Sun Microsystems Reports Preliminary Results for Fiscal Year 2005 and Fourth Quarter
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Sun Microsystems Reports Preliminary Results for Fiscal Year 2005 and Fourth Quarter

Achieves 16th Consecutive Year of Positive Cash Flow From Operations Significantly Improves Operational Performance

SANTA CLARA, Calif., July 26 /PRNewswire-FirstCall/ -- Sun Microsystems, Inc., (NASDAQ: SUNW) reported results today for its fiscal fourth quarter, which ended June 30, 2005.

Revenues for the fourth quarter were $2.975 billion, a decrease of 4.3 percent as compared with $3.110 billion for the fourth quarter of fiscal 2004. Total gross margin as a percent of revenues was 41.4 percent, an increase of 2.0 percentage points as compared with the fourth quarter of fiscal 2004. Net income for the fourth quarter of fiscal 2005 on a GAAP basis was $121 million or a net income of $0.04 per share as compared with a net income of $783 million or a net income of $0.23 per share for the fourth quarter of fiscal 2004. The fiscal 2004 fourth quarter results included $1.6 billion of other income related to a legal settlement with Microsoft.

Fiscal 2005 Q4 net income included a net tax benefit of $190 million. Included in this amount was a tax expense of $82 million on income generated in certain foreign jurisdictions and adjustments for the difference between estimated amounts recorded and actual liabilities resulting from the filing of prior periods' tax returns. This expense was more than offset by a $249 million tax benefit arising from adjustments to our income tax reserves resulting from the June 2005 conclusion of both a previously disclosed U.S. income tax audit and a foreign income tax audit, and a $23 million net beneficial correction to the valuation allowance on deferred tax assets and prior years' state and foreign tax provisions.

For the full 2005 fiscal year, Sun reported revenues of $11.071 billion, a decline of 1.0 percent as compared with $11.185 billion for the full 2004 fiscal year. Total gross margin as a percent of revenues was 41.5 percent, an increase of 1.1 percentage points as compared with the 2004 fiscal year. The net loss for fiscal year 2005 was $11 million or a net loss of $0.00 per share as compared with a net loss of $388 million or a net loss of $0.12 per share for the 2004 fiscal year.

Net income for Q4 fiscal year 2005 on a non-GAAP basis was $200 million or a net income of $0.06 per share, excluding a charge of $84 million for workforce and real estate restructuring and the related tax benefit of $6 million, and a $1 million loss on equity investments. This compared with a net loss, on a non-GAAP basis, in Q4 fiscal 2004 of $173 million or a net loss of $0.05 per share.

Net income for fiscal 2005 on a non-GAAP basis was $184 million or a net income of $0.05 per share, excluding $260 million for workforce and real estate restructuring, a $6 million gain on equity investments, $54 million in additional settlement income from Microsoft, a charge of $55 million related to a litigation settlement with Kodak, a $34 million beneficial correcting adjustment to the valuation allowance on deferred tax assets, and $26 million for related tax effects. This compared with a net loss, on a non-GAAP basis, in fiscal 2004 of $791 million or a net loss of $0.24 per share.

Cash flow from operations for the fourth quarter was $195 million and $369 million for the full fiscal year, Sun's 16th consecutive year of generating positive cash flow from operations. The cash and marketable debt securities balance at the end of the quarter was $7.524 billion.

Steve McGowan, Sun's chief financial officer and executive vice president, corporate resources, commented, "We achieved impressive operational improvements in fiscal 2005 in the areas of gross margin dollars and percent, R&D and SG&A spend reductions, a $975 million non-GAAP net income improvement, and generation of $369 million positive cash flow from operations, our 16th consecutive year of generating positive cash flow from operations."

"Putting our cash to work, we've expanded our product portfolio and announced plans to acquire companies that deepen and broaden our systems strategy. We've materially grown our key communities including the Java(TM), Solaris(TM) and SPARC(R) efforts. We've maintained our R&D commitment and delivered crown jewels like Solaris 10 to the market," said Scott McNealy, chairman and chief executive officer, Sun Microsystems. "Big-time progress in FY05. The company is now in a position to take advantage of the investments we have made over the past few years and we believe there is more to come in FY06."

McNealy continued, "Our demand indicators for Q4 were positive. We have great partners, lots of cash, and a strong team across the board. FY05 was a year of stabilized revenue and earnings. Our opportunity for FY06 is sustained growth and profitability."

Please note that these results are preliminary and include a total of approximately $45 million in cumulative accounting adjustments. These reflect a variety of items detected during the Company's routine quarterly accounting review process. The two principal items are an increase in both revenue reserves and cost of goods sold. The company has reflected these items in the fourth quarter financial results and does not believe that they are material to any prior periods. Nevertheless, the company has not completed its review of this matter. Depending upon the outcome of that review, the company may conclude that these adjustments could result in restatements of prior period financial statements. Should the company reach that conclusion, the impact would be to improve the fourth quarter results reported today. The company expects to complete this process prior to filing its Form 10-K.

Sun has scheduled a conference call today to discuss its earnings for the fiscal year 2005 and fourth quarter at 1:30 p.m. (PT), which is being broadcast live at www.sun.com/investors.

About Sun Microsystems, Inc.

Since its inception in 1982, a singular vision -- "The Network Is The Computer(TM)" -- has propelled Sun Microsystems, Inc. to its position as a leading provider of industrial-strength hardware, software and services that make the Net work. Sun can be found in more than 100 countries and on the World Wide Web at http://www.sun.com.

     FOR MORE INFORMATION

     INVESTOR CONTACT:
     Jeff Boldt 650-786-0333
     
Email Contact

     MEDIA CONTACT:
     Stephanie Vonallmen 650-786-8589
     
Email Contact

     INDUSTRY ANALYST CONTACT:
     Joanne Masters 650-786-0847
     
Email Contact

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the future results and performance of Sun Microsystems, Inc., including statements that the company is now in a position to take advantage of the investments we have made over the past few years; that we believe there is more to come in FY06; that our opportunity for FY06 is sustained growth and profitability; that results are preliminary; that the company does not believe that these items are material to any prior period; that the company has not completed its review of the matter; that the company may conclude that these adjustments should result in restatements; that the impact would be to improve the fourth quarter results reported today; and that the company expects to complete this process prior to filing its Form10K. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those predicted in any such forward-looking statements. Factors which could cause actual results to differ materially from those contained in our projections and forward-looking statements include: increased competition; adverse changes in market conditions both in the US and internationally; failure to timely develop, introduce and deliver new products and services; delays in product development or customer acceptance and implementation of new products and technologies; pricing pressures; failure to successfully integrate acquisition candidates; and failure to resolve the accounting for items identified and taken in the fourth quarter. Please also refer to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended June 30, 2004 and our quarterly reports on Form 10-Q for the fiscal quarters ended September 26, 2004, December 26, 2004 and March 26, 2005.

The company believes that presentation of results including items such as net income (loss) on a non-GAAP basis provides meaningful supplemental information to both management and investors that is indicative of the company's core operating results and facilitates comparison of operating results across reporting periods. Non-GAAP numbers in this press release are reconciled to comparable GAAP in the numerical attachment following the text of this press release.

NOTE: Sun, Sun Microsystems, the Sun logo, Java, Solaris, and The Network Is The Computer are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and in other countries. All SPARC trademarks are used under license and are trademarks or registered trademarks of SPARC International, Inc. in the US and other countries. Products bearing SPARC trademarks are based upon an architecture developed by Sun Microsystems, Inc.


                              SUN MICROSYSTEMS, INC
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                     (in millions, except per share amounts)


                                   Three Months Ended   Fiscal Years Ended
                                    June 30,  June 30,  June 30,  June 30,
                                      2005      2004      2005     2004*

    Net revenues:
      Products                       $1,928    $2,066    $7,127    $7,355
      Services                        1,047     1,044     3,944     3,830
        Total net revenues            2,975     3,110    11,071    11,185
    Cost of sales:
      Cost of sales-products          1,130     1,238     4,174     4,290
      Cost of sales-services            613       648     2,307     2,379
        Total cost of sales           1,743     1,886     6,481     6,669
          Gross margin                1,232     1,224     4,590     4,516
    Operating expenses:
      Research and development          472       518     1,785     1,926
      Selling, general and
       administrative                   776       849     2,904     3,317
      Restructuring charges              84       150       260       344
      Impairment of goodwill and
       other intangible assets           --        49        --        49
      Purchased in-process research
       and development              --        69        --        70
      Total operating expenses        1,332     1,635     4,949     5,706
        Operating loss                 (100)     (411)     (359)   (1,190)
    Gain (loss) on equity investments,
     net                                 (1)       (6)        6       (64)
    Interest and other income, net       32        30       133        94
    Settlement income                    --     1,597        54     1,597
      Income (loss) before
       income taxes                     (69)    1,210      (166)      437
    Provision for (benefit from)
     income taxes                      (190)    427      (155)      825
    Net income (loss)                  $121      $783      $(11)    $(388)
    Net income (loss) per common
     share-basic                      $0.04     $0.24     $0.00    $(0.12)
    Net income (loss) per common
     share-diluted                    $0.04     $0.23     $0.00    $(0.12)
    Shares used in the calculation of
     net income (loss) per common
     share - basic                    3,399     3,327     3,368     3,277
    Shares used in the calculation of
     net income (loss) per
     common share - diluted           3,410     3,348     3,368     3,277

    * Derived from audited financial statements


                              SUN MICROSYSTEMS, INC
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (in millions)

                                            June 30,          June 30,
                                              2005              2004*
                                           (unaudited)

    ASSETS
    Current assets:
        Cash and cash equivalents            $2,051            $2,141
        Short-term marketable debt
         securities                           1,345             1,460
        Accounts receivable, net              2,231             2,339
        Inventories                             430               464
        Deferred and prepaid tax assets         255                62
        Prepaid expenses and other
         current assets                         878               837
                Total current assets          7,190             7,303

    Property, plant and equipment, net        1,769             1,996
    Long-term marketable debt securities      4,128             4,007
    Goodwill                                    441               406
    Other acquisition-related intangible
     assets, net                                113               127
    Other non-current assets, net               548               664
                                            $14,189           $14,503
    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
        Current portion of long-term
         debt and short-term
         borrowings                             $--              $257
        Accounts payable                      1,167             1,057
        Accrued payroll-related
         liabilities                            698               622
        Accrued liabilities and other        1,014              1,308
        Deferred revenues                     1,647             1,617
        Warranty reserve                        224               252
                Total current liabilities     4,750             5,113

    Long-term debt                            1,123             1,175
    Long-term deferred revenues                 544               557
    Other non-current obligations             1,047             1,220
    Total stockholders' equity                6,725             6,438
                                            $14,189           $14,503

    * Derived from audited financial statements


                            SUN MICROSYSTEMS, INC
      NON-GAAP CALCULATION OF NET INCOME (LOSS) EXCLUDING SPECIAL ITEMS
                                 (unaudited)
                   (in millions, except per share amounts)

                                       Three Months Ended  Fiscal Years Ended
                                        June 30, June 30,  June 30, June 30,
                                         2005***    2004     2005*     2004

    Calculation of net income (loss)
     excluding special items:
          Net income (loss)                $121      $783     $(11)    $(388)
          Restructuring charges              84       150      260       344
          Purchased in-process research
           and development                   --        69       --        70
          Loss (gain) on equity
           investments, net                   1         6       (6)       64
          Settlement income                  --    (1,597)     (54)   (1,597)
          Settlement of litigation**         --        --       55        --
          Impairment of goodwill and
           other intangible assets           --        49       --        49
          Valuation allowance on
           deferred tax assets               --        --      (34)      300
          Related tax effects
                                             (6)      367      (26)      367
    Net income (loss) excluding special
     items                                 $200     $(173)    $184     $(791)
    Net income (loss) excluding special
     items per common share -
     basic                                $0.06    $(0.05)   $0.05    $(0.24)
    Net income (loss) excluding special
     items per common share -
     diluted                               0.06    $(0.05)   $0.05    $(0.24)
    Shares used in the calculation of
     net income (loss) excluding special
     items per common share -
     basic                                3,399     3,327    3,368     3,277
    Shares used in the calculation of
     net income (loss) excluding special
     items per common share -
     diluted                              3,410     3,327    3,392     3,277

    *   The non-GAAP calculation of Net income excluding special items for the
        fiscal year ended June 30, 2005 includes a $69 million benefit for the
        impact of the change in Dutch withholding tax legislation which was
        effected in the third quarter of fiscal 2005 and a $249 million
        benefit arising from adjustments to our income tax reserves resulting
        from the conclusion of a U.S. and foreign income tax audit.
    **  Included in Cost of sales-products.
    *** The non-GAAP calculation of net income excluding special items for the
        three months ended June 30, 2005 includes a $249 million benefit
        arising from adjustments to our income tax reserves resulting from the
        conclusion of a U.S. and foreign income tax audit.


                            SUN MICROSYSTEMS, INC
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (unaudited, in millions)

                                                       Fiscal Years Ended
                                                   June 30,          June 30,
                                                     2005             2004*
    Cash flows from operating activities:
     Net loss                                        $(11)            $(388)
      Adjustments to reconcile net loss to net cash
       provided by operating activities:
      Depreciation and amortization                   671               730
      Amortization of other intangible assets and
       unearned equity compensation                    96                83
      Impairment of goodwill and other
       intangible assets                               --                49
      Tax benefits from employee stock plans           25                 4
      Deferred taxes                                 (403)              620
      Loss on investments, net                          9                64
      Purchased in-process research and development    --                70
      Changes in operating assets and liabilities:
         Accounts receivable, net                     112                61
         Inventories                                   34               (44)
         Prepaid and other assets                     (29)              (34)
         Accounts payable                             105               158
         Other liabilities                           (240)              853
    Net cash provided by operating activities         369             2,226
    Cash flows from investing activities:
     Purchases of marketable debt securities       (7,154)           (8,469)
     Proceeds from sales of marketable
      debt securities                               6,181             5,795
     Proceeds from maturities of
      marketable debt securities                      941               854
     Proceeds from sales of equity
      investments, net                                 49                30
     Acquisition of property, plant and
      equipment, net                                 (257)             (249)
     Acquisition of spare parts and other assets      (90)              (71)
     Payments for acquisitions, net of
      cash acquired                                   (95)             (201)
    Net cash used in investing activities            (425)           (2,311)
    Cash flows from financing activities:
     Proceeds from issuance of common stock, net      218               239
     Principal payments on borrowings and
      other obligations                              (252)              (28)
    Net cash provided by (used in)
     financing activities                             (34)              211
    Net increase (decrease) in cash and
     cash equivalents                                 (90)              126
    Cash and cash equivalents, beginning
     of period                                      2,141             2,015
    Cash and cash equivalents, end of
     period                                        $2,051            $2,141

    * Derived from audited financial statements

CONTACT: investors, Jeff Boldt, +1-650-786-0333, or Email Contact, or
media, Stephanie Vonallmen, +1-650-786-8589, or
Email Contact, or industry analysts, Joanne Masters,
+1-650-786-0847, or Email Contact, all of Sun Microsystems, Inc.

Web site: http://sun.com/