Two years before the Great Recession began tighten its grip on the throats of the Detroit Three, a prescient Bill Ford put all of Ford’s (NYSE:F) assets on the line to secure a mammoth $25 billion line of credit. As company chairman, Ford boldly declared “bankruptcy is not an option” and used his clout and determination to secure historic labor concessions with the United Auto Workers union.

The plan worked — and unlike General Motors (NYSE:GM) or Chrysler, Ford did not declare bankruptcy or accept bailout funds from the government. A leaner, meaner Ford emerged from the recession with a new menu of products, a common global manufacturing platform and an aggressive strategy to take advantage of growth in Asian markets — particularly China.

Ford’s second-quarter earnings, which the company released Tuesday, illustrate the bottom-line benefits of the company’s turnaround strategy. Revenue jumped to $35.5 billion, an increase of 13% over the same quarter in 2010. But despite the revenue growth, Ford’s profit slipped 8% to $2.64 billion (65 cents per share) — $67 million less than the company posted for the second quarter of last year. Even with the earnings miss, Ford beat analysts’ estimate of 60 cents per share.

But what do these quarterly earnings say about the challenges and opportunities Ford faces for the rest of this fiscal year? Here’s a peek at the good, the bad and the ugly of Ford’s quarterly earnings:

The Good

1. Ford Still Is Selling Cars and Making Money. Ford’s automotive sector performed well, posting a pretax operating profit of $2.3 billion. The company’s vehicle wholesales for the second quarter totaled 1.5 million units, up 7% from 2010.
2. The Company Has Paid Down Debt. Ford has been aggressive in strengthening its balance sheet by paying down debt — it paid off another $2.6 billion during the second quarter. Its debt load now is down to just $14 billion.
3. The Worst Of Japan’s Supply Chain Woes Are Over. The earthquake, tsunami and nuclear disaster in Japan’s Sendai region sent tremors through the tightly choreographed automotive supply chain. Ford never experienced the losses felt by Japanese manufacturers who saw production plummet after the crisis, but it did have to contend with hiccups at some plants. But now, with parts suppliers recovering faster than expected, there are few bumps for Ford on the road ahead.

The Bad

1. The Recovery May Be Stalling. A heinous jobs report in June (the economy added a mere 18,000 jobs) reinforced fears that the much-heralded recovery is faltering. That’s bad news for auto sales. The game of chicken between the White House and Congressional Republicans over raising the debt ceiling could make matters worse. If there’s no deal by the Aug. 2 deadline, U.S. Treasuries likely would be downgraded, making all loans — including auto loans — more expensive for borrowers.
2. Ford’s Financing Unit Disappoints. Ford’s financing arm is having challenges of its own. The unit reported a pretax operating profit of $604 million in the second quarter, down from $888 million in the same quarter last year. For the first half of 2011, Ford Credit earned $1.3 billion, down from the $1.7 billion in the first half of last year.

The Ugly

1. Commodity Costs Are Rising. Ford estimates commodity costs will increase by $2 billion this year. The effect of inflation on raw material costs, as well as more expensive technology and features for Ford’s new vehicles, are largely responsible for the increase.
2. Structural Costs Are Increasing, Too. Ford’s structural costs are expected to rise by another $2 billion this year. While automotive structural costs typically reflect the costs associated with higher production volumes, investment in future growth and new-launch preparations, they also include items like health care and retiree benefits.
3. The Labor Union Wants Its Concessions Back. When the UAW begins contract negotiations with Ford this week, they will be looking for payback. Union workers made two rounds of major concessions in 2007 and 2009 — including giving up vacation days, cost-of-living adjustments, overtime and the length of scheduled breaks. Ford contends that a stronger, more competitive company improves the fortunes of workers, too. Now that the company is profitable again, Ford management might find cost control a harder sell than it was when the company was on the brink.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.