Edgar Filing: FORD MOTOR CO

FMC Form 10-Q Quarter ended 06/30/2006

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, 2006

[ ]	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

[ ]

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

[ ]

Non-accelerated filer

[ ]

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

[ ]

Yes

[X]

As of August 1, 2006, the registrant had outstanding 1,810,158,409 shares of Common Stock and 70,852,076 shares of Class B Stock.

Exhibit index located on page number 39.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FORD MOTOR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Periods Ended June 30, 2006 and 2005

(in millions, except per share amounts)

	Second Quarter						First Half
	2006			2005			2006			2005
	(unaudited)						(unaudited)
Sales and revenues
Automotive sales	$	37,747		$	38,685		$	74,732		$	78,017
Financial Services revenues		4,218			5,863			8,288			11,667
Total sales and revenues		41,965			44,548			83,020			89,684

Costs and expenses
Automotive cost of sales		36,167			36,713			72,841			72,271
Selling, administrative and other expenses		4,631			6,127			9,223			12,217
Interest expense		2,178			1,719			4,197			3,683
Financial Services provision for credit and insurance losses		61			(17	)		96			168
Total costs and expenses		43,037			44,542			86,357			88,339

Automotive interest income and other non-operating income/(expense), net		310			651			525			804
Automotive equity in net income/(loss) of affiliated companies		205			69			284			126
Income/(loss) before income taxes		(557	)		726			(2,528	)		2,275
Provision for/(benefit from) income taxes		(320	)		(301	)		(1,163	)		13
Income/(loss) before minority interests		(237	)		1,027			(1,365	)		2,262
Minority interests in net income/(loss) of subsidiaries		19			84			78			142
Income/(loss) from continuing operations		(256	)		943			(1,443	)		2,120
Income/(loss) from discontinued operations (Note 3)		2			3			2			38
Net income/(loss)	$	(254	)	$	946		$	(1,441	)	$	2,158

AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 10)
Basic income/(loss)
Income/(loss) from continuing operations	$	(0.14	)	$	0.51		$	(0.77	)	$	1.16
Income/(loss) from discontinued operations		—			—			—			0.02
Net income/(loss)	$	(0.14	)	$	0.51		$	(0.77	)	$	1.18
Diluted income/(loss)
Income/(loss) from continuing operations	$	(0.14	)	$	0.47		$	(0.77	)	$	1.05
Income/(loss) from discontinued operations		—			—			—			0.01
Net income/(loss)	$	(0.14	)	$	0.47		$	(0.77	)	$	1.06
Cash dividends	$	0.10		$	0.10		$	0.20		$	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, 2006 and 2005

(in millions, except per share amounts)

	Second Quarter						First Half
	2006			2005			2006			2005
	(unaudited)						(unaudited)
AUTOMOTIVE
Sales	$	37,747		$	38,685		$	74,732		$	78,017
Costs and expenses
Cost of sales		36,167			36,713			72,841			72,271
Selling, administrative and other expenses		2,950			3,076			5,924			6,185
Total costs and expenses		39,117			39,789			78,765			78,456
Operating income/(loss)		(1,370	)		(1,104	)		(4,033	)		(439	)

Interest expense		348			187			694			589

Interest income and other non-operating income/(expense), net		310			651			525			804
Equity in net income/(loss) of affiliated companies		205			69			284			126
Income/(loss) before income taxes — Automotive		(1,203	)		(571	)		(3,918	)		(98	)

FINANCIAL SERVICES
Revenues		4,218			5,863			8,288			11,667
Costs and expenses
Interest expense		1,830			1,532			3,503			3,094
Depreciation		1,291			1,540			2,499			3,054
Operating and other expenses		390			1,511			800			2,978
Provision for credit and insurance losses		61			(17	)		96			168
Total costs and expenses		3,572			4,566			6,898			9,294
Income/(loss) before income taxes — Financial Services		646			1,297			1,390			2,373

TOTAL COMPANY
Income/(loss) before income taxes		(557	)		726			(2,528	)		2,275
Provision for/(benefit from) income taxes		(320	)		(301	)		(1,163	)		13
Income/(loss) before minority interests		(237	)		1,027			(1,365	)		2,262
Minority interests in net income/(loss) of subsidiaries		19			84			78			142
Income/(loss) from continuing operations		(256	)		943			(1,443	)		2,120
Income/(loss) from discontinued operations (Note 3)		2			3			2			38
Net income/(loss)	$	(254	)	$	946		$	(1,441	)	$	2,158

AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 10)
Basic income/(loss)
Income/(loss) from continuing operations	$	(0.14	)	$	0.51		$	(0.77	)	$	1.16
Income/(loss) from discontinued operations		—			—			—			0.02
Net income/(loss)	$	(0.14	)	$	0.51		$	(0.77	)	$	1.18
Diluted income/(loss)
Income/(loss) from continuing operations	$	(0.14	)	$	0.47		$	(0.77	)	$	1.05
Income/(loss) from discontinued operations		—			—			—			0.01
Net income/(loss)	$	(0.14	)	$	0.47		$	(0.77	)	$	1.06
Cash dividends	$	0.10		$	0.10		$	0.20		$	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, 2006			December 31, 2005
	(unaudited)
ASSETS
Cash and cash equivalents	$	27,985		$	28,406
Marketable securities		12,600			10,672
Loaned securities		33			3,461
Finance receivables, net		106,554			105,975
Other receivables, net		9,194			8,522
Net investment in operating leases		31,884			27,099
Retained interest in sold receivables		1,150			1,420
Inventories (Note 5)		12,116			10,271
Equity in net assets of affiliated companies		2,751			2,579
Net property		41,639			40,706
Deferred income taxes		6,879			5,881
Goodwill and other intangible assets (Note 7)		6,392			5,945
Assets of discontinued/held-for-sale operations		—			5
Other assets		17,771			18,534
Total assets	$	276,948		$	269,476

LIABILITIES AND STOCKHOLDERS’ EQUITY
Payables	$	23,595		$	22,813
Accrued liabilities and deferred revenue		78,473			72,977
Debt		153,478			154,332
Deferred income taxes		5,729			5,275
Total liabilities		261,275			255,397

Minority interests		1,054			1,122

Stockholders’ equity
Capital stock
Common Stock, par value $0.01 per share (1,837 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		4,636			4,872
Accumulated other comprehensive income/(loss)		(262	)		(3,562	)
Treasury stock		(420	)		(833	)
Earnings retained for use in business		10,646			12,461
Total stockholders’ equity		14,619			12,957
Total liabilities and stockholders’ equity	$	276,948		$	269,476

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, 2006			December 31, 2005
	(unaudited)
ASSETS
Automotive
Cash and cash equivalents	$	14,700		$	13,388
Marketable securities		8,887			6,860
Loaned securities		33			3,461
Total cash, marketable and loaned securities		23,620			23,709
Receivables, net		3,496			3,061
Inventories (Note 5)		12,116			10,271
Deferred income taxes		832			1,187
Other current assets		9,397			8,177
Total current assets		49,461			46,405
Equity in net assets of affiliated companies		1,949			1,756
Net property		41,328			40,378
Deferred income taxes		11,926			11,049
Goodwill and other intangible assets (Note 7)		6,374			5,928
Assets of discontinued/held-for-sale operations		—			5
Other assets		9,505			8,308
Total Automotive assets		120,543			113,829
Financial Services
Cash and cash equivalents		13,285			15,018
Marketable securities		3,713			3,812
Finance receivables, net		112,252			111,436
Net investment in operating leases		26,073			22,951
Retained interest in sold receivables		1,150			1,420
Goodwill and other intangible assets (Note 7)		18			17
Other assets		5,943			7,457
Receivable from Automotive		759			83
Total Financial Services assets		163,193			162,194
Intersector elimination		(759	)		(83	)
Total assets	$	282,977		$	275,940

LIABILITIES AND STOCKHOLDERS’ EQUITY
Automotive
Trade payables	$	18,393		$	16,554
Other payables		3,253			4,222
Accrued liabilities and deferred revenue		31,743			28,733
Deferred income taxes		953			804
Debt payable within one year		1,269			978
Current payable to Financial Services		52			83
Total current liabilities		55,663			51,374
Long-term debt		16,450			16,900
Other liabilities		41,430			38,639
Deferred income taxes		563			586
Non-current payable to Financial Services		707			—
Total Automotive liabilities		114,813			107,499
Financial Services
Payables		1,949			2,037
Debt		135,759			136,454
Deferred income taxes		10,242			10,349
Other liabilities and deferred income		5,300			5,605
Total Financial Services liabilities		153,250			154,445

Minority interests		1,054			1,122

Stockholders’ equity
Capital stock
Common Stock, par value $0.01 per share (1,837 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		4,636			4,872
Accumulated other comprehensive income/(loss)		(262	)		(3,562	)
Treasury stock		(420	)		(833	)
Earnings retained for use in business		10,646			12,461
Total stockholders’ equity		14,619			12,957
Intersector elimination		(759	)		(83	)
Total liabilities and stockholders’ equity	$	282,977		$	275,940

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, 2006 and 2005

(in millions)

	First Half
				Revised - See Note 1
	2006			2005
	(unaudited)

Cash flows from operating activities of continuing operations
Net cash (used in)/provided by operating activities	$	10,453		$	14,582

Cash flows from investing activities of continuing operations
Capital expenditures		(3,403	)		(3,572	)
Acquisitions of retail and other finance receivables and operating leases		(29,407	)		(28,951	)
Collections of retail and other finance receivables and operating leases		21,021			25,150
Net acquisitions of daily rental vehicles		—			(2,997	)
Purchases of securities		(11,170	)		(3,044	)
Sales and maturities of securities		11,247			2,395
Proceeds from sales of retail and other finance receivables and operating leases		2,947			12,506
Proceeds from sale of businesses		51			2,070
Cash paid for acquisitions		(37	)		(1,296	)
Transfer of cash balances upon disposition of discontinued/held-for-sale operations		(4	)		(4	)
Other		49			71
Net cash (used in)/provided by investing activities		(8,706	)		2,328

Cash flows from financing activities of continuing operations
Cash dividends		(374	)		(367	)
Sales of Common Stock		234			447
Purchases of Common Stock		(97	)		(263	)
Changes in short-term debt		265			834
Proceeds from issuance of other debt		23,900			14,765
Principal payments on other debt		(26,433	)		(25,769	)
Other		89			(6	)
Net cash (used in)/provided by financing activities		(2,416	)		(10,359	)

Effect of exchange rate changes on cash		241			(526	)

Net increase/(decrease) in cash and cash equivalents from continuing operations		(428	)		6,025

Cash flows from discontinued operations
Cash flows from operating activities of discontinued operations		3			70
Cash flows from investing activities of discontinued operations		—			(50	)
Cash flows from financing activities of discontinued operations		—			—

Net increase/(decrease) in cash and cash equivalents	$	(425	)	$	6,045

Cash and cash equivalents at January 1	$	28,406		$	22,828
Cash and cash equivalents of discontinued/held-for-sale operations at January 1		4			681
Net increase/(decrease) in cash and cash equivalents		(425	)		6,045
Less: cash and cash equivalents of discontinued/held-for-sale operations at June 30		—			(722	)
Cash and cash equivalents at June 30	$	27,985		$	28,832

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, 2006 and 2005

(in millions)

							Revised - See Note 1
	First Half 2006						First Half 2005
	Automotive			Financial Services			Automotive			Financial Services
	(unaudited)						(unaudited)
Cash flows from operating activities of continuing operations
Net cash (used in)/provided by operating activities	$	5,297		$	4,386		$	5,093		$	5,322

Cash flows from investing activities
Capital expenditures		(3,381	)		(22	)		(3,347	)		(225	)
Acquisitions of retail and other finance receivables and operating leases		—			(29,407	)		—			(28,951	)
Collections of retail and other finance receivables and operating leases		—			20,923			—			24,979
Net (increase)/decrease of wholesale receivables		—			868			—			599
Net acquisitions of daily rental vehicles		—			—			—			(2,997	)
Purchases of securities		(2,478	)		(8,692	)		(2,149	)		(895	)
Sales and maturities of securities		2,300			8,947			1,883			512
Proceeds from sales of retail and other finance receivables and operating leases		—			2,947			—			12,506
Proceeds from sales of wholesale receivables		—			—			—			3,739
Proceeds from sale of businesses		51			—			29			2,041
Transfer of cash balances upon disposition of discontinued/held-for-sale operations		(4	)		—			1			(5	)
Investing activity from Financial Services		552			—			1,402			—
Investing activity to Financial Services		(1,400	)		—			—			—
Cash paid for acquisitions		(37	)		—			(1,296	)		—
Other		11			38			(11	)		82
Net cash (used in)/provided by investing activities		(4,386	)		(4,398	)		(3,488	)		11,385

Cash flows from financing activities
Cash dividends		(374	)		—			(367	)		—
Sales of Common Stock		234			—			447			—
Purchases of Common Stock		(97	)		—			(263	)		—
Changes in short-term debt		239			26			158			676
Proceeds from issuance of other debt		175			23,725			84			14,681
Principal payments on other debt		(550	)		(25,883	)		(595	)		(25,174	)
Financing activity from Automotive		—			1,400			—			—
Financing activity to Automotive		—			(552	)		—			(1,402	)
Other		150			(61	)		(4	)		(2	)
Net cash (used in)/provided by financing activities		(223	)		(1,345	)		(540	)		(11,221	)

Effect of exchange rate changes on cash		4			237			(39	)		(487	)
Net change in intersector receivables/payables and other liabilities		613			(613	)		(356	)		356
Net increase/(decrease) in cash and cash equivalents from continuing operations		1,305			(1,733	)		670			5,355

Cash flows from discontinued operations
Cash flows from operating activities of discontinued operations		3			—			(1	)		71
Cash flows from investing activities of discontinued operations		—			—			16			(66	)
Cash flows from financing activities of discontinued operations		—			—			—			—

Net increase/(decrease) in cash and cash equivalents	$	1,308		$	(1,733	)	$	685		$	5,360

Cash and cash equivalents at January 1	$	13,388		$	15,018		$	10,139		$	12,689
Cash and cash equivalents of discontinued/held-for-sale operations at January 1		4			—			2			679
Net increase/(decrease) in cash and cash equivalents		1,308			(1,733	)		685			5,360
Less: cash and cash equivalents of discontinued/held-for-sale operations at June 30		—			—			(18	)		(704	)
Cash and cash equivalents at June 30	$	14,700		$	13,285		$	10,808		$	18,024

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 accounting principles generally accepted in the United States 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 those adjustments necessary for 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, 2005 (the "2005 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.

Presentation of Cash Flows

Beginning with our year ended December 31, 2005 statements of cash flows, we have revised the presentation of cash flows to separately disclose the operating, investing, and financing portions of the cash flows attributable to our discontinued operations. This revision is in response to public statements by the staff of the Securities and Exchange Commission concerning classification of discontinued operations within the statement of cash flows.

In accordance with the definition of cash equivalents in Statement of Financial Accounting Standards ("SFAS") No. 95, Statement of Cash Flows, we revised the presentation of $3.1 billion and $593 million of marketable securities with contractual maturities exceeding ninety days from the date of purchase from Cash and cash equivalents to Marketable securities on the balance sheet and statement of cash flows as of December 31, 2005 and statement of cash flows as of June 30, 2005, respectively. All of these securities had maturity dates of less than twelve months from the date of purchase and were highly liquid. This revision had no impact on 2005 Net income/(loss).

NOTE 2. INCOME TAXES

For the first half of the year, we have used the actual effective tax rate for the year-to-date tax provision calculation because a reliable estimate of the full-year effective tax rate cannot be made. External business conditions and other factors throughout the year may contribute to significant variability of the effective tax rate due to the impact of permanent differences relative to our financial results. The second quarter tax rate of 41.9% and first half tax rate of 41.2% include the impact on deferred tax balances of tax law changes in the country of Turkey and the state of Texas.

NOTE 3. DISCONTINUED OPERATIONS AND OTHER DISPOSITIONS

Total Company Discontinued Operations

The results of all discontinued operations are as follows (in millions):

	Second Quarter						First Half
	2006			2005			2006			2005
Sales and revenues	$	—		$	17		$	—		$	120

Operating income/(loss) from discontinued operations	$	—		$	(3	)	$	—		$	54
Gain/(loss) on discontinued operations		3			(15	)		3			(16	)
(Provision for)/benefit from income taxes		(1	)		21			(1	)		—
Income/(loss) from discontinued operations	$	2		$	3		$	2		$	38

Item 1. Financial Statements (Continued)

NOTE 4. EXIT AND DISPOSAL ACTIVITIES AND OTHER ACTIONS

Jobs Bank Benefits Reserve: On January 23, 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 have announced that the following facilities would be idled through 2008: St. Louis Assembly Plant, Atlanta Assembly Plant, Wixom Assembly Plant, Batavia Transmission Plant, Windsor Casting Plant, Twin Cities Assembly Plant, and Norfolk Assembly Plant. In addition, we announced that production at our St. Thomas Assembly Plant in Canada would be reduced to one shift.

Hourly employees working at the U.S. plants identified above are represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"); hourly employees working at the Canadian plants identified above are represented by the National Automobile, Aerospace, Transportation and General Workers Union of Canada ("CAW"). The collective bargaining agreement between us and the UAW contains a guaranteed employment numbers provision, pursuant to which we are required to pay idled workers who meet certain conditions substantially all of their wages and benefits for the term of the current agreement; the collective bargaining agreement between us and the CAW contains provisions pursuant to which we are required to pay idled workers a portion of their wages and certain benefits for a specified period of time based on the number of credits an employee has received. We refer to these benefits under the UAW and CAW agreements as "Jobs Bank Benefits."

The plant idlings and shift reduction described above are expected to create a population of hourly workers covered under the UAW and CAW collective bargaining agreements who will be permanently idled because we do not have the ability or intent to redeploy or absorb them in our operations. Consequently, we recognized a $1.75 billion pre-tax charge during the first quarter of 2006, reported in Automotive cost of sales, for costs associated with 13,500 UAW-represented employees (including 3,500 Automotive Components Holdings, LLC ("ACH") employees) and 2,000 CAW-represented employees who are expected to be idled on a permanent basis. The employee-related costs associated with these actions include an amount for Jobs Bank Benefits expected to be provided in their present form under the current UAW and CAW collective bargaining agreements, which are scheduled to expire in September 2007 and September 2008, respectively, and an amount for Jobs Bank Benefits or similar benefits in an expected modified form under new collective bargaining agreements after expiration of the current agreements. The reserve balance is adjusted for Jobs Bank Benefits payments made to employees. In addition, the reserve includes the expected cost of voluntary separation and relocation packages offered to affected employees and is adjusted when we receive UAW agreement to offer voluntary separation packages and/or relocation packages to employees at these plants and the number of acceptances can be reasonably estimated. Approximately 3,400 of the 15,500 affected employees have already accepted voluntary separation packages or have agreed to relocate to other facilities. In addition, we have received union agreement to offer approximately 4,100 additional voluntary separation packages at the seven plants to be idled identified above.

The reserve balance at June 30, 2006 was $1.32 billion and represents our best estimate of our remaining liability considering several factors: the demographics of the population at each affected facility, redeployment alternatives, recent experience relative to voluntary redeployments, and recent experience with regard to the rate of acceptance of voluntary termination packages. However, because of the complexities inherent in estimating this reserve, our actual costs could differ materially. Accordingly, we will continue to review actively our expected liability and make adjustments as necessary. We will continue to expense costs associated with the small number of employees who are temporarily idled on an as-incurred basis.

Other Voluntary Employee Separation Actions: During the first half of 2006, we also reduced our hourly workforce in U.S. plants other than those identified above by approximately 2,700 employees year-to-date and recognized a $149 million pre-tax charge related to these separations. In the second quarter of 2005, we announced a salaried personnel separation program for North American employees. We recognized pre-tax employee separation charges of $7 million and $205 million in 2006 and 2005, respectively, related to this separation program.

During the third quarter of 2005, Premier Automotive Group ("PAG") and Ford Europe initiated hourly and salaried employee separation actions resulting in pre-tax charges of $57 million and $360 million in 2006 and 2005, respectively.

All charges disclosed above exclude costs for pension, postretirement health care and life insurance benefits. For further discussion regarding pension, postretirement health care and life insurance benefits, see Note 12 of the Notes to the Financial Statements.

Item 1. Financial Statements (Continued)

NOTE 5. AUTOMOTIVE INVENTORIES

Inventories are summarized as follows (in millions):

	June 30,			December 31,
	2006			2005
Raw materials, work-in-process and supplies	$	4,515		$	4,057
Finished products		8,644			7,223
Total inventories at FIFO		13,159			11,280
Less: LIFO adjustment		(1,043	)		(1,009	)
Total inventories	$	12,116		$	10,271

NOTE 6. NET PROPERTY

Beginning January 1, 2006, we changed our method of amortization for special tools from an activity-based method (units-of-production) to a time-based method. The time-based method amortizes the cost of special tools over their expected useful lives using a straight-line method or, if the production volumes for major product programs associated with the tool are expected to materially decline over the life of the tool, an accelerated method reflecting the rate of decline. This change decreased Cost of sales by $50 million and $134 million for the second quarter and first half of 2006, respectively, and increased Income/(loss) from continuing operations and Net income by $31 million or $0.01 per diluted share and $84 million or $0.05 per diluted share for the second quarter and first half of 2006, respectively.

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Beginning in 2006, 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. This testing is conducted at the reporting unit level. To test for impairment, the carrying value of each reporting unit is compared with its fair value. Fair value is estimated using the present value of free cash flows method. Prior to 2006, our policy was to test in the second quarter; in 2005, we tested in both the second and fourth quarters. Fourth quarter testing is considered preferable because it allows us to use more current financial information and matches our business plan timing. This change in accounting principle does not delay, accelerate or avoid an impairment charge or affect our financial statements.

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

	Goodwill, December 31, 2005		Goodwill Acquired		Goodwill Impaired		Exchange Translation/Other		Goodwill, June 30, 2006
Automotive Sector:
Ford North America	$	202	$	4	$	—	$	—	$	206
Ford South America		—		—		—		—		—
Ford Europe		31		—		—		2		33
PAG		4,875		—		—		385		5,260
Ford Asia Pacific and Africa		—		—		—		—		—
Total Automotive Sector		5,108		4		—		387		5,499
Financial Services Sector:
Ford Credit		17		—		—		1		18
Total Financial Services Sector		17		—		—		1		18
Total	$	5,125	$	4	$	—	$	388	$	5,517

In addition to the goodwill presented in the above table, included within Equity in net assets of affiliated companies was goodwill of $249 million at June 30, 2006. This included an increase of $36 million related to the conversion of our investment in Mazda Motor Corporation ("Mazda") convertible bonds to an investment in Mazda's equity.

Item 1. Financial Statements (Continued)

NOTE 7. GOODWILL AND OTHER INTANGIBLES (Continued)

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

	June 30, 2006							December 31, 2005
	Gross Carrying Amount		Less: Accumulated Amortization			Net Intangible Assets		Gross Carrying Amount		Less: Accumulated Amortization			Net Intangible Assets
Automotive Sector:
Tradename	$	459	$	—		$	459	$	431	$	—		$	431
Distribution Networks		358		(90	)		268		337		(83	)		254
Other		247		(99	)		148		221		(86	)		135
Total Automotive Sector		1,064		(189	)		875		989		(169	)		820
Total Financial Services Sector		4		(4	)		—		4		(4	)		—
Total	$	1,068	$	(193	)	$	875	$	993	$	(173	)	$	820

The intangibles account is comprised of a non-amortizable tradename, distribution networks with a useful life of 40 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 for the first half of 2006 and 2005 was $12 million and $34 million, respectively. Intangible asset amortization is forecasted to range from $20 million to $30 million per year for the next five years, excluding the impact of foreign currency translation.

NOTE 8. 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, 2006 balance sheet are consolidated VIE assets of $5.5 billion for the Automotive sector and $54.6 billion for the Financial Services sector. Included in Automotive consolidated VIE assets are $577 million of cash and cash equivalents. For the Financial Services sector, consolidated VIE assets include $5.3 billion in cash and cash equivalents, and $49.3 billion of finance receivables.

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 ($269 million for the Automotive sector and $197 million for the Financial Services sector at June 30, 2006) to any potential losses, should they occur, associated with these VIEs is limited to the value of our invested capital or equity rights and, where applicable, receivables due from the VIEs.

Ford Credit also sells finance receivables to bank-sponsored asset-backed commercial paper issuers that are special purpose entities ("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 these SPEs was approximately $5 billion at June 30, 2006.

Item 1. Financial Statements (Continued)

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS

All derivative instruments, including embedded derivatives, are recorded at fair market value on our balance sheet.

Income Statement Impact: The ineffective portion of designated hedges, amortization of mark-to-market adjustments associated with hedging relationships that have been terminated, and mark-to-market adjustments for non-designated hedging activity are recognized in Cost of sales or Interest income and other non-operating income/(expense), net for the Automotive sector and in Revenues for the Financial Services sector. The impact on Income/(loss) before income taxes from these items is shown below (in millions):

	Second Quarter						First Half
	2006			2005			2006			2005
Automotive Sector	$	128		$	94		$	270		$	138
Financial Services Sector		(1	)		(50	)		(22	)		(100	)
Total	$	127		$	44		$	248		$	38

Fair Value of Derivative Instruments: The fair value of derivatives reflects the price that a third party would be willing to pay or receive in arm’s-length transactions for these derivatives, and includes mark-to-market adjustments to reflect the effects of changes in the related index. The following table summarizes the estimated fair value of our derivative financial instruments, taking into consideration the effects of legally enforceable netting agreements (in millions):

	June 30, 2006						December 31, 2005
	Fair Value Assets			Fair Value Liabilities			Fair Value Assets			Fair Value Liabilities
Automotive Sector
Foreign currency forwards and options	$	1,242		$	652		$	747		$	1,168
Commodity forwards and options		1,190			51			703			38
Other		121			—			128			1
Total derivative financial instruments	$	2,553		$	703		$	1,578		$	1,207
Financial Services Sector
Foreign currency swaps, forwards, and options	$	861		$	754		$	1,126		$	789
Interest rate swaps		713			107			1,657			96
Impact of netting agreements		(9	)		(9	)		(205	)		(205	)
Total derivative financial instruments	$	1,565		$	852		$	2,578		$	680

NOTE 10. 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 obligations, 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
	2006					2005			2006					2005
Basic and Diluted Income/(Loss)
Basic income/(loss) from continuing operations	$	(256	)			$	943		$	(1,443	)			$	2,120
Effect of dilutive convertible preferred securities		—		(a	)		54			—		(a	)		107
Diluted income/(loss) from continuing operations	$	(256	)			$	997		$	(1,443	)			$	2,227

Basic and Diluted Shares
Average shares outstanding		1,876					1,842			1,870					1,836
Restricted and uncommitted-ESOP shares		(1	)				(3	)		(2	)				(3	)
Basic shares		1,875					1,839			1,868					1,833
Net dilutive options and restricted and uncommitted-ESOP shares		—		(b	)		8			—		(b	)		12
Dilutive convertible preferred securities		—		(a	)		282			—		(a	)		282
Diluted shares		1,875					2,129			1,868					2,127

__________

Not included in calculation of diluted earnings per share due to their antidilutive effect:

(a)	282 million shares and the related income effect for convertible preferred securities.

(b)	4 million and 5 million contingently issuable shares for second quarter 2006 and first half 2006, respectively.

Item 1. Financial Statements (Continued)

NOTE 11. COMPREHENSIVE INCOME/(LOSS)

Total comprehensive income/(loss) is summarized as follows (in millions):

	Second Quarter						First Half
	2006			2005			2006			2005
Net income/(loss)	$	(254	)	$	946		$	(1,441	)	$	2,158
Other comprehensive income/(loss)
Foreign currency translation		1,291			(1,899	)		1,471			(3,040	)
Minimum pension liability		1,180			88			1,146			136
Net income/(loss) on derivative instruments		427			(677	)		699			(954	)
Net holding gain/(loss)		(4	)		27			(16	)		(11	)
Total other comprehensive income/(loss)		2,894			(2,461	)		3,300			(3,869	)
Total comprehensive income/(loss)	$	2,640		$	(1,515	)	$	1,859		$	(1,711	)

NOTE 12. RETIREMENT BENEFITS

Pension, postretirement health care and life insurance benefit expense is summarized as follows (in millions):

	Second Quarter
	Pension Benefits												Health Care and
	U.S. Plans						Non-U.S. Plans						Life Insurance
	2006			2005			2006			2005			2006			2005
Service cost	$	176		$	185		$	171		$	160		$	198		$	178
Interest cost		598			600			341			356			548			551
Expected return on assets		(841	)		(846	)		(396	)		(417	)		(129	)		(126	)
Amortization of:
Prior service costs		115			126			30			31			(160	)		(54	)
(Gains)/losses and other		39			25			138			80			229			223
Separation programs		5			107			18			16			—			—
Loss from curtailment		489			—			—			—			2			—
Costs allocated to Visteon		—			(28	)		—			—			1			(81	)
Net expense/(income)	$	581		$	169		$	302		$	226		$	689		$	691

	First Half
	Pension Benefits											Health Care and
	U.S. Plans						Non-U.S. Plans					Life Insurance
	2006			2005			2006			2005		2006		2005
Service cost	$	354		$	369		$	342		$	326	$	377	$	356
Interest cost		1,195			1,198			678			724		1,095		1,102
Expected return on assets		(1,676	)		(1,669	)		(795	)