Whoever thinks a faultless piece to see,
Thinks what ne'er was, nor is, nor e'er shall be.
-- Alexander Pope, "An Essay On Criticism"

On April 24, Unix System veteran Sun Microsystems (NASDAQ:SUNW) released third-quarter earnings for the period ending April 1. It wasn't a perfect report, and the faultless flair of National Poetry Month shall soon pass. Nevertheless, there were a few positive signs.

  • Sun scraped together its second profitable quarter in a row, albeit powered by negative operating margins. It can be nice to have a strong and interest-generating balance sheet sometimes.
  • Cash flows, including the structural cash flows we Fools like to call owner earnings, were much stronger across the board, and much healthier than the GAAP net income. That's usually a sign of conservative accounting and a lack of market-pandering shenanigans.
  • Management says that next quarter's revenues should be much stronger, as big customers supposedly delayed purchases until a new product line is launched this spring.

(Figures in millions, except per-share data)

Income Statement Highlights

Q3 2007

Q3 2006

Change

Sales

$3,283

$3,177

3.3%

Net Profit

$67

($217)

N/A

EPS

$0.02

($0.06)

N/A

Diluted Shares

3661.0

3443.0

6.3%

Get back to basics with the income statement.

Margin Checkup

Q3 2007

Q3 2006

Change*

Gross Margin

44.5%

43.0%

1.5

Operating Margin

(1.4%)

(6.7%)

5.3

Net Margin

2.0%

(6.8%)

8.9

*Expressed in percentage points.

Margins are the earnings engine.

Balance Sheet Highlights

Assets

Q3 2007

Q3 2006

Change

Cash + ST Invest.

$4,114

$2,872

43.2%

Accounts Rec.

$2,458

$2,301

6.8%

Inventory

$567

$574

(1.2%)

Liabilities

Q3 2007

Q3 2006

Change

Accounts Payable

$1,214

$1,315

(7.7%)

Long-Term Debt

$1,270

$585

117.1%

The balance sheet reflects the company's health.

Cash Flow Highlights

Q3 2007

Q3 2006

Change

Cash From Ops.

$485

$197

146.2%

Capital Expenditures

$73

$76

(3.9%)

Free Cash Flow

$412

$121

240.5%

Owner Earnings

$203

($65)

N/A

Free cash flow is a Fool's best friend.

Related Foolishness:

Fool by Numbers is designed to give you the raw earnings information in a timely fashion, putting all the numbers you need in one easy-to-read place. But at The Motley Fool, we believe numbers tell only part of the story, so check Fool.com for more of our in-depth discussion of what the numbers mean.

At the time of publication, Anders Bylund had no position in any company mentioned. Fool rules are here.