The FINANCIAL — Sony Corporation (“Sony”) on March 17 announced its consolidated financial results for the third quarter ended December 31, 2014 (October 1, 2014 to December 31, 2014).
On February 4, 2015, Sony announced third quarter results for each of its segments, with the exception of the Pictures segment, and third quarter forecasts for consolidated results and the Pictures segment based on the information available to management at that time, according to Sony Corporation.
Consolidated Results for the Third Quarter Ended December 31, 2014
Sales and operating revenue (“Sales”) were 2,566.7 billion yen (21,213 million U.S. dollars), an increase of 6.5% compared to the same quarter of the previous fiscal year (“year-on-year”). This increase is primarily due to the favorable impact of foreign exchange rates, a significant increase in Mobile Communications (“MC”) segment sales reflecting an increase in unit sales of smartphones, a significant increase in Devices segment sales due to the strong performance of image sensors, and a significant increase in Game & Network Services (“G&NS”) segment sales reflecting the strong performance of PlayStation 4 (“PS4”). This increase was partially offset by a significant decrease in sales in All Other, primarily related to Sony’s exit from the PC business, and a decrease in sales in the Pictures segment, mainly due to lower Motion Pictures and Television Productions sales. On a constant currency basis, sales decreased by 0.3% year-on-year.
Operating income increased 93.2 billion yen year-on-year to 182.1 billion yen (1,505 million U.S. dollars). This significant increase was primarily due to a significant improvement in the operating results of the Devices, Home Entertainment & Sound (“HE&S”), G&NS, and Imaging Products & Solutions (“IP&S”) segments. This improvement was partially offset by a significant decrease in operating income in the Pictures segment.
Operating income in the current quarter includes an 11.2 billion yen (93 million U.S dollars) write-down of PlayStation®Vita (“PS Vita”) and PlayStation TV (“PS TV”) components in the G&NS segment. In the same quarter of the previous fiscal year, a 32.1 billion yen impairment charge related to long-lived assets in the battery business in the Devices segment and a 6.2 billion yen write-off of certain PC software titles in the G&NS segment were recorded.
During the current quarter, restructuring charges, net, decreased 4.6 billion yen year-on-year to 9.0 billion yen (75 million U.S. dollars). PC exit costs decreased 6.1 billion yen year-on-year to 4.9 billion yen (41 million U.S. dollars) which includes 1.4 billion yen (11 million U.S. dollars) of restructuring charges.
Equity in net loss of affiliated companies, recorded within operating income, of 0.1 billion yen (1 million U.S. dollars) was recorded, compared to income of 1.7 billion yen in the same period of the previous fiscal year. This deterioration was mainly due to a deterioration of equity in net income (loss) for EMI Music Publishing.
The net effect of other income and expenses was an expense of 14.3 billion yen (118 million U.S. dollars), a deterioration of 13.7 billion yen year-on-year primarily due to a decrease in the gain on sales of securities investments. In the same quarter of the previous fiscal year, a 7.4 billion yen gain on the sale of Sony’s share in SKY Perfect JSAT Holdings Inc. was recorded.
Income before income taxes increased 79.5 billion yen to 167.8 billion yen (1,387 million U.S. dollars).
Income taxes: During the current quarter, Sony recorded 56.2 billion yen (464 million U.S. dollars) of income tax expense, resulting in an effective tax rate of 33.5%.
Net income attributable to Sony Corporation’s stockholders, which excludes net income attributable to noncontrolling interests, increased 63.6 billion yen year-on-year to 90.0 billion yen (744 million U.S. dollars).
Operating Performance Highlights by Business Segment
Sales increased 28.7% year-on-year (a 23% increase on a constant currency basis) to 429.0 billion yen (3,545 million U.S. dollars), primarily due to an increase in smartphone unit sales, an improvement in product mix and the favorable impact of foreign exchange rates.
Operating income increased 2.9 billion yen year-on-year to 9.3 billion yen (76 million U.S. dollars). This increase was primarily due to the above-mentioned improvement in product mix and increase in smartphone unit sales, partially offset mainly by the unfavorable impact of the appreciation of the U.S. dollar, reflecting the high ratio of U.S. dollar-denominated costs.
Game & Network Services (G&NS)
Sales increased 16.8% year-on-year (an 8% increase on a constant currency basis) to 531.5 billion yen (4,393 million U.S. dollars). This significant increase was primarily due to an increase in PS4 hardware unit sales, the favorable impact of foreign exchange rates and a significant increase in network services revenue, partially offset by a decrease in PlayStation®3 (“PS3”) hardware and PS3 software sales. Sales to external customers increased 19.7% year-on-year.
Operating income increased 15.2 billion yen year-on-year to 27.6 billion yen (228 million U.S. dollars). This significant increase was primarily due to the impact of the above-mentioned increase in sales, partially offset by the impact of the decrease in PS3 software sales, the unfavorable impact of the appreciation of the U.S. dollar reflecting the high ratio of U.S. dollar-denominated costs, as well as the recording of an 11.2 billion yen (93 million U.S. dollars) write-down of PS Vita and PS TV components. This write-down was recorded because the latest forecast of PS TV unit sales does not reach our original forecast as a result of lower than expected unit sales in the current quarter. In the same quarter of the previous fiscal year, a 6.2 billion yen write-off of certain PC software titles was recorded.
Imaging Products & Solutions (IP&S)
Sales increased 1.5% year-on-year (a 5% decrease on a constant currency basis) to 201.0 billion yen (1,661 million U.S. dollars), primarily due to the favorable impact of foreign exchange rates, partially offset by a significant decrease in unit sales of digital cameras *.
Operating income increased 10.9 billion yen year-on-year to 23.0 billion yen (190 million U.S. dollars). This significant increase was mainly due to a reduction in selling, general and administrative expenses and the favorable impact of foreign exchange rates, partially offset by the above-mentioned decrease in sales of digital cameras.
Home Entertainment & Sound (HE&S)
Sales increased 2.3% year-on-year (a 5% decrease on a constant currency basis) to 413.3 billion yen (3,416 million U.S. dollars). This increase was primarily due to the favorable impact of foreign exchange rates and a significant increase in sales of televisions, partially offset by a decrease in Audio and Video sales. Unit sales of LCD televisions increased mainly due to a significant increase in North America and Europe, partially offset by a significant decrease in Latin America.
Operating income increased 18.9 billion yen year-on-year to 25.3 billion yen (209 million U.S. dollars). This increase was primarily due to cost reductions, partially offset by the unfavorable impact of the appreciation of the U.S. dollar, reflecting the high ratio of U.S. dollar-denominated costs.
In Televisions, sales increased 10.1% year-on-year to 280.6 billion yen (2,319 million U.S. dollars). This significant increase was primarily due to the above-mentioned increase in unit sales, and the favorable impact of foreign exchange rates. Operating income* of 9.3 billion yen (77 million U.S. dollars) was recorded, compared to an operating loss of 5.0 billion yen in the same quarter of the previous fiscal year. This improvement was primarily due to cost reductions, partially offset by the unfavorable impact of the appreciation of the U.S. dollar, reflecting the high ratio of U.S. dollar-denominated costs.
Devices
Sales increased 38.6% year-on-year (a 26% increase on a constant currency basis) to 292.9 billion yen (2,421 million U.S. dollars). This significant increase was primarily due to a significant increase in sales of image sensors reflecting higher demand for mobile products, the favorable impact of foreign exchange rates, as well as a significant increase in sales of camera modules. Sales to external customers increased 47.2% year-on-year.
Operating income of 54.5 billion yen (451 million U.S. dollars) was recorded, compared to an operating loss of 23.5 billion yen in the same quarter of the previous fiscal year. This significant improvement was primarily due to the recording of a 32.1 billion yen impairment charge related to long-lived assets in the battery business in the same quarter of the previous fiscal year, the above-mentioned increase in sales of image sensors, and the favorable impact of foreign exchange rates.
Total inventory of the five Electronics segments above as of December 31, 2014 was 669.9 billion yen (5,536 million U.S. dollars), a decrease of 34.6 billion yen, or 4.9% year-on-year. Inventory decreased by 153.1 billion yen, or 18.6% compared with the level as of September 30, 2014.
Pictures
Sales decreased 7.7% year-on-year (a 20% decrease on a constant currency (U.S. dollar) basis) to 206.6 billion yen (1,707 million U.S. dollars). The significant decrease in sales on a U.S. dollar basis was primarily due to a decrease in sales for Motion Pictures and Television Productions. The decrease in Motion Pictures sales was due to significantly lower home entertainment and theatrical revenues. The decrease in home entertainment revenues was due to fewer major home entertainment releases in the current quarter as compared to the same quarter of the previous fiscal year while theatrical revenues decreased due to the stronger worldwide performance of theatrical releases in the same quarter of the previous fiscal year. The decrease in Television Productions sales was due to the same quarter of the previous fiscal year benefitting from higher home entertainment and subscription video on demand (“SVOD”) revenues for the U.S. television series Breaking Bad.
Operating income decreased 18.0 billion yen year-on-year to 6.2 billion yen (51 million U.S. dollars) primarily due to the above-mentioned decrease in Motion Pictures and Television Productions sales. The current quarter includes approximately 15 million U.S. dollars (1.8 billion yen) in investigation and remediation costs relating to a cyberattack on SPE’s network and IT infrastructure which was identified in November, 2014 (“the cyberattack”).
Music
Sales increased 13.1% year-on-year (a 3% increase on a constant currency basis) to 163.6 billion yen (1,352 million U.S. dollars) primarily due to the favorable impact of the depreciation of the yen against the U.S. dollar and an increase in Recorded Music sales. Recorded Music sales increased on a constant currency basis due to the strong performance of several releases and higher digital streaming revenues. Best-selling titles included One Direction’s Four, AC/DC’s Rock or Bust, Pink Floyd’s The Endless River, Foo Fighters’ Sonic Highways and Garth Brooks’ Man Against Machine.
Operating income increased 3.7 billion yen year-on-year to 25.4 billion yen (210 million U.S. dollars). This increase was primarily due to the favorable impact of foreign exchange rates and the above-mentioned increase in Recorded Music sales.
Financial Services
Financial services revenue increased 8.1% year-on-year to 304.9 billion yen (2,520 million U.S. dollars) primarily due to an increase in revenue at Sony Life. Revenue at Sony Life increased 8.2% year-on-year to 279.1 billion yen (2,307 million U.S. dollars) due to an increase in insurance premium revenue reflecting an increase in policy amount in force, as well as an improvement in investment performance.
Operating income increased 4.5 billion yen year-on-year to 50.9 billion yen (420 million U.S. dollars). This increase was mainly due to an increase in operating income at Sony Life. Operating income at Sony Life increased 2.9 billion yen year-on-year to 51.2 billion yen (423 million U.S. dollars) primarily due to an improvement in investment performance in the general account.
All Other
Sales decreased 46.7% year-on-year to 144.3 billion yen (1,193 million U.S. dollars). This significant decrease was primarily due to a significant decrease in sales reflecting Sony’s exit from the PC business.
Operating loss decreased 0.5 billion yen year-on-year to 14.3 billion yen (118 million U.S. dollars). Operating loss was essentially flat year-on-year primarily due to a decrease in PC operating loss, partially offset by the deterioration of operating results in the disc manufacturing business. The following table provides PC exit costs and the total PC business operating loss. In the same quarter of the previous fiscal year, an 11.0 billion yen impairment charge related to long-lived assets in the PC business was recorded in PC exit costs.
Sales for the current nine months increased 6.5% year-on-year to 6,278.2 billion yen (51,886 million U.S. dollars).
This increase was primarily due to a significant increase in sales in the G&NS, MC and Devices segments, and the favorable impact of foreign exchange rates, partially offset by a significant decrease in sales in All Other, primarily related to Sony’s exit from the PC business.
During the current nine months, the average rates of the yen were 106.9 yen against the U.S. dollar and 140.3 yen against the euro, which were 7.0% lower and 5.7% lower, respectively, as compared with the same period in the previous fiscal year. On a constant currency basis, consolidated sales increased 2%.
In the MC segment, sales increased significantly primarily due to an improvement in product mix and the favorable impact of foreign exchange rates. In the G&NS segment, sales increased significantly primarily due to increases in PS4 hardware unit sales and network services revenues. In the IP&S segment, sales decreased primarily due to a decrease in sales of digital cameras. In the HE&S segment, sales increased primarily due to a significant increase in sales of televisions and the favorable impact of foreign exchange rates. In the Devices segment, sales increased significantly mainly due to an increase in sales of image sensors for mobile devices and the favorable impact of foreign exchange rates. In the Pictures segment, sales increased due to the favorable impact of the depreciation of the yen against the U.S. dollar, partially offset by lower Television Productions sales as the same period of the previous fiscal year benefitted from higher home entertainment and SVOD revenues for the U.S.television series Breaking Bad. In the Music segment, sales increased primarily due to the favorable impact of the depreciation of the yen against the U.S. dollar and an increase in Visual Media and Platform sales. In the Financial Services segment, revenue increased primarily due to higher insurance premiums revenue and an improvement in investment performance in the general account at Sony Life.
Operating income increased 28.0 billion yen year-on-year to 166.3 billion yen (1,375 million U.S. dollars) for the current nine months. This significant increase was primarily due to a significant improvement in the operating results of the Devices, G&NS, HE&S, and IP&S segments. The operating results in the MC segment deteriorated significantly primarily due to the recording of a 176.0 billion yen (1,615 million U.S. dollars) impairment of goodwill.
Operating income during the current nine months includes a net benefit of 6.2 billion yen (51 million U.S. dollars) from insurance recoveries related to damages and losses incurred from the floods in Thailand in the fiscal year ended March 31, 2012 (“the Floods”). The same period of the previous fiscal year included a 32.1 billion yen impairment charge related to long-lived assets in the battery business in the Devices segments, a gain of 12.8 billion yen from the sale of certain shares of M3, Inc., a net benefit of 8.8 billion yen from insurance recoveries related to damages and losses incurred from the Floods and a benefit of 7.0 billion yen from the reversal of a patent royalty accrual.
In the MC segment, operating results significantly deteriorated year-on-year mainly due to the above-mentioned impairment charge recorded in this segment as well as the unfavorable impact of the appreciation of the U.S. dollar, reflecting the high ratio of U.S. dollar-denominated costs. In the G&NS segment, operating results improved significantly year-on-year primarily due to an increase in PS4 hardware and software sales. In the IP&S segment, operating income increased significantly year-on-year primarily due to a reduction in costs and an improvement in product mix reflecting a shift to high value-added models. In the HE&S segment, operating income was recorded compared to a loss in the same period of the previous fiscal year primarily due to cost reductions and an improvement in product mix reflecting a shift to high value-added models. In the Devices segment, operating results improved significantly mainly due to the recording of a 32.1 billion yen impairment charge related to long-lived assets in the battery business in the same period of the previous fiscal year and the increase in sales of image sensors. In the Pictures segment, operating income increased primarily due to the stronger performance of the current fiscal year’s film release slate as the previous fiscal year reflected the theatrical underperformance of White House Down and After Earth, partially offset by the gain recognized on the sale of SPE’s music publishing catalog in the same period of the previous fiscal year, higher programming costs for Sony’s television networks in India, and the above mentioned decrease in Television Productions sales. In the Music segment, operating income increased primarily due to the favorable impact of foreign exchange rates and a shift in Recorded Music to digital streaming revenues. In the Financial Services segment, operating income increased primarily due to an
improvement in investment performance in the general account at Sony Life.
Restructuring charges, recorded as operating expenses, amounted to 33.7 billion yen (279 million U.S. dollars) for the current nine months compared to 26.1 billion yen for the same period of the previous fiscal year.
Equity in net income of affiliated companies, recorded within operating income, was 3.7 billion yen (31 million U.S. dollars), compared to a loss of 0.8 billion yen in the same period of the previous fiscal year. This improvement was mainly due to an improvement of equity in net income (loss) for Intertrust Technologies Corporation.
The net effect of other income and expenses was an expense of 20.1 billion yen (166 million U.S. dollars), compared to income of 0.5 billion yen in the same period of the previous fiscal year. This deterioration was mainly due to an increase in foreign exchange loss, net and a decrease in the gain on sales of securities investments.
In the same period of the previous fiscal year, a 7.4 billion yen gain on the sale of Sony’s share in SKY Perfect JSAT Holdings Inc. was recorded.
Income before income taxes increased by 7.4 billion yen year-on-year to 146.3 billion yen (1,209 million U.S. dollars).
Income taxes: During the current nine months, Sony recorded 112.3 billion yen (928 million U.S. dollars) of income tax expense, and Sony’s effective tax rate exceeded the Japanese statutory tax rate. This is primarily due to nondeductible goodwill impairments recorded during the current nine months.
Net loss attributable to Sony Corporation’s stockholders for the current nine months was 19.2 billion yen (159 million U.S. dollars) compared to income of 9.9 billion yen in the same period of the previous fiscal year.
Cash Flows
Operating Activities: During the current nine months, there was a net cash inflow of 382.9 billion yen (3,165 million U.S. dollars) from operating activities, an increase of 139.4 billion yen, or 57.3% year-on-year.
For all segments excluding the Financial Services segment, there was a net cash inflow of 112.5 billion yen (931 million U.S. dollars) for the current nine months, compared to a net cash outflow of 10.8 billion yen in the same period of the previous fiscal year. The net cash inflow was primarily due to the positive impact of a year-on-year 8 improvement in net income after taking into account non-cash adjustments (including depreciation and amortization, other operating expenses, net, deferred income taxes and equity in net loss of affiliated companies).
In addition, there was the positive impact of a decrease in inventories, compared to an increase in the same period of the previous fiscal year, and a smaller increase in other receivables from component assembly companies, included in other current assets, partially offset by the negative impact of a smaller year-on-year increase in notes and accounts payable, trade.
The Financial Services segment had a net cash inflow of 278.2 billion yen (2,300 million U.S. dollars), an increase of 17.2 billion yen, or 6.6% year-on-year. This increase was primarily due to an increase of insurance premium revenue in line with a growing policy amount in force at Sony Life.
Investing Activities: During the current nine months, Sony used 363.8 billion yen (3,007 million U.S. dollars) of net cash in investing activities, a decrease of 73.0 billion yen, or 16.7% year-on-year.
For all segments excluding the Financial Services segment, there was a 46.7 billion yen (386 million U.S. dollars) net cash outflow, an increase of 0.5 billion yen, or 1.2% year-on-year. This increase was primarily due to a year-on-year decrease in proceeds from the sales of fixed assets and investment securities. Sales of fixed assets and investment securities in the current nine months included the intersegment sale of Sony Corporation’s headquarters’ land to Sony Life, the sale of certain buildings and premises at the Gotenyama Technology Center and the sale of Sony’s shares in SQUARE ENIX HOLDINGS CO., LTD.
The Financial Services segment used 317.1 billion yen (2,621 million U.S. dollars) of net cash, a decrease of 73.6 billion yen, or 18.8% year-on-year. This decrease was mainly due to a decrease in payments for investments and advances at Sony Life and a year-on-year increase in proceeds from the sale of investment securities. This decrease was partially offset by the negative impact of the intersegment purchase of Sony Corporation’s headquarters’ land by Sony Life, which is eliminated in the consolidated financial statements.
In all segments excluding the Financial Services segment, net cash generated in operating and investing activities combined *1 for the current nine months was 65.9 billion yen (544 million U.S. dollars), a 122.8 billion yen improvement from cash used in the same period of the previous fiscal year.
Financing Activities: During the current nine months, 184.6 billion yen (1,525 million U.S. dollars) of net cash and cash equivalents was used in financing activities, compared to 151.0 billion yen of net cash and cash equivalents provided in the same period of the previous fiscal year.
For all segments excluding the Financial Services segment, there was a 281.5 billion yen (2,327 million U.S. dollars) net cash outflow, an increase of 256.8 billion yen, or 1,041% year-on-year. This increase was primarily due to an issuance of straight bonds for Japanese retail investors in the same period of the previous fiscal year and a year-on-year increase in repayments of long-term debt, net.
In the Financial Services segment, financing activities provided 89.1 billion yen (736 million U.S. dollars) of net cash, a decrease of 79.9 billion yen, or 47.3% year-on-year. This decrease was mainly due to a smaller increase in customer deposits at Sony Life, compared to the figure in the same period of the previous fiscal year.
Total Cash and Cash Equivalents: Accounting for the above factors and the effect of fluctuations in foreign exchange rates, the total outstanding balance of cash and cash equivalents at December 31, 2014 was 933.5 billion yen (7,715 million U.S. dollars). Cash and cash equivalents of all segments excluding the Financial Services segment was 642.9 billion yen (5,314 million U.S. dollars) at December 31, 2014, an increase of 34.6 billion yen, or 5.7% compared with the balance as of December 31, 2013, and a decrease of 163.2 billion yen, or 20.2% compared with the balance as of March 31, 2014. Sony believes that it continues to maintain sufficient liquidity through access to a total, translated into yen, of 775.0 billion yen (6,405 million U.S. dollars) of unused committed lines of credit with financial institutions in addition to the cash and cash equivalents balance at December 31, 2014.
Within the Financial Services segment, the outstanding balance of cash and cash equivalents was 290.6 billion yen (2,401 million U.S. dollars) at December 31, 2014, an increase of 49.6 billion yen, or 20.6% compared with the balance as of December 31, 2013, and an increase of 50.2 billion yen, or 20.9% compared with the balance as of March 31, 2014.
Mobile Communications
Sales are expected to be below the October forecast primarily due to an expected decrease in unit sales of smartphones mainly in the Asia Pacific region, partially offset by the favorable impact of foreign exchange rates.
Operating loss is expected to be larger than the October forecast primarily due to the unfavorable impact of the appreciation of the U.S. dollar, reflecting the high ratio of U.S. dollar-denominated costs in the segment and the impact of the above-mentioned decrease in sales, partially offset by an expectation that average selling prices will be maintained longer than anticipated at the time of the October forecast.
Game & Network Services
Sales are expected to be higher than the October forecast primarily due to an expected increase in unit sales of the PS4, an expected increase in network services revenue and the favorable impact of foreign exchange rates.
Operating income is expected to be above the October forecast primarily due to the above-mentioned increase in sales, partially offset by the unfavorable impact of the appreciation of the U.S. dollar, reflecting the high ratio of U.S. dollar-denominated costs in the segment.
Imaging Products & Solutions
Sales are expected to remain unchanged from the October forecast. Operating income is expected to be above the October forecast primarily due to the favorable impact of foreign exchange rates and cost reductions.
Home Entertainment & Sound
Sales are expected to be higher than the October forecast mainly due to the favorable impact of foreign exchange rates. Operating income is expected to be higher than the October forecast mainly due to cost reductions in Audio and Video.
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