maintaining the vehicle and is obligated to pay for excess wear and use as well as excess mileage, if any. At the end of the lease, the customer has the option to purchase the vehicle for the price specified in the lease contract, or return the vehicle to the dealer. If the customer returns the vehicle to the dealer, the dealer may buy the vehicle from us or return it to us. We generally sell vehicles returned to us to Ford and non-Ford dealers through auctions.

The amount we pay to a dealer for a lease, also called the acquisition cost, is based on the negotiated vehicle price agreed to between the dealer and the retail customer, less any vehicle trade-in allowance or down payment from the customer and special marketing cash payments offered by Ford Credit and Ford, plus any additional products, such as insurance and extended service plans, that are included in the contract. The customer makes monthly lease payments based on the purchase price less the contractual residual value of the vehicle, plus lease charges. Some of our lease programs, such as our Red Carpet Lease Advance Payment Plan, provide certain pricing advantages to customers who make all or some monthly payments at lease inception or purchase refundable higher mileage allowances. We generally require lease customers to carry fire, theft, liability, and collision insurance on leased vehicles. In the case of a contract default and repossession, the customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses.

In the United States, operating lease terms for new vehicles range primarily from 24 to 39 months. The average original lease term for contracts purchased was 35 months and 34 months for 2019 and 2020, respectively.

Item 1. Business (Continued)

Non-Consumer Financing

Overview

We extend credit to franchised dealers selling Ford and Lincoln vehicles primarily in the form of approved lines of credit to purchase new and used vehicles. Each lending request is evaluated, taking into consideration the borrower’s financial condition, supporting security, and numerous other financial and qualitative factors. Generally, receivables are secured by the related vehicle or the related property and may also be secured by other dealer assets. Asset verification processes are in place and generally include physical audits of vehicle inventories with increased audit frequency for higher-risk dealers.

Dealer Financing

Wholesale Financing. We offer a wholesale financing program for qualifying dealers to finance new and used vehicles held in inventory (also known as floorplan financing). We generally finance the vehicle’s wholesale invoice price for new vehicles and up to 100% of the dealer’s purchase price for used vehicles. Dealers generally pay a floating interest rate on wholesale loans. In the United States, the average new wholesale receivable, excluding the time the vehicle was in transit from the assembly plant to the dealership, was outstanding for 71 days in 2019 compared with 85 days in 2020. Our wholesale financing program includes financing of large multi-brand dealer groups.

When a dealer uses our wholesale financing program to purchase vehicles, we obtain a security interest in the vehicles and, in many instances, other assets of the dealer. In the United States and Canada, our wholly owned subsidiary, The American Road Insurance Company (“TARIC”), generally provides insurance for vehicle damage and theft of vehicles held in dealer inventory that are financed by us.

Dealer Loans. We make loans to dealers to finance the purchase of dealership real estate, to make improvements to dealership facilities, and to provide working capital. These loans are typically secured by mortgages on dealership real estate and / or by security interests in other dealership assets. In addition, these loans are generally supported by personal guarantees from the individual owners of the dealership.

Other Dealer Financing. We also provide financing to qualified dealers for vehicles to be utilized for service replacement and retail rental use. In addition, we provide financing to qualified daily rental companies for new and used vehicles used in their operations.

Other Financing

We also purchase receivables from Ford and its affiliates, primarily related to the sale of parts and accessories to dealers and certain used vehicles from daily rental fleet companies. In addition, we provide financing to Ford for vehicles that Ford leases to its employees. These receivables are excluded from our credit quality reporting since the performance of this group of receivables is generally guaranteed by Ford.

Marketing and Special Programs

We actively market our financing products and services to automotive dealers and customers. We demonstrate to dealers the value of a business relationship with us through personal sales contacts, targeted advertisements in trade publications, and participation in dealer-focused conventions and organizations. Our marketing strategy is based on our belief that we can better assist dealers in achieving their sales, financial, and customer satisfaction goals by being a reliable finance source with knowledgeable automotive and financial professionals offering personal attention and interaction. We demonstrate our commitment to dealer relationships with a variety of materials, measurements, and analyses showing the advantages of a full range of automotive financing products that allows consistent and predictable single source financing. We promote increased dealer transactions through incentives, bonuses, contests, and selected program and rate adjustments.

Item 1. Business (Continued)

We promote our retail financing products primarily through pre-approved credit offers to prospective customers, point-of-sale information, and ongoing communications with existing customers. Our communications to these customers promote the advantages of our financing products, the availability of special plans and programs, and the benefits of affiliated products, such as extended warranties, service plans, insurance coverage, gap protection, and excess wear and use waivers. We also emphasize the quality of our customer service and the ease of making payments and transacting business with us. For example, through our website located at www.fordcredit.com or via our FordPass mobile application, a customer can make inquiries, review an account balance, examine current incentives, schedule an electronic payment, or qualify for a pre-approved credit offer.

We also market our non-consumer financing services with a specialized group of employees who make direct sales calls on dealers and, often at the request of such dealers, on potential high-volume commercial customers. This group also uses various materials to explain our flexible programs and services specifically directed at the needs of commercial and fleet vehicle customers.

Servicing

Consumer Financing

After we purchase retail financing contracts and operating leases from dealers and other customers, we manage the contracts during their contract terms. This management process is called servicing. We service the finance receivables and operating leases we originate and purchase. Our servicing duties include the following:

•Applying monthly payments from customers;

•Maintaining a security interest in the financed vehicle;

•Providing billing statements to customers;

•Responding to customer inquiries;

•Releasing our security interest on paid-off finance contracts;

•Contacting delinquent customers for payment;

•Arranging for the repossession of vehicles; and

•Selling repossessed and returned vehicles.

Customer Payment Operations. Customers may make payments by mailing checks to a bank for deposit in a lockbox account, through electronic payment services, a direct debit program, or a telephonic payment system.

Collections. We design our collection strategies and procedures to keep accounts current and to collect on delinquent accounts. We employ a combination of proprietary and non-proprietary tools to assess the probability and severity of default for all of our finance receivables and operating leases and implement our collection efforts based on our determination of the credit risk associated with each customer. As each customer develops a payment history, we use an internally developed behavioral scoring model to assist in determining the best collection strategies. Based on data from this scoring model, contracts are categorized by collection risk. Our centralized collection operations are supported by auto-dialing technology and proprietary collection and workflow operating systems. Through our auto-dialer program and our monitoring and call log systems, we target our efforts on contacting customers about missed payments and developing satisfactory solutions to bring accounts current.

Supplier Operations. We engage vendors to perform some of our servicing processes. These processes include depositing monthly payments from customers, monitoring, processing, and storing documents and certificates of title that reflect the perfection of security interests and ownership in financed and leased vehicles, imaging of contracts and electronic data file maintenance, storing and processing paper and electronic contracts, generating and sending billing statements and other written communications to customers, providing telephonic payment systems for retail customers, handling of some inbound and outbound collections calls, and recovering deficiencies for selected accounts.

Item 1. Business (Continued)

Payment Extensions. A payment extension defers one or more past due payments and moves the scheduled maturity date by the number of months extended. Our guidelines for offering a payment extension generally require that the customer’s payment problem is temporary, the customer has an income source for making the next payment, and the customer has made at least one payment since the contract’s origination. Payment extensions are reviewed regularly by our servicing managers. When allowed by state law, we usually collect a fee on extensions. From mid-March through May 31, 2020, for customers who requested assistance, we granted extensions on about 10% of our global retail financing and operating lease contracts. Requests for contract extensions have now returned to pre-pandemic levels of about 1-2%.

Repossessions and Off-Lease Vehicles. We view repossession of a financed or leased vehicle as a final step that we undertake only after all other collection efforts have failed. Our United States and Canada systems also employ a web-based network of outside contractors who support the repossession process. In all of our markets, we sell repossessed vehicles and apply the proceeds to the amount owed on the customer’s account. We continue to attempt collection of any deficient amounts until the account is paid in full, we obtain mutually satisfactory payment arrangements with the debtor, or we determine that the account is uncollectible. Repossessed vehicles are reported in Other assets on our balance sheets at values that approximate expected net auction proceeds.

We manage the sale of returned leased vehicles and repossessed vehicles. We inspect and recondition the vehicle to maximize the net auction value of the vehicle. Returned leased vehicles are predominantly sold through an online auction, closed auctions in which only Ford and Lincoln dealers may participate, or at open auctions in which any licensed dealer can participate. Typically, repossessed vehicles are sold at open auctions.

Non-Consumer Financing

In the United States and Canada, we require dealers to submit monthly financial statements that we monitor for potential credit deterioration. We assign an evaluation rating to each dealer, which, among other things, determines the frequency of physical audits of vehicle inventory. We electronically audit vehicle inventory utilizing integrated systems allowing us to access information from Ford reported sales. We monitor dealer inventory financing payoffs to detect deviations from typical repayment patterns and take appropriate actions. If a dealer fails to make principal or interest payments when due, we will classify the dealer as “status” and may take one or more of the following actions: demand payment of all or a portion of the related receivables; suspend the dealer’s credit lines; place Ford Credit employees or security personnel at the dealership; secure the dealer’s inventory; require certified funds for all vehicles sold by the dealer; initiate legal actions to exercise rights under the floorplan financing agreement; or increase the dealer’s floorplan interest rate. If a loss appears imminent, we will attempt to redistribute new vehicle inventory, liquidate all remaining collateral, enforce any third-party guarantees, and charge off any remaining amounts as uncollectible.

We also provide financing to fleet purchasers, leasing companies, daily rental companies, and other commercial customers. We generally review our exposure under these credit arrangements at least annually.

In addition, we may service wholesale receivables that have been sold to third parties or wholesale receivables that are originated by a third party.

Outside of the United States and Canada, non-consumer financing is managed by the respective regional offices, executed within the local markets, and similar risk management principles are applied.

Item 1. Business (Continued)

Insurance

We conduct insurance underwriting operations primarily through TARIC in the United States and Canada. TARIC offers a variety of products and services, including:

•Physical damage insurance coverage for Ford Credit financed vehicles at dealer locations;

•Physical damage insurance coverage for non-affiliated company financed vehicles, serviced by Ford Credit, at dealer locations;

•Physical damage insurance coverage for Ford and Lincoln vehicles in transit between final assembly plants and dealer locations;

•Contractual liability insurance on extended service contracts for Ford and its affiliates; and

•Commercial automobile and general liability insurance and surety bonds for Ford in the United States.

TARIC invests premiums, other revenue, and its capital and surplus to fund future claims, and has established investment guidelines and strategies to reflect its risk tolerance, regulatory requirements, and rating agency considerations, among other factors. TARIC is rated by A.M. Best Company on its financial strength and issuer credit rating. Since 2012, TARIC’s rating has been A (Excellent) for its financial strength and “a” on its issuer credit rating and has a “stable” outlook.

We also offer various Ford-branded insurance products throughout the world underwritten by non-affiliated insurance companies from which we receive fee income, but the underwriting risk remains with the non-affiliated insurance companies. Premiums from our insurance business generated 1% of our total revenue in both 2019 and 2020.

Human Capital Resources

People Strategy and Governance

Caring for each other through valuing diversity, embracing inclusion, celebrating success, encouraging new thinking, supporting each other through change, and winning as a team is a key element of our plan to drive long-term business success. Our ultimate parent, Ford Motor Company, maintains an Executive People Forum consisting of the CEO and top leadership team that meets multiple times a month with a specific focus on people and organizational topics that will enable and accelerate delivery of the business plan. Key topic areas include our Enterprise People Strategy, Diversity & Inclusion, Organizational Fitness and Workforce Planning, and Leadership Development and Culture.

Diversity, Equity, and Inclusion

At Ford and Ford Credit, we believe that creating a culture of belonging for all our employees is foundational to our success and morally the right thing to do. We offer 10 Employee Resource Groups (“ERGs”) that represent various dimensions of our employee population, including racial, ethnic, gender, religious, sexual orientation and gender identity, and generational communities with chapters throughout the world, in addition to Diversity and Inclusion (“D&I”) Councils in every region. The ERGs and D&I Councils are instrumental in providing a voice to our globally diverse workforce and to help us better understand the employee experience.

Talent Attraction and Capability Assessment

In an environment where many employees are no longer bound to physical locations, where and how we source our talent is evolving. From a capability perspective, we are leveraging best practices in assessments and talent management to strengthen our current capabilities and future pipeline while reinforcing a culture of belonging, empowerment, and innovation. Further, we are also creating targeted learning experiences, democratizing learning and career development opportunities across the organization, and empowering employees to design their own career paths with skill development targeted for the roles of today and the future. Finally, the extent to which our People Leaders are equipped to care for, inspire, and empower our people plays a vital role in our strategy, and we are committed to helping our leaders strengthen these capabilities with dedicated learning paths and non-traditional learning opportunities.

Item 1. Business (Continued)

Employee Health and Safety

Nothing is more important than the health, safety, and well-being of our people, and we work hard to achieve world-class levels of safety year-over-year, through the application of policies and best practices. We maintain a robust safety culture to reduce workplace injuries, supported by effective communication, reporting, and external benchmarking.

Ford and Ford Credit also embarked on a complex journey to address the people and business implications of the COVID-19 pandemic, including how we support and protect our employees, the communities where we operate, and our company assets. We created the COVID-19 Business Resumption Plan, i.e., “The Return-To-Work Playbook.” The Return-To-Work Playbook is our corporate guideline and aligns with recommendations from the World Health Organization, the Centers for Disease Control and Prevention, and country and local health departments. The Playbook’s core objective is to protect our employees and provide a safe work environment. The main elements of the Playbook include:

•Guidelines and requirements for completion of a daily health check survey

•Guidelines for temperature scanning prior to entering facilities

•Guidelines for appropriate use and application of Personal Protective Equipment

•Guidelines and recommendations for social distancing inside and outside of workstations

•Cleaning and disinfecting workstations and common areas

•Guidelines supporting handwashing methods and frequency

•Placement strategy for hand sanitizer stations

We will continue to be vigilant and pro-active in our efforts to effectively manage the COVID-19 pandemic.

Employee Wellbeing Initiatives

Our global, holistic approach to wellbeing encompasses the financial, social, mental / emotional, physical, and professional needs of our employees. Foundational to our wellbeing philosophy is providing a broad array of resources and solutions to educate employees and build capability and support for meeting individual wellbeing needs and goals. Our wellbeing program is an integral part of our total rewards strategy as we work to address business and employee challenges through a multi-channel approach that provides our diverse populations and global regions flexibility and choice to meet their specific needs.

We use data driven insights gathered through surveys, focus groups, and claims data to prioritize our wellbeing programs. Through our wellbeing offerings, e.g., work from home support and enhanced childcare and parental resources, we provide employees the resources they need to achieve their own sense of wellbeing and build an environment where employees and People Leaders care for each other as we deliver the business objectives.

Employee Sentiment Strategy

We leverage our ask / listen / observe framework to understand employee sentiment at Ford and Ford Credit. This approach is a holistic and consistent methodology that enables us to understand how employees are feeling in real time and act accordingly. Our measurement focuses on several areas that are key to our business: Employee Mental and Emotional Wellbeing, Health & Safety (including our COVID-19 safety protocols), Employee Experience, Culture, Diversity, Equity & Inclusion, Leadership, and Strategic Alignment. A critical element of our measurement program is ensuring that data ends up in the hands of those who are best positioned to drive meaningful change. To this end, leaders at all levels have access to dashboards with data from their teams and organizations, as well as personalized next step recommendations embedded into action planning tools. Our measurement approach is also used to inform our areas of focus as an organization and to evaluate the effectiveness of talent initiatives across the enterprise.

Employee Data

We employed approximately 6,800 and 6,400 full-time employees worldwide at year-end 2019 and 2020, respectively. Most employees are salaried and are not represented by a union.

Item 1. Business (Continued)

Governmental Regulations

As a finance company, we are highly regulated by the governmental authorities in the locations where we operate.

United States

Within the United States, our operations are subject to regulation and supervision under various federal, state, and local laws.

Federal Regulation. We are subject to federal regulation, including the Truth-in-Lending Act, the Consumer Leasing Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act. These laws require us to provide certain disclosures to prospective purchasers and lessees in consumer retail financing and operating lease transactions and prohibit discriminatory credit practices. The principal disclosures required under the Truth-in-Lending Act for retail financing transactions include the terms of repayment, the amount financed, the total finance charge, and the annual percentage rate. For operating lease transactions, under the Consumer Leasing Act, we are required to disclose the amount due at lease inception, the terms for payment, and information about lease charges, insurance, excess mileage, wear and use charges, and liability on early termination. The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants and customers on a variety of factors, including race, color, sex, age, or marital status. Pursuant to the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for being denied. In addition, any of the credit scoring systems we use during the application process or other processes must comply with the requirements for such systems under the Equal Credit Opportunity Act. The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a consumer credit report obtained from a national credit bureau and sets forth requirements related to identity theft, privacy, and accuracy in credit reporting. In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), it is unlawful for us to engage in any unfair, deceptive, or abusive act or practice. We are also subject to the Servicemembers Civil Relief Act that provides additional protections for certain customers in the military such as prohibiting us from charging interest in excess of 6% on transactions with those customers, limiting our ability to collect future payments from those operating lease customers who terminate their lease early, and limiting our use of self-help repossession of the vehicle for those customers. We are subject to other federal regulation, including the Gramm-Leach-Bliley Act, which requires us to maintain confidentiality and safeguard certain consumer data in our possession and to communicate periodically with consumers on privacy matters. In addition, the Consumer Financial Protection Bureau (“CFPB”) has broad rule-making and enforcement authority for a wide range of consumer financial protection laws that regulate consumer finance businesses, such as Ford Credit’s financing business. For additional discussion of the CFPB, see “Item 1A. Risk Factors”.

We are also subject to regulation in our funding and securitization activities, including requirements under federal securities laws and specific rules and requirements for asset-backed securities. Derivative activities are regulated under the Commodities Exchange Act and Dodd-Frank Act. These regulations also impose operational and reporting requirements for these funding transactions.

State Regulation - Licensing. In most states, a consumer credit regulatory agency regulates and enforces laws relating to finance companies. Rules and regulations generally provide for licensing of finance companies, limitations on the amount, duration, and charges, including interest rates, that can be included in finance contracts, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights. We must renew these licenses periodically. In periods of high interest rates, rate limitations could have an adverse effect on our operations if we were unable to purchase retail installment sale contracts with finance charges that reflect our increased costs. In certain states, we are subject to periodic examination by state regulatory authorities.

State Regulation - Repossessions. To mitigate our credit losses, sometimes we repossess a financed or leased vehicle. Repossessions are subject to prescribed legal procedures, including peaceful repossession, one or more customer notifications, a prescribed waiting period prior to disposition of the repossessed vehicle, and return of personal items to the customer. Some states provide the customer with reinstatement rights that require us to return a repossessed vehicle to the customer in certain circumstances. Our ability to repossess and sell a repossessed vehicle is restricted if a customer declares bankruptcy.

Item 1. Business (Continued)

International

In some countries outside the United States, some of our subsidiaries, including FCE and Ford Bank GmbH (“Ford Bank”), are regulated and / or licensed banking institutions and are required, among other things, to maintain minimum capital and liquidity. FCE is authorized by the U.K. Prudential Regulation Authority (“PRA”) and regulated by the U.K. Financial Conduct Authority (“FCA”) and the PRA to carry on a range of regulated activities within the United Kingdom. Ford Bank is authorized by the European Central Bank and regulated by both the German Bundesbank and the German Federal Supervisory Authority (“BaFin”). Pursuant to the Capital Requirements Directive and Regulation, FCE operates through a branch and subsidiary network in 11 other European countries. In many locations where we operate, governmental authorities require us to obtain equivalent banking licenses to conduct our business.

Regulatory Compliance Status

Based on our compliance management processes and procedures, we believe that we maintain all material licenses and permits required for our current operations and are in material compliance with all laws and regulations applicable to us and our operations. Failure to satisfy those legal and regulatory requirements could have a material adverse effect on our operations, financial condition, reputation, and / or liquidity. Further, the adoption of new laws or regulations, or the revision of existing laws and regulations, could have a material adverse effect on our operations, financial condition, and / or liquidity.

We actively monitor proposed changes to relevant legal and regulatory requirements in order to maintain our compliance. Through our governmental relations efforts, we also attempt to participate in the legislative and administrative rule-making process on regulatory initiatives that impact finance companies. The cost of our ongoing compliance efforts has not had a material adverse effect on our operations, financial condition, or liquidity.

For additional information on new or increased credit regulations, consumer or data protection regulations, or other regulations, refer to “Item 1A. Risk Factors.”

Item 1. Business (Continued)

Certain Agreements with Ford and Affiliates

We and Ford are parties to a Second Amended and Restated Relationship Agreement (the “Relationship Agreement”) relating to our long-standing business practices with Ford. A copy of the Relationship Agreement was filed as an exhibit to our Current Report on Form 8-K dated March 19 , 20 20, and is incorporated by reference herein as an exhibit. Pursuant to the Relationship Agreement, if our managed leverage for a calendar quarter were to be higher than 11.5 to 1 (as reported in our most recent Form 10-Q Report or Form 10-K Report), we can require Ford to make or cause to be made a capital contribution to us in an amount sufficient to have caused such managed leverage to have been 11.5 to 1. No capital contributions have been made to us pursuant to the Relationship Agreement.

In addition to the foregoing, the other principal terms of the Relationship Agreement include the following:

•Any extension of credit from us to Ford or any of Ford’s automotive affiliates will be on arm’s length terms and will be enforced by us in a commercially reasonable manner;

•We will not guarantee more than $500 million of the indebtedness of, make any investments in, or purchase any real property or manufacturing equipment classified as an automotive asset from Ford or any of Ford’s automotive affiliates;

•We will not be required by Ford or any of Ford’s automotive affiliates to accept credit or residual risk beyond what we would be willing to accept acting in a prudent and commercially reasonable manner (taking into consideration any interest rate supplements or residual value support payments, guarantees, or other subsidies that are provided to us by Ford or any of Ford’s automotive affiliates); and

•We and Ford are separate, legally distinct companies, and we will continue to maintain separate books and accounts. We will prevent our assets from being commingled with Ford’s assets, and hold ourselves out as a separate and distinct company from Ford and Ford’s automotive affiliates.

We also have an agreement to maintain FCE’s net worth in excess of $500 million. No payments have been made to FCE pursuant to the agreement during the 2001 through 2020 periods.

More information about agreements between us and Ford and other affiliates is contained in our Notes to the Financial Statements, “Business - Overview,” “Business - Consumer Financing - Retail Financing,” “Business - Non-Consumer Financing - Other Financing,” and the description of Ford’s business in Ford’s 2020 Form 10-K Report.

ITEM 1A. Risk Factors.

We have listed below the material risk factors applicable to Ford or Ford Credit grouped into the following categories: Operational Risks; Macroeconomic, Market, and Strategic Risks; Financial Risks; and Legal and Regulatory Risks.

Operational Risks

Ford and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19. Ford and Ford Credit face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the global outbreak of COVID-19. The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To the extent cases surge in any locations, stringent limitations on daily activities that may have been eased previously could be reinstated in those areas. Further, if new strains of COVID-19 develop or sufficient amounts of vaccines are not available, not widely administered for a significant period of time, or otherwise prove ineffective, the impact of COVID-19 on the global economy, and, in turn, Ford and Ford Credit’s financial condition, liquidity, and results of operations could be material.

Consistent with the actions taken by governmental authorities, in late March 2020, Ford idled its manufacturing operations in regions around the world other than China, where manufacturing operations were suspended in January and February before beginning to resume operations in March. By May 2020, taking a phased approach and after introducing new safety protocols at its plants, Ford resumed manufacturing operations around the world.

The economic slowdown attributable to COVID-19 led to a global decrease in vehicle sales in markets around the world. As described in more detail below under “Industry sales volume in any of Ford’s key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event,” a sustained decline in vehicle sales would have a substantial adverse effect on Ford’s financial condition, results of operations, and cash flow.

The predominant share of Ford Credit’s business consists of financing Ford and Lincoln vehicles, and the duration or resurgence of COVID-19 or similar public health issues may negatively impact the level of originations at Ford Credit. For example, Ford’s suspension of manufacturing operations, a significant decline in dealer showroom traffic, and / or a reduction of operations at dealers may lead to a significant decline in Ford Credit’s consumer and non-consumer originations. Moreover, a sustained decline in sales could have a significant adverse effect on dealer profitability and creditworthiness. Further, COVID-19 has had a significant negative impact on many businesses and unemployment rates have increased sharply from pre-COVID-19 levels. Ford Credit expects the economic uncertainty and higher unemployment to result in higher defaults in its consumer portfolio, and prolonged unemployment is expected to have a negative impact on both new and used vehicle demand.

The global economic slowdown and stay-at-home orders enacted across the United States disrupted auction activity in many locations, which adversely impacted and caused delays in realizing the resale value for off-lease and repossessed vehicles. Although auction performance has improved, future or additional restrictions could have a similar adverse impact on Ford Credit. For more information about the impact of higher credit losses and lower residual values on Ford Credit’s business, see “Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles” below.

As described in more detail below under “Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors,” the volatility created by COVID-19 adversely affected Ford Credit’s access to the debt and securitization markets and its cost of funding, and any volatility in the capital markets as a result of a surge in cases of COVID-19, new outbreaks, or for any other reason could have an adverse impact on Ford Credit’s access to those markets and its cost of funding.

Item 1A. Risk Factors (Continued)

The full impact of COVID-19 on Ford and Ford Credit’s financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the outbreak (including any potential future waves and the success of vaccination programs), its impact on customers, dealers, and suppliers, how quickly normal economic conditions, operations, and the demand for Ford’s products can resume, and any permanent behavioral changes that the pandemic may cause. For example, in the event manufacturing operations are again suspended, fully ramping up Ford’s production schedule to prior levels may take longer than the prior resumption and will depend, in part, on whether Ford’s suppliers and dealers have resumed normal operations. Ford’s automotive operations generally do not realize revenue while its manufacturing operations are suspended, but Ford continues to incur operating and non-operating expenses, resulting in a deterioration of its cash flow. Accordingly, any significant future disruption to Ford’s production schedule, whether as a result of Ford’s or a supplier’s suspension of operations, could have a substantial adverse effect on its financial condition, liquidity, and results of operations. Further, government-sponsored liquidity or stimulus programs in response to COVID-19 may not be available to Ford or Ford Credit or their customers, suppliers, or dealers, and if available, may nevertheless be insufficient to address the impacts of COVID-19. Moreover, Ford’s supply and distribution chains may be disrupted by supplier or dealer bankruptcies or their permanent discontinuation of operations.

The COVID-19 pandemic may also exacerbate other risks disclosed in our 2020 Form 10-K Report, including, but not limited to, Ford’s competitiveness, demand or market acceptance for its products, and shifting consumer preferences.

Ford is highly dependent on its suppliers to deliver components in accordance with Ford’s production schedule, and a shortage of key components, such as semiconductors, can disrupt Ford’s production of vehicles. Ford’s products contain components that it sources globally from suppliers who, in turn, source components from their suppliers. If there is a shortage of a key component in Ford’s supply chain, and the component cannot be easily sourced from a different supplier, the shortage may disrupt Ford’s production. For example, the automotive industry is facing a significant shortage of semiconductors. With up to fifty modules on a vehicle, Ford and its competitors who need integrated circuits are experiencing various levels of semiconductor impact. The semiconductor supply chain is complex, and a constrained wafer capacity is occurring deep in the chain. Global semiconductor makers allocated more capacity to meet surging demand for consumer electronics during the COVID-19 pandemic as automotive OEMs experienced industry-wide plant closures. At the same time, wafer foundries that support chipmakers have not invested enough in recent years to increase capacities to the levels needed to support demand from all of their customers. Wafers have a long lead time for production, in some cases up to 30 weeks, which further exacerbates the shortage. When global automakers resumed vehicle production in 2020 – even more quickly than some expected – semiconductor supplies became further strained. A combination of these factors, including increased demand for consumer electronics, automotive shutdowns due to COVID-19, the rapid recovery of demand for vehicles, and long lead times for wafer production, is contributing to the shortage of semiconductors. A shortage of semiconductors or other key components can cause a significant disruption to Ford’s production schedule and have a substantial adverse effect on Ford’s financial condition or results of operations.

Ford’s long-term competitiveness depends on the successful execution of its Plan. Ford previously announced its plan for the global redesign of its business, pursuant to which Ford is working to turn around automotive operations, compete like a challenger, and capitalize on its strengths by allocating more capital, more resources, and more talent to its strongest business and vehicle franchises. Ford plans to do so by becoming more customer centric, embracing technology, and adopting processes that emphasize simplicity, speed and agility, efficiency, and accountability. The restructurings involved in turning around Ford’s automotive operations have resulted in charges that have had an adverse impact on its financial condition and results of operations, and Ford expects to incur additional charges in the future. Moreover, such restructuring actions may subject Ford to potential claims from employees, suppliers, dealers, or governmental authorities or harm its reputation. In addition, to further improve its business and overall competitiveness, Ford is attempting to leverage relationships with third parties, including various alliances and joint ventures as discussed below under “Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, or new business strategies.” Further, significant changes to Ford’s long-term business model in various regions may be necessary should they prove to be unviable. If Ford is not successful in executing the Plan or is delayed for reasons outside of its control, Ford may not be able to materially lower costs in the near term, improve its competitiveness in the long term, or realize the full benefits of its global redesign actions, which could have an adverse effect on Ford’s financial condition or results of operations.

Item 1A. Risk Factors (Continued)

Ford’s vehicles could be affected by defects that result in delays in new model launches, recall campaigns, or increased warranty costs. Government safety standards require manufacturers to remedy defects related to vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard. The National Highway Traffic Safety Administration’s (“NHTSA”) enforcement strategy has shifted to a significant increase in civil penalties levied and the use of consent orders requiring direct oversight by NHTSA of certain manufacturers’ safety processes, a trend that could continue. Should Ford or government safety regulators determine that a safety or other defect or a noncompliance exists with respect to certain of Ford’s vehicles prior to the start of production, the launch of such vehicle could be delayed until such defect is remedied. The cost of recall and customer satisfaction actions to remedy defects in vehicles that have been sold could be substantial, particularly if the actions relate to global platforms or involve defects that are identified years after production. For example, NHTSA and the automotive industry are currently engaged in a study of the safety of approximately 56 million Takata desiccated airbag inflators in the United States. Of these, approximately three and a half million of the inflators are in our vehicles. Should NHTSA determine that the inflators contain a safety defect, Ford and other manufacturers could potentially face significant incremental recall costs. Ford’s recent experience recalling about three million Takata airbag inflators with a different design resulted in Ford incurring a charge of $610 million in its fourth quarter 2020 results. Further, to the extent recall and customer satisfaction actions relate to defective components Ford receives from suppliers and Ford’s ability to recover from the suppliers may be limited by the suppliers’ financial condition. Ford accrues the estimated cost of both base warranty coverages and field service actions at the time a vehicle is sold, and it reevaluates the adequacy of its accruals on a regular basis. In addition, from time to time, Ford issues extended warranties at its expense, the estimated cost of which is accrued at the time of issuance. If warranty costs are greater than anticipated as a result of increased vehicle and component complexity, the adoption of new technologies, or otherwise, such costs could have an adverse effect on Ford’s financial condition or results of operations. Furthermore, launch delays, recall actions, and increased warranty costs could adversely affect Ford’s reputation or market acceptance of its products as discussed below under “Ford’s new and existing products and mobility services are subject to market acceptance and face significant competition from existing and new entrants in the automotive and mobility industries.”

Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, or new business strategies. Ford has invested in, formed strategic alliances with, and announced or formed joint ventures with a number of companies, and it may expand those relationships or enter into similar relationships with additional companies. These initiatives typically involve enormous complexity and Ford may not be able to complete anticipated transactions, the anticipated benefits of these transactions may not be realized, or the benefits may be delayed. For example, Ford may not successfully integrate an alliance or joint venture with its operations, including the implementation of its controls, systems, procedures, and policies, or unforeseen expenses or liabilities may arise that were not discovered during due diligence prior to an investment or entry into a strategic alliance, or a misalignment of interests may develop between Ford and the other party. Further, to the extent Ford shares ownership, control, or management with another party in a joint venture, Ford’s ability to influence the joint venture may be limited, and Ford may be unable to prevent misconduct or implement its compliance or internal control systems. In addition, implementation of a new business strategy may lead to the disruption of Ford’s existing business operations, including distracting management from current operations. Results of operations from new activities may be lower than Ford’s existing activities, and, if a strategy is unsuccessful, Ford may not recoup its investments in that strategy. Failure to successfully and timely realize the anticipated benefits of these transactions or strategies could have an adverse effect on Ford’s financial condition or results of operations.

Item 1A. Risk Factors (Continued)

Operational systems, security systems, and vehicles could be affected by cyber incidents and other disruptions. Ford and Ford Credit rely on information technology networks and systems, including in-vehicle systems and mobile devices, some of which are managed by suppliers, to process, transmit, and store electronic information that is important to the operation of their businesses and Ford’s vehicles. Despite security measures, Ford and Ford Credit are at risk for interruptions, outages, and compromises of: (i) operational systems (including business, financial, accounting, product development, consumer receivables, data processing, or manufacturing processes); (ii) facility security systems; and / or (iii) in-vehicle systems or mobile devices, whether caused by a cyber attack, security breach, or other reasons, e.g., a natural disaster, fire, or overburdened infrastructure system. Such incidents could materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise the privacy of personal information of consumers, employees, or others; jeopardize the security of Ford and / or Ford Credit’s facilities; affect the performance of in-vehicle systems; and / or impact the safety of Ford’s vehicles. This risk exposure rises as Ford continues to develop and produce vehicles with increased connectivity. Moreover, Ford, Ford Credit, their suppliers, and dealers have been the target of cyber attacks in the past, and such attacks will continue and evolve in the future, which may cause cyber incidents to be more difficult to detect for periods of time. Ford and Ford Credit’s networks and Ford’s in-vehicle systems, sharing similar architectures, could also be impacted by the negligence or misconduct of insiders or third parties who have access to Ford and Ford Credit’s networks and systems. Ford and Ford Credit continually employ capabilities, processes, and other security measures designed to reduce and mitigate the risk of cyber attacks; however, such preventative measures cannot provide absolute security and may not be sufficient in all circumstances or mitigate all potential risks. Moreover, a cyber incident could harm Ford and Ford Credit’s reputation and / or subject Ford and Ford Credit to regulatory actions or litigation, and a cyber incident involving Ford or one of its suppliers could impact production.

Ford’s production, as well as Ford’s suppliers’ production, could be disrupted by labor issues, natural or man-made disasters, financial distress, production difficulties, or other factors. A work stoppage or other limitation on production could occur at Ford’s or its suppliers’ facilities for any number of reasons, including as a result of labor issues, including disputes under existing collective bargaining agreements with labor unions or in connection with negotiation of new collective bargaining agreements, absenteeism, public health issues (e.g., COVID-19), stay-at-home orders, or in response to potential restructuring actions (e.g., plant closures); as a result of supplier financial distress or other production constraints, such as limited quantities of components, including but not limited to semiconductors, or raw materials, quality issues, or other difficulties; as a result of a natural disaster (including climate-related physical risk); or for other reasons. Many components used in Ford’s vehicles are available only from a single or limited number of suppliers and, therefore, cannot be re-sourced quickly or inexpensively to another supplier (due to long lead times, new contractual commitments that may be required by another supplier before ramping up to provide the components or materials, etc.). Such suppliers also could threaten to disrupt Ford’s production as leverage in negotiations. In addition, when Ford undertakes a model changeover, significant downtime at one or more of its production facilities may be required, and Ford’s ability to return to full production may be delayed if it experiences production difficulties at one of its facilities or a supplier’s facility. Moreover, as vehicles, components, and their integration become more complex, Ford may face an increased risk of a delay in production of new vehicles. Regardless of the cause, Ford’s ability to recoup lost production volume may be limited. Accordingly, a significant disruption to Ford’s production schedule could have a substantial adverse effect on its financial condition or results of operations and may impact its strategy to comply with fuel economy standards as discussed below under “Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations.”

Ford’s ability to maintain a competitive cost structure could be affected by labor or other constraints. Substantially all of the hourly employees in Ford’s Automotive operations in the United States and Canada are represented by unions and covered by collective bargaining agreements. These agreements provide guaranteed wage and benefit levels throughout the contract term and some degree of income security, subject to certain conditions. These agreements may restrict Ford’s ability to close plants and divest businesses. A substantial number of Ford’s employees in other regions are represented by unions or government councils, and legislation or custom promoting retention of manufacturing or other employment in the state, country, or region may constrain as a practical matter Ford’s ability to sell or close manufacturing or other facilities.

Ford’s ability to attract and retain talented, diverse, and highly skilled employees is critical to its success and competitiveness. Ford’s success depends on its ability to continue to recruit and retain talented and diverse employees who are highly skilled in engineering, software, technology (including digital capabilities and connectivity), and marketing and sales, among other areas. Competition for such employees is intense, and the loss of existing employees or Ford’s inability to recruit new employees, particularly with the introduction of new technologies, could have a substantial adverse effect on Ford’s business.

Item 1A. Risk Factors (Continued)

Macroeconomic, Market, and Strategic Risks

Ford’s new and existing products and mobility services are subject to market acceptance and face significant competition from existing and new entrants in the automotive and mobility industries. Although Ford conducts extensive market research before launching new or refreshed vehicles and introducing new services, many factors both within and outside Ford’s control affect the success of new or existing products and services in the marketplace, and Ford may not be able to accurately predict trends or the success of new products or services in the market. It takes years to design and develop a new vehicle or change an existing vehicle. Because customers’ preferences may change quickly, Ford’s new and existing products may not generate sales in sufficient quantities and at costs low enough to be profitable. Offering vehicles and services that customers want and value can mitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less desirable (whether in terms of price, quality, styling, safety, overall value, fuel efficiency, or other attributes) can exacerbate these risks. For example, if Ford is unable to differentiate its products from those of its competitors or sufficiently tailor its products to customers in markets like China, there could be insufficient demand for Ford’s products, which could have an adverse impact on Ford’s financial condition or results of operations.

With increased consumer interconnectedness through the internet, social media, and other media, mere allegations relating to quality, safety, fuel efficiency, corporate social responsibility, or other key attributes can negatively impact Ford’s reputation or market acceptance of its products or services, even where such allegations prove to be inaccurate or unfounded. Further, Ford’s ability to successfully grow through investments in the areas of mobility and electrification depends on many factors, including advancements in technology, regulatory changes, and other factors that are difficult to predict, that may significantly affect the future of autonomous vehicles and mobility services. The automotive and mobility businesses are very competitive and are undergoing rapid changes. Traditional competitors are expanding their offerings, and new types of competitors (particularly in Ford’s areas of strength, e.g., pick-up trucks and utilities) that may possess superior technology, may have business models with certain aspects that are more efficient, and are not subject to the same level of fixed costs as Ford, are entering the market. This level of competition increases the importance that Ford is able to anticipate, develop, and deliver products and services that customers desire on a timely basis, in quantities in line with demand, and at costs low enough to be profitable.

Ford has announced its intent to continue making multi-billion dollar investments in electrification and mobility. Ford’s plans include offering electrified versions of many of its vehicles, including the F-150. If the market for electrified vehicles does not develop at the rate Ford expects, even if the regulatory framework encourages a rapid adoption of electrified vehicles, or if consumers prefer its competitors’ vehicles, there could be an adverse impact on Ford’s financial condition or results of operations. Further, as discussed below under “Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations,” lower than planned market acceptance of Ford’s vehicles may impact its strategy to comply with fuel economy standards. Moreover, new offerings, including those related to autonomous vehicles, may present technological challenges that could be costly to implement and overcome and may subject Ford to customer claims if they do not operate as anticipated. In addition, since new technologies are subject to market acceptance, a malfunction involving any manufacturer’s autonomous vehicle may negatively impact the perception of autonomous vehicles and erode customer trust.

Ford’s results are dependent on sales of larger, more profitable vehicles, particularly in the United States. A shift in consumer preferences away from larger, more profitable vehicles (including trucks and utilities), whether because of spiking fuel prices, a decline in the construction industry, government actions or incentives, or other reasons, could result in an immediate and substantial adverse effect on Ford’s financial condition or results of operations. Moreover, Ford’s ability to develop and sell these vehicles may be limited for the reasons discussed below under “Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations.”

Item 1A. Risk Factors (Continued)

With a global footprint, Ford’s results could be adversely affected by economic, geopolitical, protectionist trade policies, or other events, including tariffs. With the increasing interconnectedness of the global economy, a financial crisis, economic downturn or recession, natural disaster, geopolitical crisis, or other significant event in one area of the world can have an immediate and material adverse impact on markets around the world. Changes in international trade policy can also have a substantial adverse effect on Ford’s financial condition or results of operations. For example, steps taken by the U.S. government to apply or consider applying tariffs on automobiles, parts, and other products and materials have the potential to disrupt existing supply chains, impose additional costs on Ford’s business, affect the demand for Ford’s products, and make Ford less competitive. Further, other countries attempting to retaliate by imposing tariffs would increase the cost for Ford to import its vehicles into such countries. In addition, changes to and withdrawals from existing trade agreements and the entry into new trade agreements between governments may impact Ford’s results of operations.

China, in particular, presents unique risks to automakers due to its unique competitive and regulatory landscape. For example, Ford has established joint ventures in China, and, as discussed above under “Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, or new business strategies,” Ford does not have the ability to control or operate those joint ventures for its sole benefit. Changes in the Chinese economy, and the automotive market in particular, are driving significant changes to Ford’s business model for operating in China. While the change in the U.S. administration is expected to reduce volatility in U.S.-China relations, early signals from the incoming administration indicate a continuity in China policy that may impact our business model for operating in China.

Ford has operations in various markets with volatile economic or political environments and is pursuing growth opportunities in a number of newly developed and emerging markets. These investments may expose Ford to heightened risks of economic, geopolitical, or other events, including governmental takeover (i.e., nationalization) of Ford’s 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 Ford’s financial condition or results of operations. Further, the U.S. government, other governments, and international organizations could impose additional sanctions that could restrict Ford and Ford Credit from doing business directly or indirectly in or with certain countries or parties, which could include affiliates.

Industry sales volume in any of Ford’s key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event. Because Ford, like other manufacturers, has a high proportion of relatively fixed structural costs, relatively small changes in industry sales volume can have a substantial effect on its cash flow and results of operations. Industry vehicle sales are affected by overall economic and market conditions. If industry vehicle sales were to decline to levels significantly below Ford’s planning assumption for key markets including the United States, Europe, or China, the decline could have a substantial adverse effect on Ford’s financial condition, results of operations, and cash flow.

Ford may face increased price competition or a reduction in demand for its products resulting from industry excess capacity, currency fluctuations, competitive actions, or other factors. The global automotive industry is intensely competitive, with manufacturing capacity generally far exceeding current demand (the recent capacity constraints as a result of the impacts of COVID-19 being a temporary exception). Industry overcapacity has resulted in many manufacturers offering marketing incentives on vehicles in an attempt to maintain and grow market share; these incentives historically have included a combination of subsidized financing or leasing programs, price rebates, and other incentives. As a result, Ford is not necessarily able to set its prices to offset higher marketing incentives, commodity or other cost increases, tariffs, or the impact of adverse currency fluctuations, including cost advantages foreign competitors may have because of their weaker home market currencies, which may, in turn, enable those competitors to offer their products at lower prices. Continuation of or increased excess capacity, particularly for trucks and utilities, could have a substantial adverse effect on Ford’s financial condition or results of operations.

Item 1A. Risk Factors (Continued)

Fluctuations in commodity prices, foreign currency exchange rates, interest rates, and market value of Ford or Ford Credit’s investments can have a significant effect on results. Ford and Ford Credit are exposed to a variety of market risks, including the effects of changes in commodity prices, foreign currency exchange rates, and interest rates. Ford and Ford Credit monitor and manage these exposures as an integral part of their overall risk management program, which recognizes the unpredictability of markets and seeks to reduce potentially adverse effects on our business. Changes in commodity prices (from tariffs, as discussed above under “With a global footprint, Ford’s results could be adversely affected by economic, geopolitical, protectionist trade policies, or other events, including tariffs,” or otherwise), currency exchange rates, and interest rates cannot always be predicted, hedged, or offset with price increases to eliminate earnings volatility. As a result, significant changes in commodity prices, foreign currency exchange rates, or interest rates could have a substantial adverse effect on Ford’s and / or Ford Credit’s financial condition or results of operations. In addition, Ford’s results are impacted by fluctuations in the market value of its investments.

Financial Risks

Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors. Ford and Ford Credit’s ability to obtain unsecured funding at a reasonable cost is dependent on their credit ratings or their perceived creditworthiness. Further, Ford Credit’s ability to obtain securitized funding under its committed asset-backed liquidity programs and certain other asset-backed securitization transactions is subject to having a sufficient amount of assets eligible for these programs, as well as Ford Credit’s ability to obtain appropriate credit ratings and, for certain committed programs, derivatives to manage the interest rate risk. Over time, and particularly in the event of credit rating downgrades, market volatility, market disruption, or other factors, Ford Credit may reduce the amount of receivables it purchases or originates because of funding constraints. As a result of LIBOR reform, the potential discontinuance of LIBOR is one such risk that could cause market volatility or disruption. It is difficult to predict the effect of these changes, other reforms, or the adoption of alternative reference rates, but the discontinuance of LIBOR could adversely affect Ford Credit’s access to the debt, securitization, or derivative markets and its cost of funding and hedging. In addition, Ford Credit may reduce the amount of receivables it purchases or originates if there is a significant decline in the demand for the types of securities it offers or Ford Credit is unable to obtain derivatives to manage the interest rate risk associated with its securitization transactions. A significant reduction in the amount of receivables Ford Credit purchases or originates would significantly reduce its ongoing results of operations and could adversely affect its ability to support the sale of Ford vehicles.

Ford’s receipt of government incentives could be subject to reduction, termination, or clawback. Ford receives economic benefits from national, state, and local governments in various regions of the world in the form of incentives designed to encourage manufacturers to establish, maintain, or increase investment, workforce, or production. These incentives may take various forms, including grants, loan subsidies, or tax abatements or credits. The impact of these incentives can be significant in a particular market during a reporting period. A decrease in, expiration without renewal of, or other cessation or clawback of government incentives for any of Ford’s business units, as a result of administrative decision or otherwise, could have a substantial adverse impact on Ford’s financial condition or results of operations. Until 2021, most of Ford’s manufacturing facilities in South America were located in Brazil, where the state or federal governments historically offered significant incentives to manufacturers to encourage capital investment, increase manufacturing production, and create jobs. As a result, the performance of Ford’s South American operations had been impacted favorably by government incentives to a substantial extent. The federal government in Brazil has levied assessments against Ford concerning the federal incentives it previously received, and certain states have challenged the grant to Ford of tax incentives by the State of Bahia. See “Item 3. Legal Proceedings” in Ford’s 2020 Form 10-K Report for a discussion of tax proceedings in Brazil and the potential requirement for Ford to post collateral.

Item 1A. Risk Factors (Continued)

Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles. Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit risk (which is heavily dependent upon economic factors including unemployment, consumer debt service burden, personal income growth, dealer profitability, and used car prices) has a significant impact on Ford Credit’s business. The level of credit losses Ford Credit may experience could exceed its expectations and adversely affect its financial condition or results of operations. In addition, Ford Credit projects expected residual values (including residual value support payments from Ford) and return volumes for the vehicles it leases. Actual proceeds realized by Ford Credit upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which would reduce Ford Credit’s return on the lease transaction. Among the factors that can affect the value of returned lease vehicles are the volume and mix of vehicles returned, economic conditions, marketing programs, and quality or perceived quality, safety, fuel efficiency, or reliability of the vehicles, or changes in propulsion technology and related legislative changes. Actual return volumes may be influenced by these factors, as well as by contractual lease-end values relative to auction values. Each of these factors, alone or in combination, has the potential to adversely affect Ford Credit’s results of operations if actual results were to differ significantly from Ford Credit’s projections.

Economic and demographic experience for pension and other postretirement benefit plans (e.g., discount rates or investment returns) could be worse than Ford has assumed. The measurement of Ford’s obligations, costs, and liabilities associated with benefits pursuant to its pension and other postretirement benefit plans requires that Ford estimate the present value of projected future payments to all participants. Ford uses many assumptions in calculating these estimates, including assumptions related to discount rates, investment returns on designated plan assets, and demographic experience (e.g., mortality and retirement rates). Ford generally remeasures these estimates at each year end and recognizes any gains or losses associated with changes to its plan assets and liabilities in the year incurred. To the extent actual results are less favorable than Ford’s assumptions, Ford may recognize a remeasurement loss in its results, which could be substantial.

Pension and other postretirement liabilities could adversely affect Ford’s liquidity and financial condition. Ford has defined benefit retirement plans in the United States that cover many of its hourly and salaried employees. Ford also provides pension benefits to non-U.S. employees and retirees, primarily in Europe. In addition, Ford sponsors plans to provide other postretirement benefits (“OPEB”) for retired employees (primarily health care and life insurance benefits). These benefit plans impose significant liabilities on Ford and could require Ford to make additional cash contributions, which could impair Ford’s liquidity. If Ford’s cash flows and capital resources were insufficient to meet any pension or OPEB obligations, Ford could be forced to reduce or delay investments and capital expenditures, suspend dividend payments, seek additional capital, or restructure or refinance its indebtedness.

Legal and Regulatory Risks

Ford could experience unusual or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, perceived environmental impacts, or otherwise. Ford spends substantial resources ensuring that it complies with governmental safety regulations, mobile and stationary source emissions regulations, and other standards, but it cannot ensure that employees or other individuals affiliated with Ford will not violate such laws or regulations. In addition, as discussed below under “Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations,” regulatory standards and interpretations may change on short notice and impact Ford’s compliance status. Moreover, compliance with governmental standards does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk. In certain circumstances, courts may permit tort claims even where Ford’s vehicles comply with federal and / or other applicable law. Furthermore, simply responding to actual or threatened litigation or government investigations of Ford’s compliance with regulatory standards, whether related to Ford’s products or business or commercial relationships, requires significant expenditures of time and other resources. Litigation also is inherently uncertain, and Ford could experience significant adverse results, which could have an adverse effect on Ford’s financial condition or results of operations. In addition, adverse publicity surrounding an allegation may cause significant reputational harm that could have a significant adverse effect on Ford’s sales.

Item 1A. Risk Factors (Continued)

Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations. The automotive industry is subject to regulations worldwide that govern product characteristics and that differ by global region, country, and sometimes within national boundaries. Further, additional and new regulations continue to be proposed to address concerns regarding the environment (including concerns about global climate change and its impact), vehicle safety, and energy independence, and the regulatory landscape can change on short notice. In the United States, legal and policy debates are continuing, with a primary focus on reducing greenhouse gas (“GHG”) emissions and increasing vehicle electrification. The Trump administration rolled back aggressive Obama administration GHG standards and blocked California’s authority to adopt its own regulations as well as other states’ authority to opt in to California’s standards. States, environmental groups, and others are challenging both of those Trump administration actions in court. The Trump administration’s actions also are subject to reconsideration and revision by the Biden administration. California has an ambitious plan to reduce overall GHG emissions to 40% below 1990 levels by 2030. Court rulings and actions by federal, California, and other state regulators create regulatory uncertainty and the potential for applicable regulatory standards to change quickly. In addition, many governments regulate local product content and / or impose import requirements with the aim of creating jobs, protecting domestic producers, and influencing the balance of payments.

Ford is continuing to make changes to its product cycle plan to improve the fuel economy of its petroleum-powered vehicles and to offer more propulsion choices, such as electrified vehicles, with lower GHG emissions. There are limits on Ford’s ability to achieve fuel economy improvements over a given time frame, however, primarily relating to the cost and effectiveness of available technologies, consumer acceptance of new technologies and changes in vehicle mix (as described in more detail above under “Ford’s new and existing products and mobility services are subject to market acceptance and face significant competition from existing and new entrants in the automotive and mobility industries”), willingness of consumers to absorb the additional costs of new technologies, the appropriateness (or lack thereof) of certain technologies for use in particular vehicles, the widespread availability (or lack thereof) of supporting infrastructure for new technologies, and the human, engineering, and financial resources necessary to deploy new technologies across a wide range of products and powertrains in a short time. If fuel prices remain relatively low and market conditions do not drive consumers to purchase electric vehicles and other highly fuel-efficient vehicles in large numbers, it may be difficult to meet applicable environmental standards without compromising results. Moreover, a production disruption, stop ship, lower than planned market acceptance of Ford’s vehicles, or other intervening events may cause Ford to modify its product plans, or, in some cases, purchase credits, in order to comply with fuel economy standards, which could have an adverse effect on Ford’s financial condition or results of operations and / or cause reputational harm.

Increased scrutiny of automaker emission testing by regulators around the world has led to new regulations, more stringent enforcement programs, requests for field actions, demands for reporting on the field performance of emissions components and higher scrutiny of field data, and / or delays in regulatory approvals. The cost to comply with existing government regulations (in addition to the cost of any field service actions that may result from regulatory actions) is substantial and additional regulations, changes in regulatory interpretations, or changes in consumer preferences that affect vehicle mix could have a substantial adverse impact on Ford’s financial condition or results of operations. In addition, a number of governments, as well as non-governmental organizations, publicly assess vehicles to their own protocols. The protocols could change, and any negative perception regarding the performance of Ford’s vehicles subjected to such tests could reduce future sales. Court decisions arising out of consumer and investor litigation could give rise to de facto changes in the interpretation of existing emission laws and regulations, thereby imposing new burdens on manufacturers.

Ford and other companies continue to develop autonomous vehicle technologies, and the U.S. and foreign governments are continuing to develop the regulatory framework that will govern autonomous vehicles. The evolution of the regulatory framework for autonomous vehicles, and the pace of the development of such regulatory framework, may subject Ford to increased costs and uncertainty, and may ultimately impact Ford’s ability to deliver autonomous vehicles and related services that customers want.

Item 1A. Risk Factors (Continued)

Ford and Ford Credit could be affected by the continued development of more stringent privacy, data use, and data protection laws and regulations as well as consumers’ heightened expectations to safeguard their personal information. Ford and Ford Credit are subject to laws, rules, guidelines from privacy regulators, and regulations in the United States and other countries (such as the European Union’s General Data Protection Regulation and the California Consumer Privacy Act) relating to the collection, use, cross-border data transfer, and security of personal information of consumers, employees, or others, including laws that may require Ford or Ford Credit to notify regulators and affected individuals of a data security incident. Existing and newly developed laws and regulations may contain broad definitions of personal information, are subject to change and uncertain interpretations by courts and regulators, and may be inconsistent from state to state or country to country. Accordingly, complying with such laws and regulations may lead to a decline in consumer engagement or cause Ford and / or Ford Credit to incur substantial costs or modify their operations or business practices. Moreover, regulatory actions seeking to impose significant financial penalties for noncompliance and / or legal actions (including pursuant to laws providing for private rights of action by consumers) could be brought against Ford or Ford Credit in the event of a data compromise, misuse of consumer information, or perceived or actual non-compliance with data protection or privacy requirements. Further, any unauthorized release of personal information could harm Ford and / or Ford Credit’s reputation, disrupt their businesses, cause them to expend significant resources, and lead to a loss of consumer confidence resulting in an adverse impact on Ford and / or Ford Credit’s business and / or consumers deciding to withhold or withdraw consent for Ford or Ford Credit’s collection or use of data.

Ford Credit could be subject to new or increased credit regulations, consumer protection regulations, or other regulations. As a finance company, Ford Credit is highly regulated by governmental authorities in the locations in which it operates, which can impose significant additional costs and / or restrictions on its business. In the United States, for example, Ford Credit’s operations are subject to regulation and supervision under various federal, state, and local laws, including the federal Truth-in-Lending Act, Consumer Leasing Act, Equal Credit Opportunity Act, and Fair Credit Reporting Act.

The Dodd-Frank Act directs federal agencies to adopt rules to regulate the finance industry and the capital markets and gives the CFPB broad rule-making and enforcement authority for a wide range of consumer financial protection laws that regulate consumer finance businesses, such as Ford Credit’s automotive financing business. Exercise of these powers by the CFPB may increase the costs of, impose additional restrictions on, or otherwise adversely affect companies in the automotive finance business. The CFPB has authority to supervise and examine the largest nonbank automotive finance companies, such as Ford Credit, for compliance with consumer financial protection laws.

Failure to comply with applicable laws and regulations could subject Ford Credit to regulatory enforcement actions, including consent orders or similar orders where Ford Credit may be required to revise practices, remunerate customers, or pay fines. An enforcement action against Ford Credit could harm Ford Credit’s reputation or lead to further litigation.

ITEM 1B. Unresolved Staff Comments.

None.

ITEM 2. Properties.

We own our world headquarters in Dearborn, Michigan. Most of our automotive finance operations are located in leased properties. The continued use of any of these leased properties is not material to our operations. At December 31, 2020, our total future rental commitment under leases of real property was $109 million.

ITEM 3. Legal Proceedings.

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 governmental regulations; tax matters; alleged illegal acts resulting in fines or penalties; financial services; employment-related matters; dealer and other contractual relationships; personal injury matters; 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, sanctions, assessments, or other relief, which, if granted, would require very large expenditures. At this time, we have no legal proceedings arising under any federal, state, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment, in which (i) a governmental authority is a party, and (ii) we believe there is the possibility of monetary sanctions (exclusive of interest and costs) in excess of $1,000,000.

Our significant pending matter is summarized below:

European Competition Law Matter. On October 5, 2018, FCE Bank plc (“FCE”) received a notice from the Italian Competition Authority (the “ICA”) concerning an alleged violation of Article 101 of the Treaty on the Functioning of the European Union. The ICA alleged that FCE and other parties engaged in anti-competitive practices in relation to the automotive finance market in Italy. On January 9, 2019, FCE received a decision from the ICA, which included an assessment of a fine against FCE in the amount of €42 million. On March 8, 2019, FCE appealed the decision and the fine to the Italian administrative court, and on November 24, 2020, the Italian administrative court ruled in favor of FCE. On December 23, 2020, the ICA filed an appeal of the Italian administrative court’s decision to the Italian Council of State.

In addition, any litigation, investigation, proceeding, or claim against Ford that results in Ford incurring significant liability, expenditures, or costs could also have a material adverse effect on our operations, financial condition, or liquidity. For a discussion of pending significant cases against Ford, see Item 3 in Ford’s 2020 Form 10-K Report.

ITEM 4. Mine Safety Disclosures.

Not applicable.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

At December 31, 2020, all of our Shares were owned by Ford Holdings LLC, a wholly owned subsidiary of Ford. We did not issue or sell any equity interests during 2020, and there is no market for our Shares. We paid cash distributions to our parent of $2.9 billion and $2.4 billion in 2019 and 2020, respectively.

ITEM 6. Selected Financial Data.

Not required.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Our primary focus is to profitably support the sale of Ford and Lincoln vehicles. We work with Ford to maximize customer and dealer satisfaction and loyalty, offering a wide variety of financing products and outstanding service. We strive to continually improve processes focusing on the customer and the dealer to manage costs and ensure the efficient use of capital. As a result, Ford Credit is uniquely positioned to drive incremental sales, improve customer satisfaction and owner loyalty to Ford, and direct profits and distributions back to Ford to support its overall business, including vehicle development.

We leverage three fundamental strategies in the management of our operations:

•To employ prudent origination practices while maintaining a managed level of risk;

•To have efficient and effective servicing and collection practices; and

•To fund the business efficiently while managing our balance sheet risk.

Generation of Revenue, Income, and Cash

The principal factors that influence our earnings are the amount and mix of finance receivables, operating leases, and financing margins. The performance of these receivables and operating leases over time, mainly through the impact of credit losses and variations in the residual value of leased vehicles, also affects our earnings.

The amount of our finance receivables and operating leases depends on many factors, including:

•The volume of new and used vehicle sales and leases;

•The extent to which we purchase retail financing and operating lease contracts and the extent to which we provide wholesale financing;

•The sales price of the vehicles financed;

•The level of dealer inventories;

•Ford-sponsored special financing programs available exclusively through us; and

•The availability of cost-effective funding.

For finance receivables, financing margin equals the difference between revenue earned on finance receivables and the cost of borrowed funds. For operating leases, financing margin equals revenue earned on operating leases, less depreciation expense and the cost of borrowed funds. Interest rates earned on most receivables and rental charges on operating leases generally are fixed at the time the contracts are originated. On some receivables, primarily dealer wholesale financing, we charge interest at a floating rate that varies with changes in short-term interest rates.

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

Business Performance

We review our business performance by segment (United States and Canada, Europe, and All Other) on a managed basis. Receivables are presented on a managed basis, as it closely approximates the customer’s outstanding balance on the receivables, which is the basis for earning revenue. Our managed receivables equal net finance receivables, net investment in operating leases, and held-for-sale receivables, excluding unearned interest supplements and residual support, allowance for credit losses, and other (primarily accumulated supplemental depreciation). To evaluate our performance we monitor a number of measures, such as delinquencies, repossession statistics, losses on repossessions, and the number of bankruptcy filings.

We measure the performance of our segments primarily on an income before income taxes basis, after excluding market valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions, which are reflected in Unallocated Other. These adjustments are excluded when assessing our segment performance because they are carried out at the corporate level. We also adjust segment performance to reallocate interest expense among the segments reflecting debt and equity levels proportionate to their product risk. For additional information regarding our segments, see Note 14 of our Notes to the Financial Statements.

COVID-19

The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Although restrictions have been eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities. Further, if new strains of COVID-19 develop or sufficient amounts of vaccines are not available, not widely administered for a significant period of time, or otherwise prove ineffective, the impact of COVID-19 on the global economy, and, in turn, on Ford and Ford Credit, could be material.

The remote work arrangements that we implemented in 2020 remain in place in most locations. Our remote work arrangements have been designed to allow for continued operation of business functions, including originating and servicing customer contracts, financial reporting, and internal control. Our controls and procedures have incorporated remote work arrangements using appropriate digital tools.

We established new protocols to help protect the health and safety of our employees who have returned to work. Those measures include a daily, online health self-certification, a no-touch temperature scan upon entering our facilities, a policy requiring the use of face masks in our facilities, and measures to provide additional personal protective equipment, including face shields, when employees’ jobs do not allow them to socially distance. We have also enhanced our cleaning protocols.

The full impact of COVID-19 on future results depends on future developments, such as the ultimate duration and scope of the outbreak (including any potential future waves and the success of vaccination programs) and its impact on Ford and Ford Credit’s customers, dealers, and suppliers. For additional information on the impact and potential impact of COVID-19 on us, see “Item 1A. Risk Factors”.

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

Definitions and Information Regarding Causal Factors

In general, we measure period-to-period changes in earnings before taxes (“EBT”) using the causal factors listed below:

•Volume and Mix – Volume and Mix are primarily reflected within Net financing margin on the income statements.

◦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 vehicles sold and leased, the extent to which we purchase retail financing and operating lease contracts, the extent to which we provide wholesale financing, the sales price of the vehicles financed, the level of dealer inventories, Ford-sponsored special financing programs available exclusively through us, and the availability of cost-effective funding.

◦Mix primarily measures changes in net financing margin driven by period-over-period changes in the composition of our average managed receivables by product within each region.

•Financing Margin – Financing Margin is reflected within Net financing margin on the income statements.

◦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 reflected within the Provision for credit losses on the income statements.

◦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 our present portfolio, changes in trends in historical used vehicle values, and changes in forward-looking macroeconomic conditions. For additional information, refer to the “Critical Accounting Estimates” section.

•Lease Residual – Lease Residual is reflected within Depreciation on vehicles subject to operating leases on the income statements.

◦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 us 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 our estimate of the expected auction value at the end of the lease term, and changes in our estimate of the number of vehicles that will be returned to us and sold. For additional information, refer to the “Critical Accounting Estimates” section.

•Exchange – Reflects changes in EBT driven by the effects of converting functional currency income to U.S. dollars.

•Other – Primarily includes Operating expenses, Other revenue, Insurance expenses, and Other income, net on the income statements 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 income changes are primarily driven by changes in earnings related to market valuation adjustments to derivatives (primarily related to movements in interest rates), which are included in unallocated risk management, and other miscellaneous items.

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

In addition, the following definitions and calculations apply to the charts contained in Item 7 of this Report:

• Cash (as shown in the Funding and Liquidity and Leverage sections) – Cash and cash equivalents and Marketable securities reported on Ford Credit’s balance sheets, excluding amounts related to insurance activities.

• Debt (as shown in the Key Metrics and Leverage tables) – Debt on Ford Credit’s balance sheets. Includes debt issued in securitizations and payable only out of collections on the underlying securitized assets and related enhancements. 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.

• Earnings Before Taxes (“EBT”) – Reflects Income before income taxes as reported on Ford Credit’s income statements.

• Return on Equity (“ROE”) (as shown in the Key Metrics table) – Reflects return on equity calculated by annualizing net income for the period and dividing by monthly average equity for the period.

•Securitization and Restricted Cash (as shown in the Liquidity table) – Securitization cash is held for the benefit of the securitization investors (for example, a reserve fund). Restricted cash primarily includes cash held to meet certain local governmental and regulatory reserve requirements and cash held under the terms of certain contractual agreements.

• Securitizations (as shown in the Public Term Funding Plan table) – Public securitization transactions, Rule 144A offerings sponsored by Ford Credit, and widely distributed offerings by Ford Credit Canada.

• Term Asset-Backed Securities (as shown in the Funding Structure table) – Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements.

•Total Net Receivables (as shown in the Key Metrics and Financial Condition tables) – Includes finance receivables (retail financing and wholesale) sold for legal purposes and net investment in operating leases included in securitization transactions that do not satisfy the requirements for accounting sale treatment. These receivables and operating leases are reported on Ford Credit’s balance sheets and 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 of Ford Credit or the claims of Ford Credit’s other creditors.

• Unallocated Other (as shown in the Segment Results table) – Items excluded in assessing segment performance because they are managed at the corporate level, including market valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions.

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

Results of Operations

Key Metrics

The following table shows our full year 2020 key metrics compared with full year 2019:


	Full Year
GAAP Financial Measures	2019			2020			H / (L)
Total net receivables (billions)	$	142		$	132		(7)		%
Loss-to-receivables (bps) (a)	52			36			(16)
Auction values (b)	$	19,305		$	19,950		3		%
EBT (millions)	$	2,998		$	2,608		$	(390)
ROE (%)	15		%	14		%	(1) ppt

Other Balance Sheet Metrics
Debt (billions)	$	140		$	138		(1)		%
Net liquidity (billions)	$	33		$	35		6		%
Financial statement leverage (to 1)	9.8			9.8			—

__________

(a)United States retail financing only.

(b)United States 36-month off-lease auction values at full year 2020 mix.


Non-GAAP Financial Measures	December 31, 2019		December 31, 2020		H / (L)
Managed receivables (billions) (a)	$	152	$	141	(7)	%
Managed leverage (to 1) (b)	8.9		8.3		(0.6)

__________

(a)See “Financial Condition” section for reconciliation to GAAP.

(b)See “Leverage” section for reconciliation to GAAP.

Full Year 2020 Compared with Full Year 2019

The following table shows the factors that contributed to the strong full year 2020 EBT (in millions):


Change in EBT by Causal Factor
Full year 2019 EBT	$	2,998
Volume / mix	(173)
Financing margin	20
Credit loss	(539)
Lease residual	304
Exchange	(9)
Other	7
Full year 2020 EBT	$	2,608

Our 2020 EBT of $2,608 million was $390 million lower than a year ago, driven primarily by an increase to the credit loss reserve due to COVID-19 and unfavorable volume and mix resulting from lower receivables, partially offset by favorable lease residual performance driven by improved auction values. Total net receivables at December 31, 2020 were lower than a year ago. Consumer credit metrics were healthy and stable in the United States, with the loss-to-receivables ratio at 0.36%, 16 basis points lower than a year ago. United States auction values were up 3% compared with 2019. ROE was 14%, 1 percentage point lower than a year ago, primarily reflecting lower EBT.

Our balance sheet is strong and inherently liquid reflecting cumulative debt maturities having a longer tenor than asset maturities. This means we generate liquidity as our balance sheet size declines because of lower Ford volume. Managed receivables of $141 billion at year end were $11 billion lower year-over-year. At December 31, 2020, we had $35.4 billion in net liquidity.

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

Segment Results

As of January 1, 2020, we updated our reportable segments in our consolidated financial statements to align with our new management reporting structure and reflect the manner in which our Chief Operating Decision Maker manages our business, including resource allocation and performance assessment. These segments are: the United States and Canada, Europe, and All Other. Items excluded in assessing segment performance, because they are managed at the corporate level, are reflected in Unallocated Other. Results of operations by segment and Unallocated Other for full year 2019 and 2020 are shown below (in millions):


	Full Year
	2019		2020		H / (L)
Results
United States and Canada segment	$	2,365	$	2,241	$	(124)
Europe segment	352		196		(156)
All Other segment	143		38		(105)
Total segments	$	2,860	$	2,475	$	(385)
Unallocated Other	138		133		(5)
Earnings before taxes	$	2,998	$	2,608	$	(390)
(Provision for) / Benefit from income taxes	(770)		(684)		86
Net Income	$	2,228	$	1,924	$	(304)

For additional information, see Note 14 of our Notes to the Financial Statements.

United States and Canada Segment

The United States and Canada segment EBT of $2,241 million for full year 2020 was $124 million lower than 2019, explained by an increase to the credit loss reserve due to COVID-19 and higher supplemental depreciation on operating leases, partially offset by favorable auction performance on off-lease vehicles, lower borrowing costs, and lower year-over-year credit losses.

Europe Segment

The Europe segment EBT of $196 million for full year 2020 was $156 million lower than 2019, primarily due to the impact of COVID-19, which has resulted in lower receivables, increased credit loss reserves, and reduced margins.

All Other Segment

The All Other segment EBT of $38 million for full year 2020 was $105 million lower than 2019, explained primarily by lower receivables, weakening currency exchange in Argentina and Brazil, and unfavorable credit loss performance.

Unallocated Other

Unallocated Other was a $133 million gain for full year 2020, a $5 million decrease from 2019, reflecting a lower gain in market valuation adjustments to derivatives.

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

Results of Operations - 2019

The following chart shows our full year 2019 key metrics compared with full year 2018:


	Full Year
GAAP Financial Measures	2018			2019			H / (L)
Total net receivables (billions)	$	146		$	142		(3)		%
Loss-to-receivables (bps) (a)	55			52			(3)
Auction values (b)	$	19,770		$	19,305		(2)		%
EBT (millions)	$	2,627		$	2,998		$	371
ROE (%)	14		%	15		%	1 ppt

Other Balance Sheet Metrics
Debt (billions)	$	140		$	140		—		%
Net liquidity (billions)	$	27		$	33		22		%
Financial statement leverage (to 1)	9.4			9.8			0.4

__________

(a)United States retail financing only.

(b)United States 36-month off-lease auction values at full year 2020 mix.


Non-GAAP Financial Measures	December 31, 2018		December 31, 2019		H / (L)
Managed receivables (billions) (a)	$	155	$	152	(2)	%
Managed leverage (to 1) (b)	8.8		8.9		0.1

__________

(a)See “Financial Condition” section for reconciliation to GAAP.

(b)See “Leverage” section for reconciliation to GAAP.

Full Year 2019 Compared with Full Year 2018

The following table shows the factors that contributed to the strong full year 2019 EBT:


Change in EBT by Causal Factor
Full year 2018 EBT	$	2,627
Volume / mix	(38)
Financing margin	(86)
Credit loss	127
Lease residual	249
Exchange	(71)
Other	190
Full year 2019 EBT	$	2,998

Our 2019 EBT of $2,998 million was $371 million higher than prior year, driven by favorable lease residual, credit loss, and derivative performance. Total net receivables at December 31, 2019 were lower than the prior year. Consumer credit metrics were healthy in the United States, with the loss-to-receivables ratio at 0.52%, which decreased three basis points from 2018. United States auction values were down 2% from 2018. ROE was 15%, one percentage point higher than 2018, primarily reflecting higher EBT.

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

Segment Results - 2019

Results of operations by segment and Unallocated Other for full year 2018 and 2019 are shown below (in millions):


	Full Year
	2018		2019		H / (L)
Results
United States and Canada segment	$	2,132	$	2,365	$	233
Europe segment	382		352		(30)
All Other segment	187		143		(44)
Total segments	$	2,701	$	2,860	$	159
Unallocated Other	(74)		138		212
Earnings before taxes	$	2,627	$	2,998	$	371
(Provision for) / Benefit from income taxes	(403)		(770)		(367)
Net Income	$	2,224	$	2,228	$	4

For additional information, see Note 14 of our Notes to the Financial Statements.

United States and Canada Segment

The United States and Canada segment EBT of $2,365 million for full year 2019 was $233 million higher than 2018, explained by favorable lease residual and credit loss performance, partially offset by unfavorable financing margin. The favorable lease residual performance was driven by lower supplemental depreciation on vehicles in Ford Credit’s lease portfolio, partially offset by the non-recurrence of 2018 auction performance gains. The favorable credit loss performance reflects lower reserves and the non-recurrence of 2018 non-consumer losses. The unfavorable financing margin was primarily driven by higher borrowing cost.

Europe Segment

The Europe segment EBT of $352 million for full year 2019 was $30 million lower than 2018, primarily due to the sale of the Forso Nordic AB (“Forso”) operations, separation costs for restructuring actions, and weakening European currencies, partially offset by favorable volume and mix and lower other operating costs.

All Other Segment

The All Other segment EBT of $143 million for full year 2019 was $44 million lower than 2018, explained primarily by unfavorable volume and mix as the result of lower receivables, partially offset by favorable credit loss performance and financing margin improvements.

Unallocated Other

Unallocated Other was a $138 million gain for full year 2019, a $212 million improvement from 2018, reflecting favorable performance in market valuation adjustments to derivatives.

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

Financing Shares and Contract Placement Volume

Our focus is on supporting Ford and Lincoln dealers and customers. This includes going to market with Ford and our dealers to support vehicle sales with financing products and marketing programs. Ford’s marketing programs may encourage or require Ford Credit financing and influence the financing choices customers make. As a result, our financing share, volume, and contract characteristics vary from period to period as Ford’s marketing programs change.

The following table shows our retail financing and operating lease share of new Ford and Lincoln vehicle sales, wholesale financing share of new Ford and Lincoln vehicles acquired by dealers (in percent), and contract placement volume for new and used vehicles (in thousands) in several key markets:


	For the Years Ended December 31,
	2018		2019		2020
Share of Ford and Lincoln Sales (a)
United States	58	%	51	%	56	%
Canada	75		66		74
U.K.	37		39		40
Germany	48		47		41
China	35		35		39

Wholesale Share
United States	76	%	75	%	74	%
Canada	59		57		40
U.K.	100		100		100
Germany	93		93		92
China	63		60		62

Contract Placement Volume - New and Used (000)
United States	1,151		952		954
Canada	168		141		137
U.K.	150		139		101
Germany	160		165		107
China	170		108		119

__________

(a)United States and Canada exclude Fleet sales, other markets include Fleet.

In 2020, the United States and China contract placement volume were up compared with a year ago, primarily reflecting higher financing share. In 2020, Canada, the U.K., and Germany contract volume were down compared with a year ago, explained by lower Ford sales.

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

Financial Condition

Our receivables, including finance receivables and operating leases, were as follows (in billions):


	For the Years Ended December 31,
Net Receivables	2018			2019			2020
United States and Canada Segment
Consumer financing	$	55.7		$	55.4		$	58.4
Non-Consumer financing	31.2			29.4			19.5
Net investment in operating leases	27.0			27.3			26.4
Total United States and Canada Segment	$	113.9		$	112.1		$	104.3

Europe Segment
Consumer financing	$	15.5		$	14.8		$	15.1
Non-Consumer financing	9.6			9.8			7.4
Net investment in operating leases	0.4			0.4			0.3
Total Europe Segment	$	25.5		$	25.0		$	22.8

All Other Segment
Consumer financing	$	4.6		$	3.3		$	3.4
Non-Consumer financing	2.3			1.6			1.2
Net investment in operating leases	—			—			—
Total All Other Segment	$	6.9		$	4.9		$	4.6

Total net receivables	$	146.3		$	142.0		$	131.7

Managed Receivables
Total net receivables (GAAP)	$	146.3		$	142.0		$	131.7
Held-for-sale receivables (GAAP)	—			1.5			0.0
Unearned interest supplements and residual support	6.8			6.7			6.5
Allowance for credit losses	0.6			0.5			1.3
Other, primarily accumulated supplemental depreciation	1.2			1.0			1.0
Total managed receivables (Non-GAAP)	$	154.9		$	151.7		$	140.5

United States and Canada Segment Lease Mix
SUV / CUV	56		%	57		%	59		%
Truck	27			30			32
Car	17			13			9

At December 31, 2018, 2019, and 2020, total net receivables includes consumer receivables before allowance for credit losses of $40.7 billion, $38.3 billion, and $43.7 billion, respectively, and non-consumer receivables before allowance for credit losses of $25.7 billion, $26.8 billion, and $16.4 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. In addition, at December 31, 2018, 2019, and 2020, total net receivables includes net investment in operating leases of $16.3 billion, $14.9 billion, and $12.8 billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. These net 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. For additional information on our securitization transactions, refer to the “Securitization Transactions” and “On-Balance Sheet Arrangements” sections and Note 6 of our Notes to the Financial Statements.

Total net receivables at December 31, 2020 were $10.3 billion lower compared with December 31, 2019 and $14.6 billion lower compared with December 31, 2018, primarily reflecting lower Ford vehicle production because of COVID-19.

Our operating lease portfolio was 20% of total net receivables at December 31, 2020. Leasing is an important product, and our leasing strategy balance sales, share, residuals, and long-term profitability. Operating leases in the United States and Canada represent 99% of our total operating lease portfolio.

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

Credit Risk

Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit losses are a normal part of a lending business, and credit risk has a significant impact on our business. We manage the credit risk of our consumer (retail financing) and non-consumer (dealer financing) receivables to balance our level of risk and return using our consistent underwriting standards, effective proprietary scoring system (discussed below), and world-class servicing. The allowance for credit losses (also referred to as the credit loss reserve) represents our estimate of the expected credit losses inherent in our finance receivables for the lifetime of those receivables as of the balance sheet date. The allowance for credit losses is estimated using a combination of models and management judgment and is based on such factors as historical loss performance, portfolio quality, receivable levels, and forward-looking macroeconomic scenarios. The adequacy of our allowance for credit losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly. A description of our allowance setting process is provided in the “Critical Accounting Estimates - Allowance for Credit Losses” section.

Most of our charge-offs are related to retail financing. Charge-offs are affected by the number of vehicle repossessions, the unpaid balance outstanding at the time of repossession, the auction price of repossessed vehicles, and other amounts owed. We also incur credit losses on our dealer financing, but default rates for these receivables historically have been substantially lower than those for retail financing. For additional information refer to the “Critical Accounting Estimates - Allowance for Credit Losses” section.

In purchasing retail financing contracts, we use a proprietary scoring system that measures credit quality using information in the credit application, proposed contract terms, credit bureau data, and other information. After a proprietary risk score is generated, we decide whether to purchase a contract using a decision process based on a judgmental evaluation of the applicant, the credit application, the proposed contract terms, credit bureau information (e.g., FICO score), proprietary risk score, and other information. Our evaluation emphasizes the applicant’s ability to pay and creditworthiness focusing on payment, affordability, applicant credit history, and stability as key considerations. While FICO is a part of our scoring system, our models enable us to more effectively determine the probability that a customer will pay than using credit scores alone. When we originate business, our models project expected losses and we price accordingly. We ensure that the business fits our risk appetite.

For additional information on the quality of our receivables and COVID-19 impacts, see Note 4 of our Notes to the Financial Statements.

United States Origination Metrics

The following table shows United States retail financing and operating lease average placement FICO and higher risk portfolio mix metrics. Also shown are extended term mix and United States retail financing average placement terms.


	2018		2019		2020
Origination Metrics
Average placement FICO	746		748		739
Higher risk portfolio mix	6	%	6	%	6	%
Greater than or equal to 84 months placement mix	4	%	3	%	9	%
Average placement term (months)	65		65		68

The 2020 average placement FICO score remained strong. We support customers across the credit spectrum. Our higher risk business, as classified at contract inception, consistently represents 6% of our portfolio and has been stable for over 10 years.

In 2020, our average retail financing placement term was up by three months compared with a year ago. Retail financing contracts of 84 months and longer increased by six percentage points compared with a year ago as a result of marketing campaigns, primarily in the second quarter of 2020, that offered 0% financing for 84 months in response to COVID-19. Longer term contracts returned to historical levels in the second half of 2020. Ford Credit remains focused on managing the trade cycle – building customer relationships and loyalty while offering financing products and terms customers want. Ford Credit’s origination and risk management processes deliver robust portfolio performance.

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

United States Retail Financing Credit Losses

The following table shows the primary drivers of credit losses in the United States retail financing business, which comprised 64% of our worldwide consumer finance receivables at December 31, 2020.


	2018			2019			2020
Credit Loss Drivers
Over-60-Day delinquencies (excl. bankruptcies)	0.13		%	0.13		%	0.15		%
Repossessions (000)	28			27			21
Repossession ratio	1.28		%	1.24		%	0.95		%
Loss severity (000) (a)	$	10.4		$	10.7		$	10.7
Charge-offs (millions)	$	258		$	247		$	180
LTR ratio (b)	0.55		%	0.52		%	0.36		%

__________

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

(b)Loss-to-Receivables (“LTR”) ratios are charge-offs divided by average managed receivables.

Compared with a year ago, the repossession rate has improved while delinquencies increased by two basis points. Severity was unchanged year-over-year. Our 2020 charge-offs and LTR ratio improved compared with the prior year reflecting government relief programs and our customer payment deferral programs, as well as changes in consumer spending behavior. The impact of COVID-19 has created significant volatility in the economy and the full impact of COVID-19 on our retail customers is uncertain. Given our assessment of the macroeconomic uncertainty and expectation of continued higher unemployment, we expect the impact of the economic conditions attributable to COVID-19 to have an adverse effect on credit losses in future periods.

To help our existing customers, we implemented various retail financing and lease extension programs, including payment deferrals, due date changes, and lease-end extensions. From mid-March through May 31, 2020, for customers who requested assistance, we granted extensions on about 10% of our global retail financing and operating lease contracts. As of December 31, 2020, 99% of the customers receiving these extensions have made at least one payment following their extension. Requests for contract extensions have now returned to pre-pandemic levels of about 1-2%.

Worldwide Credit Losses

The following table shows key metrics related to worldwide credit losses:


	2018			2019			2020
Charge-offs (millions)	$	425		$	371		$	301
LTR ratio	0.35		%	0.31		%	0.27		%
Credit loss reserve (millions)	$	589		$	513		$	1,305
Reserve as percent of EOP managed receivables	0.48		%	0.43		%	1.18		%

Our worldwide credit loss metrics remain strong and stable. The worldwide LTR ratio in 2020 improved from a year ago. Our credit loss reserve is based on such factors as historical loss performance, portfolio quality, receivables level, and forward-looking macroeconomic scenarios. The credit loss reserve and reserve as a percent of managed receivables were both higher than a year ago, reflecting a $252 million increase to account for the Current Expected Credit Losses (“CECL”) adoption, with the remainder primarily related to a reserve increase driven by a higher probability of default reflecting an increase in unemployment outlook as a result of COVID-19. The full impact of COVID-19 on our worldwide credit losses depends on future developments, such as the ultimate duration and scope of the outbreak (including any potential future waves and the success of vaccination programs), resolution of macroeconomic uncertainty, and the extent to which our customers and dealers are able to utilize government relief and payment deferral programs. Our credit loss reserve reflects lifetime expected losses as of the balance sheet date. See Note 4 of our Notes to the Financial Statements for more information.

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

Residual Risk

Leasing is an important product that many customers want and value, and operating lease customers also are more likely to buy or lease another Ford or Lincoln vehicle. We manage our lease share with an enterprise view to support sales, protect residual values, and manage the trade cycle. Ford Credit and Ford work together under a leasing strategy that considers share, term, model mix, geography, and other factors.

We are exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to us. Residual risk is the possibility that the amount we obtain from returned vehicles will be less than our estimate of the expected residual value for the vehicle. We estimate the expected residual value by evaluating recent auction values, return volumes for our leased vehicles, industrywide used vehicle prices, marketing incentive plans, and vehicle quality data. For operating leases, changes in expected residual values impact depreciation expense, which is recognized on a straight-line basis over the life of the lease.

For additional information on our residual risk on operating leases, refer to the “Critical Accounting Estimates - Accumulated Depreciation on Vehicles Subject to Operating Leases” section and Note 5 of our Notes to the Financial Statements.

United States Ford and Lincoln Operating Lease

The following table shows our share of Ford and Lincoln retail financing and operating lease sales, placement volume, and residual performance metrics for our United States operating lease portfolio, which represents 87% of our total net investment in operating leases at December 31, 2020.


	2018			2019			2020
Lease Share of Retail Sales
Ford Credit	22		%	20		%	17		%
Industry (a)	30		%	30		%	28		%

Placement Volume (000)
24-Month	43			41			43
36-Month	288			236			180
39-Month / other	54			52			35
Total	385			329			258

Residual Performance
Return rates	78		%	78		%	69		%
Return volume (000)	281			290			243
Off-lease auction values (b)	$	19,770		$	19,305		$	19,950

__________

(a)Source: J.D. Power PIN.

(b)36-month off-lease auction values at 2020 mix.

Our United States operating lease share of retail sales in 2020 was lower compared with a year ago and remains below the industry, reflecting the Ford sales mix.

Our total 2020 lease placement volume was down compared with a year ago, reflecting lower Ford sales and lower Ford Credit share as the result of Ford marketing programs. We are planning for full-year 2021 auction values to be lower than 2020.

Item 7. 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 United States Securities and Exchange Commission: DBRS, Fitch, Moody’s, and 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.

There have been no rating actions taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2020.

The following table summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:

NRSRO RATINGS

Ford Credit

NRSROs

Long-Term Senior Unsecured

Short -Term Unsecured

Outlook/Trend

Minimum
Long-Term Investment Grade Rating

DBRS

BB (high)

R-4

Negative

BBB (low)

Fitch

BB+

Negative

BBB-

Moody’s

Ba2

Negative

Baa3

S&P

BB+

Negative

BBB-

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

Funding and Liquidity

We ended 2020 with $35.4 billion of liquidity. During the year, we completed $27 billion of public term funding.

Key elements of our funding strategy include:

10-K	2020-12-31	Filed 2021-02-05
10-Q	2020-09-30	Filed 2020-10-29
10-Q	2020-06-30	Filed 2020-07-31
10-Q	2020-03-31	Filed 2020-04-29
10-K	2019-12-31	Filed 2020-02-05
10-Q	2019-09-30	Filed 2019-10-24
10-Q	2019-06-30	Filed 2019-07-25
10-Q	2019-03-31	Filed 2019-04-26
10-K	2018-12-31	Filed 2019-02-21
10-Q	2018-09-30	Filed 2018-10-25
10-Q	2018-06-30	Filed 2018-07-26
10-Q	2018-03-31	Filed 2018-04-26
10-K	2017-12-31	Filed 2018-02-08
10-Q	2017-09-30	Filed 2017-10-26
10-Q	2017-06-30	Filed 2017-07-26
10-Q	2017-03-31	Filed 2017-04-27
10-K	2016-12-31	Filed 2017-02-09
10-Q	2016-09-30	Filed 2016-10-27
10-Q	2016-06-30	Filed 2016-07-28
10-Q	2016-03-31	Filed 2016-04-28
10-K	2015-12-31	Filed 2016-02-11
10-Q	2015-09-30	Filed 2015-10-27
10-Q	2015-06-30	Filed 2015-07-28
10-Q	2015-03-31	Filed 2015-04-28
10-K	2014-12-31	Filed 2015-02-13
10-Q	2014-09-30	Filed 2014-10-31
10-Q	2014-06-30	Filed 2014-07-31
10-Q	2014-03-31	Filed 2014-05-01
10-K	2013-12-31	Filed 2014-02-18
10-Q	2013-09-30	Filed 2013-10-31
10-Q	2013-06-30	Filed 2013-07-31
10-Q	2013-03-31	Filed 2013-05-01
10-K	2012-12-31	Filed 2013-02-19
10-Q	2012-09-30	Filed 2012-11-02
10-Q	2012-06-30	Filed 2012-08-03
10-Q	2012-03-31	Filed 2012-05-04
10-K	2011-12-31	Filed 2012-02-21
10-Q	2011-09-30	Filed 2011-11-04
10-Q	2011-06-30	Filed 2011-08-05
10-Q	2011-03-31	Filed 2011-05-10
10-K	2010-12-31	Filed 2011-02-28
10-Q	2010-09-30	Filed 2010-11-08
10-Q	2010-06-30	Filed 2010-08-06
10-Q	2010-03-31	Filed 2010-05-07
10-K	2009-12-31	Filed 2010-02-25

8-K	2021-02-16	Other Events, Exhibits
8-K	2021-02-04	Earnings, Exhibits
8-K	2021-01-06	Other Events, Exhibits
8-K	2020-12-14	Other Events, Exhibits
8-K	2020-12-10	Other Events, Exhibits
8-K	2020-11-13
8-K	2020-10-28
8-K	2020-10-02
8-K	2020-09-15
8-K	2020-08-17
8-K	2020-07-30
8-K	2020-07-02
8-K	2020-06-19
8-K	2020-04-28
8-K	2020-04-28
8-K	2020-04-02
8-K	2020-03-19
8-K	2020-02-20
8-K	2020-02-04
8-K	2020-01-09
8-K	2020-01-06
8-K	2019-12-03
8-K	2019-11-25
8-K	2019-11-15
8-K	2019-11-07
8-K	2019-11-01
8-K	2019-10-23
8-K	2019-10-02
8-K	2019-09-26
8-K	2019-08-01
8-K	2019-07-24
8-K	2019-07-03
8-K	2019-06-20
8-K	2019-06-17
8-K	2019-05-03
8-K	2019-04-25
8-K	2019-04-04
8-K	2019-03-18
8-K	2019-03-06
8-K	2019-01-23
8-K	2019-01-16
8-K	2019-01-07
8-K	2019-01-03
8-K	2018-12-03
8-K	2018-11-01
8-K	2018-10-24
8-K	2018-10-02
8-K	2018-09-24
8-K	2018-09-04
8-K	2018-08-09
8-K	2018-08-01
8-K	2018-07-25
8-K	2018-07-03
8-K	2018-06-28
8-K	2018-06-01
8-K	2018-05-15
8-K	2018-05-03
8-K	2018-05-01
8-K	2018-04-25
8-K	2018-04-03
8-K	2018-03-28
8-K	2018-03-23
8-K	2018-03-05
8-K	2018-03-01
8-K	2018-02-22
8-K	2018-02-22
8-K	2018-02-07
8-K	2018-02-01
8-K	2018-01-24
8-K	2018-01-16
8-K	2018-01-03

EX-4.C	fmcc12312020ex4-c.htm
EX-23	fmcc12312020ex23.htm
EX-24	fmcc12312020ex24.htm
EX-31.1	fmcc12312020ex311.htm
EX-31.2	fmcc12312020ex312.htm
EX-32.1	fmcc12312020ex321.htm
EX-32.2	fmcc12312020ex322.htm

FMCC 10K Annual Report

Ford Motor Credit Earnings 2020-12-31