Sony Corporation Form 20-F: Fiscal year ended March 31, 2016
Period clarification: The supplied filing is an annual report for the fiscal year ended March 31, 2016, not a standalone 2015 Q4 filing. Financial statements are prepared under U.S. GAAP and amounts below are in yen unless stated otherwise.
Business context and reporting period
Sony operates across consumer and professional electronics, games and network services, pictures, music, and Japanese financial services. It realigned segment reporting during FY2016; comparative segment figures were reclassified to the new presentation. The Financial Services segment is large and has distinct cash flows, so Sony also reports selected measures excluding that segment.
Financial performance and liquidity
| Metric | FY ended March 31, 2016 | Change from FY2015 |
|---|---|---|
| Sales and operating revenue | ¥8,105.7 billion | Down 1.3% |
| Operating income | ¥294.2 billion; 3.6% margin | Up ¥225.6 billion |
| Income before income taxes | ¥304.5 billion | Up from ¥39.7 billion |
| Net income attributable to Sony Corporation stockholders | ¥147.8 billion; 1.8% of revenue | Turned from a ¥126.0 billion loss |
| Operating cash flow | ¥749.1 billion | Down ¥5.6 billion |
| Investing cash flow | Used ¥1,030.4 billion | Outflow increased ¥390.8 billion |
| Financing cash flow | Provided ¥380.1 billion | Versus ¥263.2 billion used |
| Cash and cash equivalents at year-end | ¥983.6 billion consolidated; ¥749.9 billion excluding Financial Services | Ex-Financial Services cash up ¥8.0 billion |
| Interest-bearing debt | ¥893.5 billion | Down ¥40.1 billion |
| Sony stockholders’ equity | ¥2,463.3 billion; 14.8% of total assets | Up ¥146.3 billion |
Consolidated operating and investing cash flows combined were a ¥281.3 billion outflow. Excluding Financial Services, the corresponding measure was a ¥72.1 billion outflow, versus ¥200.0 billion generated in FY2015. Sony said this non-GAAP measure is supplemental and does not deduct required debt principal payments. Ex-Financial Services working capital was negative ¥634.0 billion. Sony reported ¥522.5 billion of unused committed credit lines and no outstanding commercial paper under its programs at year-end.
Operating expense ratios improved: cost of sales was 73.4% of relevant sales, compared with 73.9%; SGA was 24.0%, compared with 25.4%. R&D was ¥468.2 billion, or 6.7% of relevant sales. FY2016 capital expenditures were ¥468.9 billion.
Material changes versus the prior comparable period
- Operating income improved sharply, with better results in Mobile Communications, Games, IP&S, HE&S, Music and All Other; lower restructuring costs and the absence of FY2015’s ¥176.0 billion Mobile goodwill impairment also contributed.
- Mobile Communications sales fell 20.0% to ¥1,127.5 billion and the segment recorded a ¥61.4 billion operating loss. Smartphone shipments fell 36.3% to 24.9 million as Sony prioritized profitability over scale.
- Game & Network Services sales rose 11.8% to ¥1,551.9 billion and operating income increased to ¥88.7 billion, supported by PS4 software, network revenue and hardware cost reductions.
- Devices swung from ¥89.0 billion operating income to a ¥28.6 billion loss, including ¥90.2 billion of impairment charges for camera-module and battery assets. Semiconductor sales increased, but component sales declined.
- Financial Services operating income fell 19.0% to ¥156.5 billion, primarily as lower interest rates and weaker equity markets increased policy-reserve provisions and deferred acquisition cost amortization at Sony Life.
- Pictures operating income fell to ¥38.5 billion, while Music operating income rose to ¥87.3 billion. HE&S sales declined, but operating income increased to ¥50.6 billion on cost reductions and improved product mix.
Outlook, commentary, risks and unusual items
- Targets and outlook: Sony’s mid-range plan targets ROE above 10% and operating income above ¥500 billion for the fiscal year ending March 31, 2018. For FY2017, Sony expected R&D costs of about ¥460 billion, capital expenditures of about ¥355 billion and restructuring charges of about ¥12 billion. These are forward-looking targets, not guarantees.
- Investment plans: Sony expected FY2017 semiconductor investment of about ¥120 billion, including ¥70 billion for image-sensor capacity. Management also said it revised capacity plans in response to slower smartphone-market growth and would align investment with customer demand.
- Earthquake impact: April 2016 Kumamoto earthquakes disrupted a key semiconductor site. Sony expected lower Devices and IP&S sales in FY2017 and said the financial impact, including potential asset and inventory losses and insurance recoveries, was still being evaluated. In May 2016 it also decided to stop developing and manufacturing certain camera modules, with related costs under evaluation.
- Notable gains and charges: FY2016 other operating expense included ¥59.6 billion of camera-module impairment and ¥30.6 billion of battery impairment. Other income included a ¥46.8 billion gain on selling Olympus shares. Music recorded an ¥18.1 billion gain from remeasuring its prior interest in The Orchard; a logistics-business sale generated a ¥12.3 billion gain. FY2015 included the ¥176.0 billion Mobile goodwill impairment. Restructuring charges were ¥38.3 billion in FY2016, down from ¥98.0 billion.
- Capital and transactions: In July and August 2015, Sony raised about ¥421.7 billion through new shares and convertible bonds. The filing states proceeds were intended mainly for Devices capital expenditures and R&D, with part of the convertible-bond proceeds for debt repayment. Sony agreed to acquire the Estate of Michael Jackson’s 50% interest in Sony/ATV for $750 million, subject to closing conditions and regulatory approval.
- Contingencies and risk factors: Sony appealed a €31 million European Commission optical-disc-drive antitrust fine; related proceedings and a separate battery-sector investigation and lawsuits remained, with possible losses not estimable. A customs investigation involving HE&S products also remained unquantified. Other key risks include intense competition and price pressure, foreign exchange, image-sensor demand and capacity utilization, financial-services exposure to low rates and market movements, pensions, cybersecurity, disasters, litigation and tax-asset realizability.
- Controls and dividends: Management and the independent auditor reported effective internal control over financial reporting as of March 31, 2016. The FY2016 annual dividend was ¥20 per share, including a ¥10 year-end dividend approved in April 2016.
Most important facts for an investor to verify
- How much of the earnings turnaround reflects sustainable segment improvement versus reduced restructuring charges, prior-year impairment comparisons, and one-off gains?
- Whether Sony’s FY2017 outlook and FY2018 operating-income and ROE targets remain achievable after the Kumamoto disruption and camera-module exit.
- Whether image-sensor demand and utilization support the planned capacity spending, and whether the Devices impairments signal further asset or earnings risk.
- How much liquidity is practically available to the non-financial businesses, given their negative working capital and negative FY2016 operating-plus-investing cash flow.
- The eventual cost and timing of the Sony/ATV acquisition, antitrust and customs proceedings, and the earthquake-related losses and insurance recoveries.
- The sensitivity of Financial Services profitability and pension funding to low interest rates, equity-market performance and discount-rate changes.