On Thursday, Aug. 3, Nortel Networks (NYSE:NT) released Q2 2006 earnings for the period ended June 30. Highlights:

  • Nortel is GAAP profitable again, but at the same time, free cash flow has turned negative.
  • The operating and net margin improvements are not as solid as they look. $455 million, or $0.10 per diluted share, of the operating earnings came from litigation recoveries and other one-time items.
  • Back out those items, and Nortel saw operating margins of -1.32%, along with net margins of -3.1%. Looks can be deceiving.

(Figures in millions, except per-share data)

Income Statement Highlights

Avg. Est. Q2 2006 Q2 2005 Change
Sales $2,800 $2,744 $2,619 4.8%
Net Profit -- $366 ($33) N/A
EPS $0.01 $0.08 ($0.01) N/A
Diluted Shares -- 4,340 4,338 0%

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Margin Checkup

Q2 2006 Q2 2005 Change*
Gross Margin 38.85% 43.3% (4.45)
Operating Margin 15.09% (1.79%) 16.88
Net Margin 13.34% (1.26%) 14.6
*Expressed in percentage points.

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Balance Sheet Highlights

Assets Q2 2006 Q2 2005 Change
Cash + ST Invest. $2,550 $3,133 (18.6%)
Accounts Rec. $2,785 $2,735 1.8%
Inventory $2,035 $1,315 54.8%

Liabilities Q2 2006 Q2 2005 Change
Accounts Payable $1,065 $1,144 (6.9%)
Long-Term Debt $3,770 $3,887 (3%)

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Cash Flow Highlights

Q2 2006 Q2 2005 Change
Cash From Ops. ($108) $110 N/A
Capital Expenditures $78 $70 11.4%
Free Cash Flow ($186) $40 N/A

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