Sun Microsystems is a leading supplier of computer-related products, including servers, workstations, storage devices, and network switches.*

In the letter to stockholders as part of the 2001 annual report, President and CEO Scott G. McNealy offered the following remarks:

Fiscal 2001 was clearly a mixed bag for Sun, the industry, and the economy as a whole. Still, we finished with revenue growth of 16 percent-and that's significant. We believe it's a good indication that Sun continued to pull away from the pack and gain market share. For that, we owe a debt of gratitude to our employees worldwide, who aggressively brought costs down- even as they continued to bring exciting new products to market.

The statement would not appear to be telling you enough. For example, McNealy says the year was a mixed bag with revenue growth of 16 percent. But what about earnings? You can delve further by examining the income statement in Exhibit 1. Also, for additional analysis of other factors, consolidated balance sheet(s) are presented in Exhibit 2 on page 92.

1. Referring to Exhibit 1, compute the annual percentage change in net income per common share-diluted (second numerical line from the bottom) for 1998-1999, 1999-2000, and 2000-2001.

2. Also in Exhibit 1, compute net income/net revenue (sales) for each of the four years. Begin with 1998.

3. What is the major reason for the change in the answer for Question 2 between 2000 and 2001? To answer this question for each of the two years, take the ratio of the major income statement accounts to net revenues (sales).

Cost of sales

Research and development

Selling, general and administrative expense

Provision for income tax

4. Compute return on stockholders' equity for 2000 and 2001 using data from Exhibits 1 and 2.

* In 2009, Sun Microsystems was acquired by Oracle Corporation.

Exhibit 1

5. Analyze your results to Question 4 more completely by computing ratios 1, 2a, 2b, and 3b (all from this chapter) for 2000 and 2001. Actually, the answer to ratio 1 can be found as part of the answer to question 2, but it is helpful to look at it again.
What do you think was the main contributing factor to the change in return on stockholders' equity between 2000 and 2001? Think in terms of the Du Pont system of analysis.
6. The average stock prices for each of the four years shown in Exhibit 1 were as follows:
199811¼
199916¾
200028½
2001 9½
a. Compute the price/earnings (P/E) ratio for each year. That is, take the stock price shown above and divide by net income per common stock-dilution from Exhibit 1.
b. Why do you think the P/E has changed from its 2000 level to its 2001 level?
A brief review of P/E ratios can be found under the topic of Price-Earnings Ratio Applied to Earnings per Share in Chapter 2.
Exibit 2

7. The book values per share for the same four years discussed in the preceding question were:
1998$1.18
1999$1.55
2000$2.29
2001$3.26
a. Compute the ratio of price to book value for each year.
b. Is there any dramatic shift in the ratios worthy of note?

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SUN MICROSYSTEMS INC. Summary Consolidated Statement of Income (in millions) 1999 2001 2000 Dollars Dollars Dollars Dollars $18,250 $15,721 11,806$9,862 10,041 2,016 4,544 261 5,670 1,280 3,196 19 121 13,32810,286 1,520 7,549 1,630 4,072 65 12 Cost of sales 4,713 1,029 2,826 Seling, general and administrative.... Goodwill amortization In-process research and development 176 8,748 1,114 16,939 1,311 (90) 363 Total costs and expenses Operating Income Gain (loss) on strategic investments Interest income, net. Litigation settlement. Income before taxes Provision for income taxes. Cumulative effect of change 2,393 208 170 48 1,584 603 2,771 917 1,605 575 1,162 407 in accounting principle, net Net income Net income per common share-diluted.. Shares used in the calculation of net income per common share-diluted (54) S 927 1,854 $ 1,030 0.27 0.55 0.31 755 $ 0.24 1 3,417 3,379 3,282 3,180 SUN MⅡCROSYSTEMS, INC Consolidated Balance Sheets (in millions) 2000 Assets Current assets 2001 Cash and cash equivalents Short-term investments Accounts receivable, net allowances of $410 in 2001 and $ 1,472 1,849 626 387 $534 in 2000 Inventories. Deferred tax assets Prepaids and other current assets 2,690 557 673 482 $7,934 $6,877 2,095 4,496 2,955 1,049 1,102 969 Total current assets Property, plant and equipment, net Long-term investments Goodwill, net of accumulated amortization of $349 in 2001 and 2,697 4,677 $88 in 2000 Other assets, net. 163 521 $18181S14.152 2,041 832 Liabilities and Stockholders' Equity Current liabilities Short-term borrowings Accounts payable Accruedpayroll-related liabilities Accruedliabilities and other Deferred rev Warranty reserve Income taxes payable 1,050 488 1,374 924 751 enues and customer deposits 1,827 1,289 211 209 $5,146 $4,546 577 1.720 S7,595 $6,843 314 90 Total current liabilities Deferred income taxes. Long-term debt and other obligations 744 1.705 Total debt. Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value, 10 shares authorized (1 share which has been designated as Series A Preferred participating stock): no shares issued and outstanding Common stock and additional paid-in-capital, $0.00067 par value, 7,200 shares authorized; issued: 3,536 shares in 2001 and 3,495 shares in 2000 Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000 Deferred equity compensation Retained earnings Accumulated other comprehensive income (loss) 6,238 2,728 (2,435)(1,438) (15) 5,959 (29 75 $10,586 S7.309 S18.181 S14.152 (73) 6,885 Total stockholders' equity