“The recovery is likely to be more modest than many of us had hoped," says Ford CEO Alan Mulally, shown here last month.

For Ford Motor Co., the glass might seem half-full, right now.  But despite some good news, in the second quarter, company officials made it clear, during a call with reporters that they continue to worry that it’s actually half-empty and continuing to drain out.

Ford surprised industry observers by announcing a pre-tax operating loss of only $424 million in the second-quarter, a $609 million improvement over the same period a year ago.  The automaker’s ability to shed more than $10 billion in debt, combined with the ability to reduce annual cash interest payments by more than $500 million during the quarter helped propel overall profits to $2.3 billion, a $10.8 billion improvement versus year-ago numbers.

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These results would be more than a cause for celebration during normal business cycles, but Ford is being very cautious about its success as it tries to determine whether the global automotive downturn has come to an end.  The automaker expects full-year total U.S. industry sales to end at between 10.5 to 11 million units, roughly in line with original planning.  European market sales are expected to end between 15 and 15.5 million units, due in large part to the success of vehicle scrapping incentive programs.

“Demand for new vehicles continues to remain weak,” Ford CEO Alan Mulally told journalists during a conference call to discuss the results.  “Clearly, the road ahead remains challenging.  The recovery is likely to be more modest than many of us had hoped.”  Still, Mulally is confident that Ford has the right plan in place for its survive the current challenging sales environment.

The automaker says its plans build 485,000 vehicles in North America in the third quarter, a modest 67,000-unit increase from year-ago levels.  The increase in output is the result of Ford’s careful attention to maintaining low vehicle inventories through the downturn.  Vehicle production will be reduced in Europe in the coming quarter to 385,000 units, a 9,000-unit decline, because the region remains volatile to the global economy malaise.

While there are a few bright spots on the horizon, Ford executives continue to worry about the health of their supply base.  As Ford, GM and Chrysler ramp-up increased production levels in the coming quarters, it’s likely supplier may run into ever-increasing liquidity problems, which could force automakers, like Ford, to provide more help. 

“We have some distressed suppliers and there’s no secret about that,” says Ford Chief Financial Officer Lewis Booth.  “We think our suppliers cash flow is going to be under pressure in the fourth quarter when the volumes have picked up around the industry.”  Ford has already taken some steps to help its most vulnerable suppliers, including advancing payments and providing loans.

Ford says it has not seen any parts delivery interruptions as a result of the bankruptcy filing by its largest parts supplier, Visteon, which  Ford spun off in a piece of financial engineering a decade ago.  The automaker also says it has no immediate plans to conduct another stock offering to shore up its balance sheet even further.  It expects its cash burn rate, which fell to $1 billion during the quarter from $3.7 billion in the first-quarter, to continue to decline through the rest of the year. Still, Ford’s debt looms large. It has mortgaged everything including its brand name and has  to pay back more than $20 billion  to lenders while figuring out how to finance new products.