Edgar Filing: FORD MOTOR CO

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2007

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the transition period from __________ to __________

	Commission File Number: 1-3950

FORD MOTOR COMPANY

(Exact name of registrant as specified in its charter)

1-3950	38-0549190
(Commission File Number)	(IRS Employer Identification No.)

One American Road, Dearborn, Michigan	48126
(Address of principal executive offices)	(Zip Code)

(313) 322-3000

(Registrant's telephone number, including area code)

Indicate by check mark 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

x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

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

o Yes x No

As of August 3, 2007, the registrant had outstanding 2,028,742,402 shares of Common Stock and 70,852,076 shares of Class B Stock.

Exhibit index located on page number 45.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FORD MOTOR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Periods Ended June 30, 2007 and 2006

(in millions, except per share amounts)

	Second Quarter					First Half
	2007		2006			2007		2006
	(unaudited)					(unaudited)
Sales and revenues
Automotive sales	$	40,106	$	37,811		$	78,736	$	74,772
Financial Services revenues		4,136		4,067			8,525		7,895
Total sales and revenues		44,242		41,878			87,261		82,667

Costs and expenses
Automotive cost of sales		36,182		36,131			70,897		72,786
Selling, administrative and other expenses		4,952		4,623			10,924		9,217
Interest expense		2,759		2,258			5,477		4,393
Financial Services provision for credit and insurance losses		121		50			180		96
Total costs and expenses		44,014		43,062			87,478		86,492

Automotive interest income and other non-operating income/(expense), net		559		311			888		525
Automotive equity in net income/(loss) of affiliated companies		139		205			211		284
Income/(loss) before income taxes		926		(668	)		882		(3,016	)
Provision for/(benefit from) income taxes		123		(364	)		305		(1,346	)
Income/(loss) before minority interests		803		(304	)		577		(1,670	)
Minority interests in net income/(loss) of subsidiaries		85		19			143		78
Income/(loss) from continuing operations		718		(323	)		434		(1,748	)
Income/(loss) from discontinued operations (Note 7)		32		6			34		8
Net income/(loss)	$	750	$	(317	)	$	468	$	(1,740	)

AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 8)
Basic income/(loss)
Income/(loss) from continuing operations	$	0.38	$	(0.17	)	$	0.23	$	(0.94	)
Income/(loss) from discontinued operations		0.02		—			0.02		0.01
Net income/(loss)	$	0.40	$	(0.17	)	$	0.25	$	(0.93	)
Diluted income/(loss)
Income/(loss) from continuing operations	$	0.30	$	(0.17	)	$	0.21	$	(0.94	)
Income/(loss) from discontinued operations		0.01		—			0.01		0.01
Net income/(loss)	$	0.31	$	(0.17	)	$	0.22	$	(0.93	)

Cash dividends	$	—	$	0.10		$	—	$	0.20

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

SECTOR STATEMENT OF INCOME

For the Periods Ended June 30, 2007 and 2006

(in millions, except per share amounts)

	Second Quarter					First Half
	2007		2006			2007		2006
	(unaudited)					(unaudited)
AUTOMOTIVE
Sales	$	40,106	$	37,811		$	78,736	$	74,772
Costs and expenses
Cost of sales		36,182		36,131			70,897		72,786
Selling, administrative and other expenses		3,224		2,942			7,298		5,918
Total costs and expenses		39,406		39,073			78,195		78,704
Operating income/(loss)		700		(1,262	)		541		(3,932	)

Interest expense		577		347			1,157		693

Interest income and other non-operating income/(expense), net		559		311			888		525
Equity in net income/(loss) of affiliated companies		139		205			211		284
Income/(loss) before income taxes — Automotive		821		(1,093	)		483		(3,816	)

FINANCIAL SERVICES
Revenues		4,136		4,067			8,525		7,895
Costs and expenses
Interest expense		2,182		1,911			4,320		3,700
Depreciation		1,479		1,291			2,979		2,499
Operating and other expenses		249		390			647		800
Provision for credit and insurance losses		121		50			180		96
Total costs and expenses		4,031		3,642			8,126		7,095
Income/(loss) before income taxes — Financial Services		105		425			399		800

TOTAL COMPANY
Income/(loss) before income taxes		926		(668	)		882		(3,016	)
Provision for/(benefit from) income taxes		123		(364	)		305		(1,346	)
Income/(loss) before minority interests		803		(304	)		577		(1,670	)
Minority interests in net income/(loss) of subsidiaries		85		19			143		78
Income/(loss) from continuing operations		718		(323	)		434		(1,748	)
Income/(loss) from discontinued operations (Note 7)		32		6			34		8
Net income/(loss)	$	750	$	(317	)	$	468	$	(1,740	)

AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 8)
Basic income/(loss)
Income/(loss) from continuing operations	$	0.38	$	(0.17	)	$	0.23	$	(0.94	)
Income/(loss) from discontinued operations		0.02		—			0.02		0.01
Net income/(loss)	$	0.40	$	(0.17	)	$	0.25	$	(0.93	)
Diluted income/(loss)
Income/(loss) from continuing operations	$	0.30	$	(0.17	)	$	0.21	$	(0.94	)
Income/(loss) from discontinued operations		0.01		—			0.01		0.01
Net income/(loss)	$	0.31	$	(0.17	)	$	0.22	$	(0.93	)

Cash dividends	$	—	$	0.10		$	—	$	0.20

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	June 30, 2007			December 31, 2006
	(unaudited)
ASSETS
Cash and cash equivalents	$	32,000		$	28,896
Marketable securities		16,553			21,472
Loaned securities		4,641			5,256
Finance receivables, net		108,179			106,863
Other receivables, net		11,395			7,657
Net investment in operating leases		32,949			29,834
Retained interest in sold receivables		868			990
Inventories (Note 2)		12,614			11,421
Equity in net assets of affiliated companies		2,875			2,787
Net property		37,303			38,174
Deferred income taxes		4,253			4,920
Goodwill and other net intangible assets (Note 3)		6,344			6,821
Assets of discontinued/held-for-sale operations (Note 7)		166			767
Other assets		9,078			12,696
Total assets	$	279,218		$	278,554

LIABILITIES AND STOCKHOLDERS’ EQUITY
Payables	$	25,495		$	23,417
Accrued liabilities and deferred revenue		80,971			82,388
Debt		170,036			172,049
Deferred income taxes		3,397			2,743
Liabilities of discontinued/held-for-sale operations (Note 7)		14			263
Total liabilities		279,913			280,860

Minority interests		1,251			1,159

Stockholders’ equity
Capital stock
Common Stock, par value $0.01 per share (1,843 million shares issued)		18			18
Class B Stock, par value $0.01 per share (71 million shares issued)		1			1
Capital in excess of par value of stock		4,663			4,562
Accumulated other comprehensive income/(loss)		(8,146	)		(7,846	)
Treasury stock		(189	)		(183	)
Retained earnings/(Accumulated deficit)		1,707			(17	)
Total stockholders’ equity		(1,946	)		(3,465	)
Total liabilities and stockholders’ equity	$	279,218		$	278,554

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

SECTOR BALANCE SHEET

(in millions)

	June 30, 2007			December 31, 2006
	(unaudited)
ASSETS
Automotive
Cash and cash equivalents	$	17,069		$	16,022
Marketable securities		13,674			11,310
Loaned securities		4,641			5,256
Total cash, marketable and loaned securities		35,384			32,588
Receivables, net		6,389			3,753
Inventories (Note 2)		12,614			11,421
Deferred income taxes		445			1,569
Other current assets		7,027			7,707
Current receivable from Financial Services		727			—
Total current assets		62,586			57,038
Equity in net assets of affiliated companies		2,132			2,029
Net property		37,050			37,905
Deferred income taxes		12,386			14,850
Goodwill and other net intangible assets (Note 3)		6,327			6,804
Assets of discontinued/held-for-sale operations (Note 7)		166			767
Other assets		2,545			3,241
Total Automotive assets		123,192			122,634
Financial Services
Cash and cash equivalents		14,931			12,874
Marketable securities		2,879			10,162
Finance receivables, net		113,185			110,767
Net investment in operating leases		28,732			26,606
Retained interest in sold receivables		868			990
Goodwill and other net intangible assets (Note 3)		17			17
Other assets		4,862			6,167
Receivable from Automotive		—			1,467
Total Financial Services assets		165,474			169,050
Intersector elimination		(727	)		(1,467	)
Total assets	$	287,939		$	290,217

LIABILITIES AND STOCKHOLDERS’ EQUITY
Automotive
Trade payables	$	19,297		$	16,937
Other payables		4,372			4,893
Accrued liabilities and deferred revenue		29,406			28,877
Deferred income taxes		3,366			3,138
Debt payable within one year		1,598			1,499
Current payable to Financial Services		—			640
Total current liabilities		58,039			55,984
Long-term debt		28,380			28,514
Other liabilities		47,100			49,386
Deferred income taxes		1,028			441
Liabilities of discontinued/held-for-sale operations (Note 7)		14			263
Non-current payable to Financial Services		359			827
Total Automotive liabilities		134,920			135,415
Financial Services
Payables		1,826			1,587
Debt		140,058			142,036
Deferred income taxes		7,724			10,827
Other liabilities and deferred income		4,465			4,125
Payable to Automotive		368			—
Total Financial Services liabilities		154,441			158,575

Minority interests		1,251			1,159

Stockholders’ equity
Capital stock
Common Stock, par value $0.01 per share (1,843 million shares issued)		18			18
Class B Stock, par value $0.01 per share (71 million shares issued)		1			1
Capital in excess of par value of stock		4,663			4,562
Accumulated other comprehensive income/(loss)		(8,146	)		(7,846	)
Treasury stock		(189	)		(183	)
Retained earnings/(Accumulated deficit)		1,707			(17	)
Total stockholders’ equity		(1,946	)		(3,465	)
Intersector elimination		(727	)		(1,467	)
Total liabilities and stockholders’ equity	$	287,939		$	290,217

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Periods Ended June 30, 2007 and 2006

(in millions)

	First Half
	2007			2006
	(unaudited)

Cash flows from operating activities of continuing operations
Net cash (used in)/provided by operating activities	$	5,227		$	9,713

Cash flows from investing activities of continuing operations
Capital expenditures		(2,637	)		(3,403	)
Acquisitions of retail and other finance receivables and operating leases		(26,280	)		(29,407	)
Collections of retail and other finance receivables and operating leases		20,591			21,021
Purchases of securities		(4,720	)		(11,170	)
Sales and maturities of securities		12,088			11,247
Proceeds from sales of retail and other finance receivables and operating leases		702			2,947
Proceeds from sale of businesses		1,001			51
Cash paid for acquisitions		(10	)		(37	)
Transfer of cash balances upon disposition of discontinued/held-for-sale operations		(83	)		(4	)
Other		1,178			777
Net cash (used in)/provided by investing activities		1,830			(7,978	)

Cash flows from financing activities of continuing operations
Cash dividends		—			(374	)
Sales of Common Stock		51			234
Purchases of Common Stock		(31	)		(97	)
Changes in short-term debt		(1,396	)		280
Proceeds from issuance of other debt		17,165			23,900
Principal payments on other debt		(19,768	)		(26,433	)
Other		(51	)		89
Net cash (used in)/provided by financing activities		(4,030	)		(2,401	)

Effect of exchange rate changes on cash		71			241

Net increase/(decrease) in cash and cash equivalents from continuing operations		3,098			(425	)

Cash flows from discontinued operations
Cash flows from operating activities of discontinued operations		16			—
Cash flows from investing activities of discontinued operations		—			—
Cash flows from financing activities of discontinued operations		—			—

Net increase/(decrease) in cash and cash equivalents	$	3,114		$	(425	)

Cash and cash equivalents at January 1	$	28,896		$	28,391
Cash and cash equivalents of discontinued/held-for-sale operations at January 1		(2	)		19
Net increase/(decrease) in cash and cash equivalents		3,114			(425	)
Less: cash and cash equivalents of discontinued/held-for-sale operations at June 30		(8	)		(40	)
Cash and cash equivalents at June 30	$	32,000		$	27,945

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

CONDENSED SECTOR STATEMENT OF CASH FLOWS

For the Periods Ended June 30, 2007 and 2006

(in millions)

	First Half 2007						First Half 2006
	Automotive			Financial Services			Automotive			Financial Services
	(unaudited)						(unaudited)
Cash flows from operating activities of continuing operations
Net cash (used in)/provided by operating activities	$	2,810		$	3,358		$	5,280		$	3,663

Cash flows from investing activities
Capital expenditures		(2,616	)		(21	)		(3,381	)		(22	)
Acquisitions of retail and other finance receivables and operating leases		—			(26,280	)		—			(29,407	)
Collections of retail and other finance receivables and operating leases		—			20,427			—			20,923
Net (increase)/decrease of wholesale receivables		—			(777	)		—			868
Purchases of securities		(924	)		(3,796	)		(2,478	)		(8,692	)
Sales and maturities of securities		917			11,171			2,300			8,947
Proceeds from sales of retail and other finance receivables and operating leases		—			702			—			2,947
Proceeds from sale of businesses		1,001			—			51			—
Cash paid for acquisitions		(10	)		—			(37	)		—
Transfer of cash balances upon disposition of discontinued/held-for-sale operations		(83	)		—			(4	)		—
Investing activity from Financial Services		—			—			552			—
Investing activity to Financial Services		(6	)		—			(1,400	)		—
Other		498			680			31			746
Net cash (used in)/provided by investing activities		(1,223	)		2,106			(4,366	)		(3,690	)

Cash flows from financing activities
Cash dividends		—			—			(374	)		—
Sales of Common Stock		51			—			234			—
Purchases of Common Stock		(31	)		—			(97	)		—
Changes in short-term debt		6			(1,402	)		239			41
Proceeds from issuance of other debt		158			17,007			175			23,725
Principal payments on other debt		(363	)		(19,405	)		(550	)		(25,883	)
Financing activity from Automotive		—			6			—			1,400
Financing activity to Automotive		—			—			—			(552	)
Other		6			(57	)		150			(61	)
Net cash (used in)/provided by financing activities		(173	)		(3,851	)		(223	)		(1,330	)

Effect of exchange rate changes on cash		62			9			4			237
Net change in intersector receivables/payables and other liabilities		(435	)		435			613			(613	)
Net increase/(decrease) in cash and cash equivalents from continuing operations		1,041			2,057			1,308			(1,733	)

Cash flows from discontinued operations
Cash flows from operating activities of discontinued operations		16			—			—			—
Cash flows from investing activities of discontinued operations		—			—			—			—
Cash flows from financing activities of discontinued operations		—			—			—			—

Net increase/(decrease) in cash and cash equivalents	$	1,057		$	2,057		$	1,308		$	(1,733	)

Cash and cash equivalents at January 1	$	16,022		$	12,874		$	13,373		$	15,018
Cash and cash equivalents of discontinued/held-for-sale operations at January 1		(2	)		—			19			—
Net increase/(decrease) in cash and cash equivalents		1,057			2,057			1,308			(1,733	)
Less: cash and cash equivalents of discontinued/held-for-sale operations at June 30		(8	)		—			(40	)		—
Cash and cash equivalents at June 30	$	17,069		$	14,931		$	14,660		$	13,285

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. FINANCIAL STATEMENTS

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("GAAP") for interim financial information and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these unaudited financial statements reflect a fair statement of the results of operations and financial condition of Ford Motor Company and its consolidated subsidiaries and consolidated variable interest entities ("VIEs") of which we are the primary beneficiary for the periods and at the dates presented. Results for interim periods should not be considered indicative of results for a full year. Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2006 ("2006 Form 10-K Report"). For purposes of this report, "Ford," the "Company," "we," "our," "us" or similar references mean Ford Motor Company and our consolidated subsidiaries and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise.

NOTE 2. INVENTORIES

Inventories are summarized as follows (in millions):

	June 30, 2007			December 31, 2006
Raw materials, work-in-process and supplies	$	4,360		$	4,545
Finished products		9,314			7,891
Total inventories under first-in, first-out method ("FIFO")		13,674			12,436
Less: last-in, first-out method ("LIFO") adjustment		(1,060	)		(1,015	)
Total inventories	$	12,614		$	11,421

During 2006, inventory quantities were reduced, resulting in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of 2006 purchases, the effect of which decreased Automotive cost of sales by about $4 million.

NOTE 3. GOODWILL AND OTHER INTANGIBLES

Goodwill

Our policy is to perform annual testing of goodwill and certain other intangible assets during the fourth quarter to determine whether any impairment has occurred. Testing is conducted at the reporting unit level.

Changes in the carrying amount of goodwill are as follows (in millions):

	Goodwill, December 31, 2006		Goodwill Acquired		Exchange Translation/ Other			Goodwill, June 30, 2007
Automotive Sector
Ford North America	$	95	$	—	$	(9	)	$	86
Ford Europe		35		—		—			35
Premier Automotive Group ("PAG")		5,574		—		(486	)		5,088
Ford Asia Pacific and Africa		6		—		—			6
Total Automotive sector		5,710		—		(495	)		5,215
Financial Services Sector
Ford Credit		17		—		—			17
Total Financial Services sector		17		—		—			17
Total	$	5,727	$	—	$	(495	)	$	5,232

Item 1. Financial Statements (Continued)

NOTE 3. GOODWILL AND OTHER INTANGIBLES (Continued)

Automobile Protection Corporation ("APCO"). During the second quarter of 2007, our wholly-owned North American subsidiary, APCO, was sold. APCO was not an integrated component of our Ford North America reporting unit. Accordingly, the full amount of APCO's goodwill, $112 million, was classified within Assets of discontinued/held-for-sale operations at December 31, 2006.

Aston Martin Lagonda Group Limited ("Aston Martin"). Aston Martin was owned primarily through our wholly-owned subsidiary, Jaguar Cars Limited, and has been a component of our PAG reporting unit. Its operations were integrated with our other PAG reporting entities, sharing, among other things, certain facilities and tooling, intellectual property, in-bound logistics, information technology services, and parts supply.

During the second quarter of 2007, we sold Aston Martin. Accordingly, we commissioned a third-party valuation to determine an appropriate allocation of goodwill for Aston Martin based on its fair value relative to the overall fair value of PAG. The third-party valuation used discounted cash flow and market methods of determining fair value, which resulted in $434 million of goodwill being allocated to Aston Martin. We deemed the third-party valuations to be appropriate, and we classified the goodwill allocated to Aston Martin within Assets of discontinued/held-for-sale operations as of March 31, 2007. The goodwill remaining in our PAG reporting unit was tested at March 31, 2007, and no goodwill impairment was necessary.

Land Rover Deferred Tax. During the second quarter of 2007, we settled a tax matter related to the acquisition of Land Rover which resulted in a reduction of PAG goodwill of $108 million. See Note 6 for additional information.

Exchange Translation. The net foreign currency translation adjustment for the first half of 2007 resulted in an increase in PAG goodwill of $56 million.

In addition to the goodwill presented in the above table, included within Automotive equity in net assets of affiliated companies was goodwill of $249 million at June 30, 2007.

Other Intangibles

The components of identifiable intangible assets are as follows (in millions):

	June 30, 2007							December 31, 2006
	Gross Carrying Amount		Less: Accumulated Amortization			Net Intangible Assets		Gross Carrying Amount		Less: Accumulated Amortization			Net Intangible Assets
Automotive Sector
Tradename	$	502	$	—		$	502	$	491	$	—		$	491
Distribution networks		372		(103	)		269		372		(98	)		274
Manufacturing and production incentive rights		273		(34	)		239		246		—			246
Other		273		(171	)		102		240		(157	)		83
Total Automotive Sector		1,420		(308	)		1,112		1,349		(255	)		1,094
Total Financial Services Sector		4		(4	)		—		4		(4	)		—
Total	$	1,424	$	(312	)	$	1,112	$	1,353	$	(259	)	$	1,094

Our identifiable intangible assets are comprised of a non-amortizable tradename, distribution networks with a useful life of 40 years, manufacturing and production incentive rights with a useful life of 4 years, and other intangibles with various amortization periods (primarily patents, customer contracts, technology, and land rights).

Pre-tax amortization expense related to these intangible assets was as follows (in millions):

	First Half
	2007		2006
Pre-tax amortization expense	$	47	$	12

Excluding the impact of foreign currency translation, intangible asset amortization is forecasted to range from $80 million to $90 million per year for the next four years and $20 million to $30 million thereafter.

Item 1. Financial Statements (Continued)

NOTE 4. VARIABLE INTEREST ENTITIES

We consolidate VIEs of which we are the primary beneficiary. The liabilities recognized, as a result of consolidating these VIEs, do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against our general assets.

Reflected in our June 30, 2007 and December 31, 2006 balance sheets are consolidated VIE assets of $5.9 billion and $5.6 billion, respectively, for our Automotive sector and $77.8 billion and $69.5 billion, respectively, for our Financial Services sector. Included in Automotive consolidated VIE assets are $592 million and $488 million of cash and cash equivalents at June 30, 2007 and December 31, 2006, respectively. For our Financial Services sector, consolidated VIE assets included $7.5 billion and $3.7 billion in cash and cash equivalents and $70.3 billion and $65.8 billion of receivables and beneficial interests in net investment in operating leases at June 30, 2007 and December 31, 2006, respectively.

We have several investments in other entities determined to be VIEs of which we are not the primary beneficiary. The risks and rewards associated with our interests in these entities are based primarily on ownership percentages. Our maximum exposure was $187 million and $294 million for our Automotive sector and $219 million and $182 million for our Financial Services sector at June 30, 2007 and December 31, 2006, respectively. Any potential losses associated with these VIEs would be limited to the value of our invested capital or equity rights and, where applicable, receivables due from the VIEs.

Our Financial Services sector consists primarily of Ford Motor Credit Company LLC ("Ford Credit"). Ford Credit uses special purpose entities ("SPEs") that are considered VIEs for most of our on-balance sheet securitizations. Ford Credit also sells finance receivables to bank-sponsored asset-backed commercial paper issuers that are SPEs of the sponsor bank; these SPEs are not consolidated by us. The outstanding balance of finance receivables that have been sold by Ford Credit to the SPEs of the sponsored banks was approximately $4.5 billion and $5.2 billion at June 30, 2007 and December 31, 2006, respectively.

NOTE 5. EMPLOYEE SEPARATION ACTIONS

Automotive Sector

General

In 2006, we announced a major business improvement plan for our North American Automotive operations, which we refer to as the Way Forward plan. As part of this plan, we began implementing a number of different employee separation actions during 2006, our accounting for which is dependent on the design of the individual benefit action.

Jobs Bank Benefits Reserve

We expense Jobs Bank Benefits (see Note 17 of the Notes to the Financial Statements in our 2006 Form 10-K Report) expected to be provided to our hourly employees in accordance with our International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") and National Automobile, Aerospace, Transportation and General Workers Union of Canada ("CAW") collective bargaining agreements at facilities that will be permanently idled. We recorded an expense in Automotive cost of sales, and the following table summarizes the activity in the related Jobs Bank Benefits reserve:

	Reserve (in millions)						Number of employees
	First Half 2007			Full Year 2006			First Half 2007			Full Year 2006
Beginning balance	$	1,036		$	—			10,728			—
Additions to Jobs Bank/transfers from voluntary separation program (i.e., rescissions)		194			2,583			1,910			25,849
Voluntary separations and relocations		(224	)		(1,445	)		(3,775	)		(15,121	)
Benefit payments and other adjustments		(126	)		(102	)		—			—
Ending balance	$	880		$	1,036			8,863			10,728

Item 1. Financial Statements (Continued)

NOTE 5. EMPLOYEE SEPARATION ACTIONS (Continued)

Separation Actions

The cost of voluntary employee separation actions are recorded at the time of an employee's acceptance, unless the acceptance requires explicit approval by the Company. The costs of conditional voluntary separations are accrued when all conditions are satisfied. The costs of involuntary separation programs are accrued when management has approved the program and the affected employees are identified.

UAW Voluntary Separations. During 2006, we offered voluntary separation packages to our entire UAW hourly workforce and established a reserve for the costs associated with this action. We recorded an expense in Automotive cost of sales and the following table summarizes the activity in the related separation reserve:

	Reserve (in millions)						Number of employees
	First Half 2007			Full Year 2006			First Half 2007			Full Year 2006
Beginning balance	$	2,435		$	—			26,351			—
Voluntary acceptances, including transfers from Jobs Bank		—			3,240			—			36,623
Payments/terminations		(1,464	)		(788	)		(17,097	)		(10,084	)
Rescissions		(253	)		(17	)		(2,759	)		(188	)
Ending balance	$	718		$	2,435			6,495			26,351

Other Employee Separation Actions. Most salaried employee separations within the United States were completed by the end of the first quarter of 2007, and were achieved through early retirements, voluntary separations, and involuntary separations where necessary. These actions resulted in pre-tax charges of $1 million and $7 million in the second quarter of 2007 and 2006 and $154 million and $10 million during the first half of 2007 and 2006, respectively, reported in Automotive cost of sales and Selling, administrative and other expenses.

The following table shows pre-tax charges for other hourly and salaried employee separation actions for the second quarter and first half of 2007 and 2006 (in millions). These charges are reported in Automotive cost of sales and Selling, administrative and other expenses.

	Second Quarter				First Half
	2007		2006		2007		2006
Ford Canada	$	26	$	—	$	194	$	14
Ford Europe		21		12		27		40
PAG		21		15		28		17
Ford Asia Pacific and Africa		1		—		3		—

The charges above exclude costs for pension and other postretirement employee benefits ("OPEB"). For further information, see Note 10 for employee separation costs related to pension, postretirement health care and life insurance benefits.

Financial Services Sector

Separation Actions

In the first half of 2007, we recognized pre-tax charges of $43 million in Selling, administrative and other expenses for employee separation actions in the United States and in Canada. These actions were associated with Ford Credit's North American business transformation initiative (i.e., the consolidation of its North American branches into its seven existing business centers). These charges exclude costs for pension and OPEB. For further information, see Note 10 for employee separation costs related to pension, postretirement health care and life insurance benefits.

Item 1. Financial Statements (Continued)

NOTE 6. INCOME TAXES

Generally, for interim tax reporting one single tax rate is estimated for tax jurisdictions not subject to a valuation allowance, which is applied to the year-to-date ordinary income/loss. However, we manage our operations by multi-jurisdictional business units and thus are unable to reasonably compute one overall estimated annual effective tax rate. Accordingly, our worldwide tax provision is calculated pursuant to Financial Accounting Standards Board ("FASB") Interpretation No. 18, Accounting for Income Taxes in Interim Periods, which provides that the tax (or benefit) in each foreign jurisdiction, not subject to a valuation allowance, be separately computed as ordinary income/loss occurs within the jurisdiction.

In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Pursuant to FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recorded an increase of $1.3 billion to Retained earnings. The favorable impact to Retained earnings is primarily the result of recognizing a receivable of approximately $1.5 billion associated with refund claims and related interest for prior years that meet the "more-likely-than-not" recognition threshold of FIN 48. These prior year refund claims and related interest were not recognized as of December 31, 2006 because they were considered gain contingencies under Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for Contingencies and could not be recognized until the contingency lapsed. The amount of gross unrecognized tax benefits at January 1, 2007 was $1.7 billion, of which $471 million would affect our effective tax rate, if recognized.

Examinations by tax authorities have been completed through 1998 in the United Kingdom, 1999 in Germany, and 2000 in Canada, Sweden, and the United States.

Effective with the adoption of FIN 48, we have elected to recognize accrued interest related to unrecognized tax benefits and tax-related penalties in the Provision for/(benefit from) income taxes on our consolidated statement of income. As of January 1, 2007, we had recorded a liability of $221 million for the payment of interest. During the second quarter of 2007, we recorded an additional liability of $127 million in interest and inflationary adjustments related to interest refunds in dispute for tax refunds received in prior periods.

During the second quarter of 2007, we settled tax matters related to the acquisition of Land Rover with the U.K. tax authorities. The final resolution resulted in an increase in deferred tax assets and a corresponding decrease in goodwill. The increase in deferred tax assets resulted in an increase in the valuation allowance of $108 million.

NOTE 7. DISCONTINUED OPERATIONS, HELD-FOR-SALE OPERATIONS, AND OTHER DISPOSITIONS

Discontinued Operations

APCO. On April 2, 2007, the management team of APCO, together with Trident IV, L.P., a private equity fund managed by Stone Point Capital LLC, purchased APCO from us. This transaction was the result of the ongoing strategic review of our operations. As a result of the transaction, we received $180 million as gross proceeds on the sale. In the second quarter of 2007, we realized a pre-tax gain of $51 million (net of transaction costs and working capital adjustments), reported in Income/(loss) from discontinued operations.

Item 1. Financial Statements (Continued)

NOTE 7. DISCONTINUED OPERATIONS, HELD-FOR-SALE OPERATIONS, AND OTHER DISPOSITIONS (Continued)

The assets and liabilities of APCO that were classified as a discontinued operation at April 2, 2007 and December 31, 2006 are summarized as follows (in millions):

	April 2, 2007		December 31, 2006
Assets
Cash and cash equivalents	$	16	$	—
Receivables		18		20
Net property		8		8
Goodwill		112		112
Other assets		13		16
Total assets of the discontinued operations	$	167	$	156

Liabilities
Payables	$	22	$	16
Other liabilities		21		22
Total liabilities of the discontinued operations	$	43	$	38

At June 30, 2007, there were no assets or liabilities on our balance sheet related to APCO.

The results of discontinued operations for the Automotive sector are as follows (in millions):

	Second Quarter						First Half
	2007			2006			2007			2006
Sales and revenues	$	1		$	16		$	13		$	28

Operating income/(loss) from discontinued operations	$	(1	)	$	7		$	2		$	10
Gain/(loss) on discontinued operations		51			3			51			3
(Provision for)/benefit from income taxes		(18	)		(4	)		(19	)		(5	)
Income/(loss) from discontinued operations	$	32		$	6		$	34		$	8

Held-for-Sale Operations

Aston Martin. In order to restructure our core Automotive operations and build liquidity, on March 12, 2007, we announced that we had entered into a definitive agreement to sell Aston Martin. On May 31, 2007, Ford Motor Company and its subsidiary Jaguar Cars Limited completed the sale of our 100% interest in Aston Martin. Under the terms of the transaction, we received $931 million (£474 million) in gross proceeds through a combination of cash and preferred stock in Primrose Cove, Ltd., the holding company of the acquirer. As a result of the sale, we recognized a pre-tax gain of $187 million (net of transaction costs and working capital adjustments) reported in Automotive interest income and other non-operating income/(expense), net.

The assets and liabilities of Aston Martin that were classified as a held-for-sale operation at May 31, 2007 and December 31, 2006 are summarized as follows (in millions):

	May 31, 2007		December 31, 2006
Assets
Cash and cash equivalents	$	67	$	(2	)
Receivables		62		80
Inventories		123		93
Net property		266		251
Goodwill and other net intangible assets*		438		4
Other assets		3		22
Total assets of the held-for-sale operations	$	959	$	448

Liabilities
Payables	$	111	$	106
Other liabilities		109		102
Total liabilities of the held-for-sale operations	$	220	$	208

__________

* For further discussion of goodwill allocated to Aston Martin, see Note 3.

At June 30, 2007, there were no assets or liabilities on our balance sheet related to Aston Martin.

Item 1. Financial Statements (Continued)

NOTE 7. DISCONTINUED OPERATIONS, HELD-FOR-SALE OPERATIONS, AND OTHER DISPOSITIONS (Continued)

Automotive Components Holdings, LLC ("ACH"). In April 2007, ACH committed to sell its Converca I plant in Mexico, which produces power transfer units, to Linamar Corporation. We expect to complete the sale during the third quarter of 2007. Accordingly, we have reported Converca I as held-for-sale. As a result of the transaction, we expect to receive an amount approximately equal to the book value of the plant during the third quarter of 2007.

The assets of Converca I classified as a held-for-sale operation are summarized as follows (in millions):

	June 30, 2007		December 31, 2006
Assets
Inventories	$	14	$	15
Net property		51		50
Total assets of the held-for-sale operations	$	65	$	65

European dealerships. In April 2007, we committed to sell three European dealership operations. As a result of the transaction, we recorded a pre-tax loss of $17 million in Automotive interest income and other non-operating income/(expense), net.

The assets and liabilities of the three dealerships classified as held-for-sale operations at June 30, 2007 and December 31, 2006 are summarized as follows (in millions):

	June 30, 2007		December 31, 2006
Assets
Cash and cash equivalents	$	8	$	—
Receivables		27		25
Inventories		50		46
Net property		15		14
Other assets		1		1
Total assets of the held-for-sale operations	$	101	$	86

Liabilities
Payables	$	12	$	11
Other liabilities		2		6
Total liabilities of the held-for-sale operations	$	14	$	17

Other Dispositions

ACH has entered into non-binding agreements for the sale of five of its businesses. The following table lists the businesses with their corresponding products:

Sheldon Road plant	Produces heating, ventilating and cooling assemblies; heat exchangers; and manual control panel components

Milan plant	Produces fuel tanks and bumper fascias

Monroe plant	Produces catalytic converters, driveshafts, and springs (driveshaft business only included in agreement – not the plant itself)

Nashvillle, Tulsa, and VidrioCar (Mexico) plants	Produces automotive and architectural glass products

Sandusky plant	Produces lighting components

Each of these sales is conditional on a successful negotiation by the buyer of labor terms with the UAW, which has not been completed. Therefore, none has yet reached held-for-sale status.

Item 1. Financial Statements (Continued)

NOTE 8. AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK

The calculation of diluted income per share of Common and Class B Stock takes into account the effect of common stock equivalents, such as stock options and convertible securities, considered to be potentially dilutive. Basic and diluted income/(loss) per share were calculated using the following (in millions):

Second Quarter

First Half

2007

2006

2007

2006

Basic and Diluted Income/(Loss)

Basic income/(loss) from continuing operations

718