Sony Corporation (Sony Group) — FY2014 Form 20-F
Business context and reporting period
This is an annual report, not a quarterly filing. It covers the fiscal year ended March 31, 2014, with comparisons primarily to FY2013. Sony reports under U.S. GAAP. Its businesses span electronics, gaming, pictures, music and financial services. Amounts below are in yen unless indicated otherwise; “billion” and “trillion” are used for readability.
Financial performance and position
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Sales and operating revenue | ¥7.767tn | ¥6.796tn | +14.3%; approximately -2% on a constant-currency basis |
| Operating income | ¥26.5bn | ¥226.5bn | -88.3%; approximately ¥0.3bn operating margin on reported revenue |
| Income before taxes | ¥25.7bn | ¥242.1bn | -89.4% |
| Net income (loss) attributable to Sony stockholders | (¥128.4bn) | ¥41.5bn | Basic loss per share: ¥124.99 |
| Net cash from operating activities | ¥664.1bn | ¥476.2bn | +39.5% |
| Net cash used in investing activities | ¥710.5bn | ¥705.3bn | Cash outflow remained substantial |
| Cash and cash equivalents | ¥1,046.5bn | ¥826.4bn | Includes Financial Services; excluding that segment, cash was ¥806.1bn |
| Total interest-bearing debt | ¥1,294.4bn | ¥1,182.6bn | Up 9.5%; excluding Financial Services, ¥1,247.0bn |
| Total assets | ¥15.334tn | ¥14.211tn | +7.9% |
| Stockholders’ equity | ¥2.258tn | ¥2.192tn | Equity-to-assets ratio declined to 14.7% from 15.4% |
| Capital expenditures | ¥164.6bn | ¥188.6bn | Down 12.7% |
Current liabilities exceeded current assets; reported net working capital was negative ¥578.7bn. Sony cited ¥733.3bn of unused committed credit lines at March 31, 2014. Consolidated liquidity and cash flow figures include the Financial Services segment, whose funding is managed separately. For Sony excluding Financial Services, operating and investing cash flows combined were positive ¥162.9bn, versus an ¥11.3bn outflow in FY2013.
Cost of sales rose 14.6% to ¥5.140tn, while its ratio to relevant sales improved to 75.8% from 77.4%. SG&A rose 18.6% to ¥1.729tn; its ratio increased to 25.5% from 25.1%. R&D expense decreased 1.6% to ¥466.0bn.
Material changes and segment results
- Revenue growth reflected yen depreciation, PS4 launch and smartphone growth. The yen’s average rate weakened to ¥100.2 per U.S. dollar and ¥134.4 per euro; Sony estimated foreign exchange added materially to reported sales and operating results.
- Mobile Products & Communications revenue rose 29.6% to ¥1.630tn; operating loss narrowed to ¥75.0bn. Smartphone unit sales increased 18.5% to 39.1 million, while PC unit sales fell 26.3% to 5.6 million.
- Game revenue rose 38.5% to ¥979.2bn, primarily on PS4 launch and currency effects, but the segment moved from ¥1.7bn operating income to an ¥8.1bn loss, reflecting launch costs and a software write-off.
- Home Entertainment & Sound revenue rose 17.5% to ¥1.169tn, and operating loss narrowed to ¥25.5bn. Television revenue increased 29.7%, with improved product mix and cost reductions contributing to lower losses.
- Imaging Products & Solutions revenue decreased 2.0% to ¥741.2bn, but operating income improved to ¥26.3bn. Compact camera and video camera markets contracted.
- Devices revenue fell 6.4% to ¥794.2bn and the segment recorded a ¥13.0bn operating loss, versus ¥43.9bn income, due mainly to a battery-business impairment and lower insurance-recovery benefits.
- Pictures revenue increased 13.2% to ¥829.6bn and operating income reached ¥51.6bn. On a U.S.-dollar basis, revenue fell about 6%, with weaker film results partly offset by television production and media networks.
- Music revenue increased 13.9% to ¥503.3bn and operating income rose to ¥50.2bn. On a constant-currency basis, revenue was essentially flat.
- Financial Services revenue declined 0.9% to ¥993.8bn, while operating income rose 19.7% to ¥170.3bn. Sony Life revenue decreased, partly offset by improved results at Sony Bank.
Outlook, management commentary, risks and unusual items
- Sony forecast approximately ¥80bn of restructuring charges and ¥180bn of capital expenditures for FY2015. R&D expense was expected to rise 4.1% to ¥485bn.
- Management targeted more than ¥100bn in annual fixed-cost reductions from FY2016 compared with FY2014. Sony aimed to return the TV business to profitability in FY2015, complete its PC-business exit and establish a separate TV company.
- In May 2014, Sony announced a corporate strategy focused on reforming electronics and strengthening gaming/network services, mobile, imaging, entertainment and financial services. Plans included expanding PS4 and network services, bolstering image-sensor capacity and reducing Pictures costs by US$300m by March 2016.
- FY2014 results included ¥80.6bn of restructuring charges as described in management’s discussion, including non-cash depreciation related to restructured assets; the financial statement note separately reports ¥75.6bn of net restructuring charges. Investors should reconcile the differing presentations.
- Other operating expense included ¥86.0bn of impairment charges: ¥72.7bn for long-lived assets and ¥13.3bn for goodwill. Significant items included battery, disc manufacturing and PC assets. PC-related losses totaled ¥91.7bn, including exit and restructuring costs.
- FY2013 benefited from substantial asset-sale and remeasurement gains, including M3 and real estate transactions; the smaller contribution from such gains in FY2014 was a major reason operating income fell. FY2014 also included a ¥10.3bn gain from selling a Pictures music-publishing catalog and a ¥5.6bn gain from selling Gracenote.
- Key risks include intense price and technology competition, execution of restructuring, consumer demand and product transitions, foreign exchange exposure, component supply and inventory management, market access and credit ratings, financial-services investment and insurance risks, cybersecurity, legal and regulatory proceedings, and disasters.
- Pending antitrust investigations and purchaser litigation relating to batteries and optical disk drives remained unresolved; Sony said potential losses could not be estimated. Cyber-attack-related inquiries and lawsuits also remained, with potential losses not estimable. Sony reported no significant change since the annual financial statements.
- Subsequent developments disclosed included a May 2014 agreement to sell the PC business, targeted to close July 1, 2014, and an expected ¥14.8bn gain from an April 2014 property sale.
- The board approved a FY2014 year-end dividend of ¥12.5 per share; together with the interim dividend, the annual dividend was ¥25 per share. The auditor expressed an unqualified opinion and management reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether the FY2015 TV profitability target and planned PC exit were achieved, and whether restructuring delivered the stated fixed-cost savings.
- How much of reported sales growth and segment improvement came from yen depreciation versus underlying volume, pricing and margins.
- Whether smartphone growth and PS4 economics translated into sustainable segment profitability, particularly given continuing PC losses and Game launch costs.
- Whether cash generation excluding Financial Services can fund investment, debt repayments and dividends; verify committed-line availability, maturities and debt ratings.
- Whether further impairments, restructuring payments or tax valuation allowances arise, and the resolution or financial impact of pending litigation and investigations.
- Whether the filing’s ¥80.6bn restructuring figure and ¥75.6bn note figure reflect different definitions or classifications.