TOKYO, Oct. 28, 2004 (PRIMEZONE) -- Sony Corporation today announced its consolidated results for the second quarter ended September 30, 2004 (July 1, 2004 to September 30, 2004).
(Billions of yen, millions of U.S. dollars, except per share
amounts)
Second quarter ended September 30
2003 2004 Change in 2004*
Yen
Sales and operating Y1,797.0 Y1,702.3 -5.3% $15,336
revenue
Operating income 33.2 43.4 +30.6 391
Income before 44.1 63.3 +43.6 570
income taxes
Equity in net 2.9 6.1 +109.6 55
income of
affiliated companies
Net income 32.9 53.2 +61.6 479
Net income per
share of common
stock
- Basic Y35.69 Y57.50 +61.1% $0.52
- Diluted 33.48 53.76 +60.6 0.48
* U.S. dollar amounts have been translated from yen, for convenience only, at the rate of Y111=U.S.$1, the approximate Tokyo foreign exchange market rate as of September 30, 2004.
Unless otherwise specified, all amounts are on the basis of Generally Accepted Accounting Principles in the U.S. ("U.S. GAAP").
Consolidated Results for the Second Quarter Ended September 30, 2004
Sales and operating revenue ("sales") decreased 5.3% compared with the same quarter of the previous fiscal year; on a local currency basis sales decreased 2%. (For all references herein to results on a local currency basis, see Note I.)
In the Electronics segment, although sales to outside customers increased 0.7%, overall sales decreased 2.5% due to a significant decline in intersegment sales to the Game segment resulting from the outsourcing of PlayStation 2 ("PS2") production to third parties in China. With respect to major products in the Electronics segment, as in the previous quarter of the current fiscal year, sales of flat panel and LCD rear projection televisions and digital still cameras increased, while sales of portable audio and CRT televisions decreased. Although there was an increase in sales of software, sales declined in the Game segment due to lower sales of hardware. In the Music segment, sales decreased because Sony BMG Music Entertainment ("Sony BMG"), a recorded music business joint venture formed with Bertelsmann AG, began to be accounted for by the equity method from August 2004 (please refer to note.) In the Pictures segment, there was an increase in sales mainly due to the contribution of theatrical revenues from Spider-Man 2. In the Financial Services segment, revenue decreased mainly due to a decrease in revenue at Sony Life Insurance Co., Ltd. ("Sony Life").
Operating income increased 30.6% (a 62% increase on a local currency basis) compared with the same quarter of the previous fiscal year.
In the Electronics segment, operating income declined mainly due to a deterioration in the cost of sales ratio, the appreciation of the yen and an increase in restructuring charges. In the Game segment, although there was an increase in software sales revenue, a very small operating loss was recorded due to lower hardware sales. In the Pictures segment, operating income was recorded, compared to an operating loss in the previous fiscal year, due to the strong theatrical performance from Spider-Man 2 and higher revenue from home entertainment releases. In the Financial Services segment, operating income increased due to higher operating income at Sony Life.
Restructuring charges, which were recorded as operating expenses, for the second quarter amounted to Y18.8 billion ($169 million) compared to Y9.7 billion in the same quarter of the previous fiscal year. In the Electronics segment, restructuring charges were Y15.6 billion ($141 million) compared to Y6.3 billion in the same quarter of the previous fiscal year.
Income before income taxes increased 43.6% compared to the same quarter of the previous fiscal year. An improvement in the net effect of other income and other expenses was mainly the result of the recognition of a gain of Y9.0 billion ($81 million) from a change in interest from Monex Inc., an equity affiliate of Sony, following its business integration, by way of a share transfer, with Nikko Beans, Inc., and total gains of Y4.2 billion ($38 million) from the sale of stock and a change in interest in a subsidiary resulting from the initial public offering of So-net M3 Inc., a consolidated subsidiary of Sony Communications Network Corporation.
The effective tax rate during the quarter was 25.6% as compared to 23.4% for the same quarter of the previous fiscal year. The effective tax rate was lower than the statutory tax rate in Japan during the quarter primarily due to the use of foreign tax credit carryforwards against taxable income recorded in the U.S.
Equity in net income of affiliated companies of Y6.1 billion ($55 million) was recorded, a 109.6% increase from the same quarter of the previous fiscal year. Sony Ericsson Mobile Communications AB ("Sony Ericsson") contributed Y6.0 billion ($54 million) to equity in net income, a 50% increase from the same quarter of the previous year. In addition, equity in net income of affiliated companies for the second quarter of the current fiscal year reflects the two months of operating results for Sony BMG since its establishment. Mainly due to restructuring charges, an equity in net loss of Y1.4 billion ($12 million) was recorded from Sony BMG.
Net income, as a result, increased 61.6% compared to the same quarter of the previous fiscal year.
Remarks by Nobuyuki Idei, Chairman and Group CEO of Sony Corporation
We achieved increased operating income for our consolidated results for this second quarter, primarily due to a significant improvement in the profitability of our Pictures business. Net income also increased significantly, partly due to the contribution of equity in net income of affiliated companies, primarily that from Sony Ericsson.
With regard to the Electronics segment, in anticipation of the year-end sales season we are introducing competitive new products in such key categories as digital AV products, including our new line-up of flat panel televisions that are highly differentiated from those of our competitors. Within the Music segment, we saw the establishment in August of Sony BMG. This joint venture has already embarked on a process of restructuring, with the aim of improving profitability through enhanced management efficiencies and increased business size. Within the Pictures segment as well, Sony and our four consortium partners have entered into a definitive agreement for the purchase of Metro-Goldwyn-Mayer Inc. ("MGM").
Looking forward, we are working towards improved profitability by focusing strategic resources in key business areas, as well as making use of alliances with other companies.
Operating Performance Highlights by Business Segment
Note: As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. The newly formed company, known as Sony BMG, is 50% owned by each parent company. Under U.S. GAAP, Sony BMG is accounted for by Sony using the equity method and, since August 1, 2004, 50% of net profits or losses of this business have been included under "Equity in net income (loss) of affiliated companies."
In connection with the establishment of this joint venture, Sony's non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment to recognize the new management reporting structure whereby Sony's Electronics segment has now assumed responsibility for these businesses. Results for the same quarter of the previous fiscal year in the Electronics and Music segments have been restated to account for this reclassification. In the Music segment, results for the second quarter of this fiscal year only include the results of Sony Music Entertainment Inc.'s ("SMEI") recorded music business for the month of July 2004, and the full quarter results of SMEI's music publishing business and Sony Music Entertainment (Japan) Inc. ("SMEJ"). However, results for the second quarter of the previous fiscal year in the Music segment include the consolidated results for SMEI's recorded music business for all three months of the quarter, as well as the full quarter results of SMEI's publishing business and SMEJ.
Electronics
(Billions of yen, millions of U.S. dollars)
Second quarter ended September 30
2003 2004 Change in 2004
Yen
Sales and operating Y1,243.8 Y1,213.3 -2.5% $10,931
revenue
Operating income 43.2 7.2 -83.4 65
Unless otherwise specified, all amounts are on a U.S. GAAP basis.
Sales decreased 2.5% (1% increase on a local currency basis) due to a significant decline in intersegment sales to the Game segment primarily due to the outsourcing of PS2 game console production to third parties in China. On the other hand, sales to outside customers increased 0.7% compared to the same quarter of the previous fiscal year. There was an increase in sales of several products within the Electronics segment including digital still cameras and flat panel televisions, which both experienced increased unit sales in all geographic areas due to an expanding market; and LCD rear projection televisions, which saw increased unit sales especially in the U.S. However, CRT televisions, faced with a shift in demand towards flat panel televisions, experienced a decline in sales, as did portable audio due to intense competition.
Operating income decreased by Y36.0 billion, or 83.4% compared with the same quarter of the previous fiscal year. Although sales to outside customers increased, operating income decreased due to a deterioration in the cost of sales ratio as a result of falling prices, the appreciation of the yen, and an increase in restructuring charges. In addition, the effect of the reversal of certain previously provided patent related reserves in the same quarter of the previous fiscal year contributed to the decrease in operating income. With respect to products within the Electronics segment, the decrease in sales of portable audio and the decline in unit prices of DVD recorders, video cameras and flat panel televisions contributed to the decrease in operating income.
Inventory, as of September 30, 2004, was Y688.5 billion ($6,203 million), a Y126.4 billion, or 22.5%, increase compared with the level as of September 30, 2003 and a Y81.6 billion, or 13.4%, increase compared with the level as of June 30, 2004.
Note: In association with the business integration of Sony Group's semiconductor manufacturing businesses, it was decided to account for semiconductor manufacturing operations inventory, which was previously recorded in the Game segment, within the Electronics segment as of the quarter beginning July 1, 2004. (Regarding the integration of Sony Group's semiconductor manufacturing operations, please refer to note 6.)
Game
(Billions of yen, millions of U.S. dollars)
Second quarter ended September 30
2003 2004 Change in Yen 2004
Sales and operating Y161.3 Y119.6 -25.8% $1,078
revenue
Operating income (loss) 2.2 (0.0) - (0)
Unless otherwise specified, all amounts are on a U.S. GAAP basis.
Sales decreased 25.8% compared with the same quarter of the previous fiscal year (a 25% decrease on a local currency basis) due to a decrease in sales of hardware, despite an increase in sales of software.
During the current quarter, in preparation for the launch of the new PS2 model, a strategic curtailment of production shipments of the current model, with a reduction in inventory of components, caused production shipments and inventory for the PS2 to significantly decrease when compared to the same quarter of the previous fiscal year.
Hardware: In addition to a decline of PS2 unit sales in Japan, the U.S. and Europe as a result of the aforementioned reason, strategic price reductions of the PS2 in Japan, the U.S. and Europe resulted in a decline in hardware sales.
Software: Although unit sales of and revenue from PlayStation software decreased, this was more than offset by an increase in the unit sales and revenue of PS2 software, resulting in an overall increase in software sales. Although software sales revenue decreased in Japan, revenue in the U.S. and Europe increased.
A very small operating loss was recorded, compared to operating income of Y2.2 billion in the same quarter of the previous fiscal year, mainly due to a decrease in hardware sales, despite an increase in software sales revenue.
Worldwide hardware production shipments:*
--- PS2: 1.99 million units (a decrease of 6.79 million units) --- PS one: 0.60 million units (a decrease of 0.36 million units)
Worldwide software production shipments:*
--- PS2: 56 million units (an increase of 12 million units) --- PlayStation: 3 million units (a decrease of 7 million units)
*Production shipment units of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
Inventory, as of September 30, 2004, was Y53.4 billion ($481 million), a Y140.2 billion, or 72.4%, decrease compared with the level as of September 30, 2003 and a Y58.1 billion, or 52.1%, decrease compared with the level as of June 30, 2004. (Regarding inventory, please refer to the note in the above Electronics segment.)
Music
(Billions of yen, millions of U.S. dollars)
Second quarter ended September 30
2003 2004 Change in Yen 2004
Sales and operating Y99.8 Y58.4 -41.5% $526
revenue
Operating income (5.9) 2.2 - 20
(loss)
The amounts presented above are the sum of the yen-translated results of SMEI, a U.S. based operation which aggregates the results of its worldwide subsidiaries on a U.S. dollar basis, and the results of SMEJ, a Japan based operation which aggregates results in yen. In addition, please refer to the note at the top of page 3 regarding the establishment of Sony BMG.
Sales decreased 41.5% compared with the same quarter of the previous fiscal year. Of the Music segment's sales, 38% were generated by SMEI, and 62% were generated by SMEJ. As noted above, due to the establishment of the Sony BMG joint venture, recorded music sales at SMEI in this year's second quarter include only the month of July 2004 as compared to a full three months in the same quarter of the previous fiscal year. Therefore, SMEI's results are not comparable with results in prior quarters.
SMEJ: Sales increased 8% compared with the same quarter of the previous fiscal year mainly due to increased album and singles sales. Best selling albums during the quarter included Porno Graffitti's PORNO GRAFFITTI BEST BLUE'S and PORNO GRAFFITTI BEST RED'S.
Operating income of Y2.2 billion ($20 million) was recorded during the quarter. Although both SMEI and SMEJ recorded improved operating results compared to the same quarter of the previous fiscal year, as noted above, SMEI's results are not comparable with results in prior quarters.
SMEJ: Operating income increased compared to the same quarter of the previous fiscal year mainly due to the higher sales noted above and lower selling, general and administrative expenses resulting from reduced advertising and promotion expenses and personnel costs.
Pictures
(Billions of yen, millions of U.S. dollars)
Second quarter ended September 30
2003 2004 Change in 2004
Yen
Sales and operating Y187.4 Y191.7 + 2.3% $1,727
revenue
Operating income (loss) (4.6) 27.4 - 247
The results presented above are a yen-translation of the results of Sony Pictures Entertainment ("SPE"), a U.S. based operation which aggregates the results of its worldwide subsidiaries on a U.S. dollar basis. Management analyzes the results of SPE in U.S. dollars, so discussion of certain portions of its results are specified as being on "a U.S. dollar basis."
Sales increased 2.3% compared with the same quarter of the previous fiscal year (9% increase on a U.S. dollar basis). Sales, on a U.S. dollar basis, increased primarily due to higher theatrical, home entertainment and pay television revenues from motion picture product. Led by the excellent box office performance of Spider-Man 2, the current quarter's theatrical revenues were higher, despite fewer films being released in the current fiscal year's second quarter. Home entertainment revenues benefited from the films Hellboy and 13 Going on 30 while pay television benefited from the prior year titles Bad Boys II and S.W.A.T. Revenues from television product declined slightly as higher DVD revenues from television library product were offset by the absence of a large television syndication sale, similar to last year's second quarter syndication sale of The King of Queens.
Operating income of Y27.4 billion ($247 million) was recorded compared with an operating loss of Y4.6 billion in the same quarter of the previous fiscal year, an improvement of Y32 billion year-on-year. The current quarter received a substantial contribution from the strong results of Spider-Man 2 and lower marketing costs associated with the smaller film slate compared with the same quarter of the previous fiscal year, while results from the same quarter of the previous fiscal year included losses on certain films, most notably Gigli. The contribution from home entertainment and pay television revenues discussed above also contributed to the current quarter's operating income performance, offset slightly by the decrease in revenues from television product.
During the quarter, a consortium led by Sony Corporation of America ("SCA") and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, together with MGM, announced that they had entered into a definitive agreement under which the investor group will acquire MGM for $12.00 in cash per MGM share, plus the assumption of MGM's approximately $2.0 billion in debt for a total purchase price of approximately $4.9 billion. SCA will invest approximately $300 million and will be a minority investor. As part of this transaction, SPE will co-finance and produce new motion pictures with MGM as well as distribute MGM's existing film and television content through SPE's global distribution channels. Following the close of the transaction, MGM will continue to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles and will be accounted for by Sony under the equity method. The acquisition is subject to MGM shareholder approval as well as regulatory approvals.
Financial Services
(Billions of yen, millions of U.S. dollars)
Second quarter ended September 30
2003 2004 Change in Yen 2004
Financial Services Y154.4 Y125.9 -18.5% $1,134
revenue
Operating income 11.3 14.9 +32.2 134
Unless otherwise specified, all amounts are on a U.S. GAAP basis.
Financial Services revenue decreased 18.5% to Y125.9 billion ($1,134 million) compared with the same quarter of the previous fiscal year, mainly due to a decrease in revenue at Sony Life. Revenue at Sony Life decreased by Y27.9 billion or 20.9% to Y105.9 billion ($954 million) compared with the same quarter of the previous fiscal year*. As of the third quarter beginning October 1, 2003, the method of recognizing insurance premiums received on certain products at Sony Life was changed from being recorded as revenues to being offset against the related provision for future insurance policy benefits. This change in revenue recognition method, which led to a decrease in revenue from insurance premiums, coupled with a deterioration in valuation gains and losses from investments, resulted in a decrease of revenue at Sony Life.
Operating income increased by Y3.6 billion or 32.2% to Y14.9 billion ($134 million) compared with the same quarter of the previous fiscal year, mainly due to the losses recorded in the same quarter of the previous fiscal year by Sony Finance International Inc. associated with reorganization proceedings commenced by Crosswave Communications Inc. under the Corporate Reorganization Law of Japan during that quarter, and due to an increase in operating income at Sony Life. Despite a deterioration in valuation gains and losses from investments in the general account, operating income at Sony Life increased by Y1.7 billion or 10.6% to Y17.6 billion ($159 million), mainly due to an increase in life insurance-in-force, and a decrease in the amount accrued to future benefit reserves. Overall, the amount accrued to future benefit reserves decreased due to a change in the valuation rates relating to the reserves for newly acquired policies, although there was a partial increase as a result of the introduction, from the first quarter of the current financial year, of a new accounting policy (see note 9)*.
* The Financial Services revenue and operating income at Sony Life are calculated on a U.S. GAAP basis. Therefore, they differ from the results that Sony Life discloses on a Japanese statutory basis. The above mentioned change in revenue recognition method did not have an impact on results on a Japanese statutory basis.
Other
(Billions of yen, millions of U.S. dollars)
Second quarter ended September 30
2003 2004 Change in Yen 2004
Sales and operating revenue Y64.2 Y61.6 -4.0% $555
Operating loss (6.0) (1.6) - (15)
Unless otherwise specified, all amounts are on a U.S. GAAP basis.
Sales decreased 4.0% compared to the same quarter of the previous fiscal year. This was mainly the result of a decrease in intersegment sales at a Japanese subsidiary involved in the advertising agency business, in association with contract changes. However, sales increases were recorded at an animation production and marketing business and at an imported general merchandise retail business.
An operating loss of Y1.6 billion ($15 million) was recorded, representing an improvement of Y4.4 billion compared with the operating loss of Y6.0 billion recorded in the same quarter of the previous fiscal year. This improvement was mainly due to the reduction of fixed costs, primarily from business realignments at several businesses in the segment.
Operating Results for Major Affiliates Accounted for by the Equity Method
The following operating results for significant companies accounted for by the equity method are not consolidated in Sony's consolidated financial statements. However, Sony believes that this disclosure provides additional useful analytical information to investors regarding operating performance.
Sony Ericsson recorded sales for the quarter ended September 30, 2004 of Euro 1,678 million, representing a Euro 373 million or 29% increase compared to the same quarter of the previous fiscal year. Income before taxes was Euro 136 million and net income was Euro 90 million, which represent improvements of Euro 97 million (249%) and Euro 28 million (45%) respectively, when compared to the same quarter of the previous fiscal year. Higher sales, boosted by new mid and high-end GSM format products, and improved operational efficiency contributed to results. As a result, equity in net income of Y6.0 billion ($54 million) was recorded by Sony.
Sony BMG recorded sales revenue of $733 million, a loss before income taxes of $26 million, and a net loss of $25 million for the two months subsequent to the establishment of the joint venture as of August 1, 2004. Restructuring charges of $30 million are included in these operating results. As a result, equity in net loss of Y1.4 billion ($12 million) was recorded by Sony.
Cash Flow
The following charts show Sony's unaudited condensed statements of cash flow on a consolidated basis for all segments excluding the Financial Services segment and for the Financial Services segment alone. These separate condensed presentations are not required under U.S. GAAP, which is used in Sony's consolidated financial statements. However, because the Financial Services segment is different in nature from Sony's other segments, Sony believes that these presentations may be useful in understanding and analyzing Sony's consolidated financial statements.
Cash Flow - Consolidated (excluding Financial Services segment)
(Billions of yen, millions of U.S. dollars)
Six months ended September 30
Cash flow 2003 2004 Change in 2004
Yen
- From operating Y0.3 Y35.0 Y +34.7 $315
activities
- From investing (162.7) (330.1) -167.4 (2,973)
activities
- From financing 94.2 (25.6) -119.8 (231)
activities
Cash and cash 438.5 592.9 +154.4 5,342
equivalents at
beginning of the
fiscal year
Cash and cash 352.0 290.1 -61.9 2,614
equivalents as of
September 30
Operating Activities: During the six months ended September 30, 2004, there was an increase in notes and accounts receivable, trade and an increase in inventory within the Electronics segment resulting from increased production in anticipation of the year-end sales season. However, as a result of an increase in notes and accounts payable, trade, in addition to net income, excluding depreciation and amortization, recorded primarily in the Pictures segment, as well as a decrease in inventory in the Game segment, operating activities generated more cash than was used.
Investing Activities: During the six months ended September 30, 2004, Sony made significant capital investments mainly concentrated in semiconductors, as well as investments associated with an amorphous TFT LCD panel manufacturing joint venture (named S-LCD Corporation) established with Samsung Electronics Co., Ltd.
As a result, the total amount of cash flow from operating activities and from investing activities was a use of cash of Y295.1 billion ($2,658 million).
Financing Activities: During the six months ended September 30, 2004, financing was carried out through the issuance of commercial paper. Sony also redeemed a portion of its long-term debt.
Cash and Cash Equivalents: In addition to the aforementioned information, the total balance of cash and cash equivalents, accounting for the effect of foreign currency exchange rate fluctuations, decreased Y302.8 billion to Y290.1 billion ($2,614 million) as of September 30, 2004, compared to March 31, 2004.
Cash Flow - Financial Services segment
(Billions of yen, millions of U.S. dollars)
Six months ended September 30
Cash flow 2003 2004 Change in 2004
Yen
- From operating Y150.0 Y83.6 Y-66.4 $753
activities
- From investing (213.1) (344.7) -131.5 (3,105)
activities
- From financing 74.7 164.3 +89.7 1,480
activities
Cash and cash 274.5 256.3 -18.2 2,309
equivalents at
beginning of the
fiscal year
Cash and cash 286.1 159.5 -126.5 1,437
equivalents as of
September 30
Operating Activities: Operating activities generated more cash than was used due to an increase in income from insurance premiums and other, reflecting an increase in insurance-in-force.
Investing Activities: As the result of the aforementioned increase in income from insurance premiums, and given higher interest rates, increased investment, particularly in domestic bonds, was carried out causing payments for investments and advances to exceed proceeds from sales of securities investments, maturities of marketable securities and collections of advances.
Financing Activities: In addition to the increase in policy holders' accounts at Sony Life, and factors including an increase in the number of accounts, deposits from customers in the banking business increased.
Cash and Cash Equivalents: As a result of the above, cash and cash equivalents decreased Y96.8 billion to Y159.5 billion ($1,437 million) as of September 30, 2004 compared to March 31, 2004.
Notes
Note I: During the second quarter ended September 30, 2004, the average value of the yen was Y108.9 against the U.S. dollar and Y132.8 against the euro, which was 7.0% higher against the U.S. dollar and 1.6% lower against the euro, compared with the average rates for the same quarter of the previous fiscal year. Operating results on a local currency basis described herein reflect sales and operating income obtained by applying the yen's average exchange rate in the same quarter of the previous fiscal year to local currency-denominated monthly sales, cost of sales, and selling, general and administrative expenses in the quarter. Local currency basis results are not reflected in Sony's financial statements and are not measures conforming with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful analytical information to investors regarding operating performance.
Note II: "Sales and operating revenue" in each business segment represents sales and operating revenue recorded before intersegment transactions are eliminated. "Operating income" in each business segment represents operating income recorded before intersegment transactions and unallocated corporate expenses are eliminated.
Outlook for the Fiscal Year ending March 31, 2005
Sony's forecast for consolidated operating results for the fiscal year ending March 31, 2005 has been revised as per the table below (refer to note on page 3 and explanations below):
Current Change from July
Forecast previous year Forecast
Sales and Y7,350 billion - 2% Y7,550 billion
operating revenue
Operating income 160 billion +62 160 billion
Income before income taxes 170 billion +18 160 billion
Net income 110 billion +24 100 billion
Restructuring charges, as operating expenses, of approximately Y110 billion are included in the above forecast (the July forecast was approximately Y130 billion).
Assumed foreign currency exchange rates for the second half of the fiscal year: approximately Y105 to the U.S. dollar, and approximately Y125 to the Euro.
Our forecast for sales and operating revenue reflects the fact that, due to the establishment of Sony BMG, as of August 2004, SMEI's recorded music business, previously recorded in the Music segment, is no longer recorded in consolidated sales and operating revenue (please refer to the note at the top of page 3). Our forecast for operating income remains unchanged, as although restructuring charges are expected to decrease as shown above, the forecast takes into account both the aforementioned establishment of Sony BMG, and the anticipated difficult business environment for the second half of the fiscal year, primarily in the Electronics segment. The forecast for income before income taxes and net income takes into account the recording of a gain resulting from a change in equity interest following the business integration of Monex, Inc., an equity affiliate of Sony, and Nikko Beans, Inc., and the gain from the sale of subsidiaries' stock and subsequent change in equity interest resulting from the initial public offering of So-net M3 Inc., a consolidated subsidiary of Sony Communications Network Corporation (please refer to the description regarding Income before Income Taxes).
There has been no change to our forecast, as of July 28, 2004, for capital expenditures, depreciation and amortization or research and development costs.
Forecast Change from
previous year
Capital expenditures Y410 billion +8%
(additions to fixed assets)
Depreciation and amortization* 370 billion +1
(Depreciation expenses (290 billion) (+1)
for tangible assets)
* Including amortization of intangible assets and amortization of
deferred insurance acquisition costs.
Research and development expenses 550 billion +7
As of September 30, 2004, Sony had deferred tax assets on tax loss carry forwards in relation to Japanese local income taxes totaling Y89.3 billion. However, there is a possibility that, depending on future operating performance, Sony may establish a valuation allowance against part or all of its deferred tax assets that would be charged to income as an increase in tax expense. On the other hand, as of September 30, 2004, the U.S. subsidiaries of Sony had valuation allowances of Y91.8 billion against deferred tax assets for U.S. federal and certain state taxes. However, there is a possibility that, depending on future operating performance, as early as during the fiscal year ending March 31, 2005, Sony may reverse part of the valuation allowances that would be recognized into income as a reduction to tax expense.
However, it should be noted that the forecast above does not include the possibility of the establishment of a valuation allowance against deferred tax assets in Japan, or the possibility of the reversal of valuation allowances against deferred tax assets in the U.S.
For your reference, further details about valuation allowances against deferred tax assets can be found under the "Deferred tax asset valuation" section of "Critical Accounting Policies" in Item 5. Operating and Financial Review and Prospects of Sony Corporation's Form 20-F for the fiscal year ended March 31, 2004.
URL:http://www.sec.gov/Archives/edgar/data/313838/000114554904000801/ 0001145549-04-000801-index.htm
Cautionary Statement
Statements made in this release with respect to Sony's current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include, but are not limited to, those statements using words such as "believe," "expect," "plans," "strategy," "prospects," "forecast," "estimate," "project," "anticipate," "may" or "might" and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management's assumptions and beliefs in light of the information currently available to it. Sony cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on any obligation of Sony to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Sony disclaims any such obligation. Risks and uncertainties that might affect Sony include, but are not limited to (i) the global economic environment in which Sony operates, as well as the economic conditions in Sony's markets, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, the euro and other currencies in which Sony makes significant sales or in which Sony's assets and liabilities are denominated; (iii) Sony's ability to continue to design and develop and win acceptance of its products and services, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology and subjective and changing consumer preferences (particularly in the Electronics, Game, Music and Pictures segments); (iv) Sony's ability to implement successfully personnel reduction and other business reorganization activities in its Electronics, Music and Pictures segments; (v) Sony's ability to implement successfully its network strategy for its Electronics, Music, Pictures and Other segments and to develop and implement successful sales and distribution strategies in its Music and Pictures segments in light of the Internet and other technological developments; (vi) Sony's continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to correctly prioritize investments (particularly in the Electronics segment); (vii) the success of Sony's joint ventures and alliances; and (viii) the risk of being unable to obtain regulatory or shareholder approval to successfully complete the acquisition of MGM. Risks and uncertainties also include the impact of any future events with material unforeseen impacts.
Business Segment Information (Unaudited)
(Millions of yen, millions of U.S. dollars)
Three months ended September 30
Sales and 2003 2004 Change 2004
operating revenue
Electronics
Customers Y 1,172,710 Y 1,181,030 +0.7% $ 10,640
Intersegment 71,109 32,297 291
Total 1,243,819 1,213,327 -2.5 10,931
Game
Customers 155,752 114,874 -26.2 1,035
Intersegment 5,534 4,771 43
Total 161,286 119,645 -25.8 1,078
Music
Customers 91,838 51,057 -44.4 460
Intersegment 7,938 7,347 66
Total 99,776 58,404 -41.5 526
Pictures
Customers 187,410 191,742 +2.3 1,727
Intersegment 0 0 0
Total 187,410 191,742 +2.3 1,727
Financial
Services
Customers 147,785 119,643 -19.0 1,078
Intersegment 6,629 6,219 56
Total 154,414 125,862 -18.5 1,134
Other
Customers 41,524 43,926 +5.8 396
Intersegment 22,626 17,677 159
Total 64,150 61,603 -4.0 555
Elimination (113,836) (68,311) - (615)
Consolidated Y 1,797,019 Y 1,702,272 -5.3% $ 15,336
total
Electronics intersegment amounts primarily consist of transactions with the Game business.
Music intersegment amounts primarily consist of transactions with the Game and Pictures businesses.
Other intersegment amounts primarily consist of transactions with the Electronics business.
Operating income 2003 2004 Change 2004
(loss)
Electronics Y 43,180 Y 7,186 -83.4% $ 65
Game 2,184 (11) - 0
Music (5,891) 2,173 - 20
Pictures (4,620) 27,418 - 247
Financial 11,256 14,881 +32.2 134
Services
Other (5,999) (1,621) - (15)
Total 40,110 50,026 +24.7 451
Unallocated (6,896) (6,641) - (60)
corporate
expenses and
elimination
Consolidated Y 33,214 Y 43,385 +30.6% $ 391
total
Commencing April 1, 2004, Sony has partly realigned its business segment configuration. Results of the previous year have been reclassified to conform to the presentations for the current quarter (See Notes 5 and 6).
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
Sales and 2003 2004 Change 2004
operating revenue
Electronics
Customers Y 2,235,228 Y 2,286,090 +2.3% $ 20,595
Intersegment 135,285 52,409 473
Total 2,370,513 2,338,499 -1.4 21,068
Game
Customers 276,084 214,935 -22.1 1,936
Intersegment 10,448 10,075 91
Total 286,532 225,010 -21.5 2,027
Music
Customers 178,109 139,314 -21.8 1,255
Intersegment 16,041 14,227 128
Total 194,150 153,541 -20.9 1,383
Pictures
Customers 338,541 339,933 +0.4 3,063
Intersegment 0 0 0
Total 338,541 339,933 +0.4 3,063
Financial
Services
Customers 290,754 247,349 -14.9 2,228
Intersegment 13,307 12,137 110
Total 304,061 259,486 -14.7 2,338
Other
Customers 82,083 86,789 +5.7 783
Intersegment 44,404 34,245 308
Total 126,487 121,034 -4.3 1,091
Elimination (219,485) (123,093) - (1,110)
Consolidated Y 3,400,799 Y 3,314,410 -2.5% $ 29,860
total
Electronics intersegment amounts primarily consist of transactions with the Game business.
Music intersegment amounts primarily consist of transactions with the Game and Pictures businesses.
Other intersegment amounts primarily consist of transactions with the Electronics business.
Operating income 2003 2004 Change 2004 (loss) Electronics Y 58,014 Y 15,742 -72.9% $ 142 Game 3,945 (2,892) - (26) Music (12,957) (552) - (5) Pictures (7,017) 31,519 - 284 Financial 25,303 25,284 -0.1 228 Services Other (2,609) (2,403) - (22) Total 64,679 66,698 +3.1 601 Unallocated (14,793) (13,539) - (122) corporate expenses and elimination Consolidated Y 49,886 Y 53,159 +6.6% $ 479 total
Commencing April 1, Sony has partly realigned its business segment configuration. Results of the previous year have been reclassified to conform to the presentations for the current quarter (See Notes 5 and 6).
Electronics Sales and Operating Revenue to Customers by Product Category
(Millions of yen, millions of U.S. dollars)
Three months ended September 30
Sales and 2003 2004 Change 2004
operating
revenue
Audio Y 171,387 Y 147,025 -14.2% $ 1,324
Video 216,643 245,876 +13.5 2,215
Televisions 215,900 218,881 +1.4 1,972
Information and 206,346 181,712 -11.9 1,637
Communications
Semiconductors 64,559 74,992 +16.2 676
Components 158,636 160,381 +1.1 1,445
Other 139,239 152,163 +9.3 1,371
Total Y 1,172,710 Y 1,181,030 +0.7% $ 10,640
Six months ended September 30
Sales and 2003 2004 Change 2004
operating
revenue
Audio Y 323,779 Y 281,411 -13.1% $ 2,535
Video 441,091 497,081 +12.7 4,478
Televisions 403,858 416,042 +3.0 3,748
Information and 394,487 355,755 -9.8 3,205
Communications
Semiconductors 117,614 141,902 +20.7 1,278
Components 294,478 312,091 +6.0 2,812
Other 259,921 281,808 +8.4 2,539
Total Y 2,235,228 Y 2,286,090 +2.3% $20,595
The above table is a breakdown of Electronics sales and operating revenue to customers in the Business Segment Information on pages F-1 and F-2. The Electronics segment is managed as a single operating segment by Sony's management. However, Sony believes that the information in this table is useful to investors in understanding the product categories in this business segment. In addition, commencing April 1, 2004, Sony has partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous year have been restated. (See Note 7)
Geographic Segment Information (Unaudited)
(Millions of yen, millions of U.S. dollars)
Three months ended September 30
Sales and 2003 2004 Change 2004
operating
revenue
Japan Y 536,588 Y 490,764 -8.5% $ 4,421
United States 517,994 457,670 -11.6 4,123
States
Europe 377,410 360,270 -4.5 3,246
Other Areas 365,027 393,568 +7.8 3,546
Total Y 1,797,019 Y 1,702,272 -5.3% $ 15,336
Six months ended September 30
Sales and 2003 2004 Change 2004
operating
revenue
Japan Y 1,047,857 Y 975,396 -6.9% $ 8,787
Unites States 977,723 875,966 -10.4 7,892
Europe 724,208 735,603 +1.6 6,627
Other Areas 651,011 727,445 +11.7 6,554
Total Y 3,400,799 Y 3,314,410 -2.5% $29,860
Classification of Geographic Segment Information shows sales and operating revenue recognized by location of customers.
Consolidated Statements of Income (Unaudited)
(Millions of yen, millions of U.S. dollars, except per share amounts)
Three months ended September 30
2003 2004 Change 2004
Sales and %
operating revenue:
Net sales Y 1,637,706 Y 1,568,026 $ 14,126
Financial 147,785 119,643 1,078
service
revenue
Other 11,528 14,603 132
operating
revenue
1,797,019 1,702,272 -5.3 15,336
Costs and
expenses:
Cost of 1,209,126 1,184,124 10,668
sales
Selling, 413,483 361,683 3,258
general
and administrative
Financial 132,474 105,216 948
service expenses
Loss on 8,722 7,864 71
sale, disposal
or impairment
of assets, net
1,763,805 1,658,887 14,945
Operating income 33,214 43,385 +30.6 391
Other income:
Interest and 3,903 3,109 28
dividends
Royalty 10,802 11,458 103
income
Foreign 2,065 - -
exchange
gain, net
Gain on 2,870 1,337 12
sale of
securities
investments, net
Gain on - 13,188 119
change in
interest
in subsidiaries
and equity
investee
Other 7,443 5,834 53
27,083 34,926 315
Other expenses:
Interest 7,319 7,031 64
Loss on 1,139 1,382 12
devaluation
of securities
investments
Foreign - 251 2
exchange
loss, net
Other 7,780 6,386 58
16,238 15,050 136
Income before 44,059 63,261 +43.6 570
income taxes
Income 10,301 16,203 146
taxes
Income before 33,758 47,058 +39.4 424
minority interest,
equity in net
income of
affiliated
companies and
cumulative effect
of an accounting
change
Minority 1,627 (49) (0)
interest
in income
(loss) of
consolidated
subsidiaries
Equity in 2,912 6,103 55
net income
of affiliated
companies
Income before 35,043 53,210 +51.8 479
cumulative effect
of an accounting
change
Cumulative (2,117) - -
effect of
an accounting
change
(2003: Net
of income
taxes of
Y0 million)
Net income Y 32,926 Y 53,210 +61.6 $ 479
Per share data:
Common stock
Income before
cumulative
effect of an
accounting change
- Basic Y 37.99 Y - $ -
- Diluted 35.60 - -
Net income
- Basic 35.69 57.50 +61.1 0.52
- Diluted 33.48 53.76 +60.6 0.48
Subsidiary
tracking stock
Net income
(loss)
- Basic (9.99) 4.25 - 0.04
(Millions of yen, millions of U.S. dollars, except per share amounts)
Six months ended September 30
2003 2004 Change 2004
Sales and %
operating revenue:
Net sales Y 3,086,928 Y 3,039,147 $ 27,380
Financial 290,754 247,349 2,228
service revenue
Other 23,117 27,914 252
operating
revenue
3,400,799 3,314,410 -2.5 29,860
Costs and
expenses:
Cost of 2,268,278 2,287,395 20,607
sales
Selling, 817,788 738,620 6,654
general
and administrative
Financial 261,500 222,510 2,005
service
expenses
Loss on 3,347 12,726 115
sale, disposal
or impairment
of assets, net
3,350,913 3,261,251 29,381
Operating income 49,886 53,159 +6.6 479
Other income:
Interest and 10,031 8,090 73
dividends
Royalty income 18,184 17,119 154
Foreign exchange 1,193 - -
gain, net
Gain on 11,396 2,026 18
sale of securities
investments, net
Gain on - 13,495 122
change in
interest in
subsidiaries and
equity investee
Other 20,294 12,683 114
61,098 53,413 481
Other expenses:
Interest 13,474 14,558 131
Loss on 1,639 2,313 21
devaluation
of securities
investments
Foreign - 5,934 53
exchange
loss, net
Other 16,041 13,892 125
31,154 36,697 330
Income before 79,830 69,875 -12.5 630
income taxes
Income taxes 35,685 14,361 130
Income before 44,145 55,514 +25.8 500
minority interest,
equity in net
income (loss) of
affiliated
companies and
cumulative effect
of an accounting
change
Minority 1,166 572 5
interest
in income
of consolidated
subsidiaries
Equity in (6,815) 26,245 236
net income
(loss) of
affiliated
companies
Income before 36,164 81,187 +124.5 731
cumulative effect
of an accounting
change
Cumulative (2,117) (4,713) (42)
effect of
an accounting
change (2003:
Net of income
taxes of
Y0 million)
(2004: Net
of income
taxes of Y2,675
million)
Net income Y 34,047 Y 76,474 +124.6 $ 689
Per share data:
Common stock
Income before
cumulative
effect of an
accounting change
- Basic Y 39.26 Y 87.70 +123.4 $ 0.79
- Diluted 37.33 82.29 +120.4 0.74
Net income
- Basic 36.97 82.61 +123.5 0.74
- Diluted 35.22 77.58 +120.3 0.70
Subsidiary tracking
stock
Net income (loss)
- Basic (17.96) 18.12 0.16
Additional Paid-in Capital and Retained Earnings (Unaudited)
The following information shows change in additional paid-in capital for the six months ended September 30, 2003 and 2004 and change in retained earnings for the six months ended September 30, 2003 and 2004.
Sony discloses this supplemental information in accordance with disclosure requirements of the Japanese Securities and Exchange Law, to which Sony, as a Japanese public company, is subject.
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
2003 2004 2004
Additional Paid-in Capital:
Balance, Y 984,196 Y 992,817 $ 8,944
beginning of year
Conversion 3,984 26 0
of convertible
bonds
Exchange offerings 5,409 - -
Reissuance (409) (342) (3)
of treasury stock
Balance Y 993,180 Y 992,501 $ 8,941
as of September 30
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
2003 2004 2004
Retained Earnings:
Balance, Y 1,301,740 Y 1,367,060 $ 12,316
beginning of year
Net income 34,047 76,474 689
Cash dividends (11,578) (11,573) (104)
Reissuance - (237) (3)
of treasury
stock
Common (28) (5) (0)
stock issue costs,
net of tax
Balance Y 1,324,181 Y 1,431,719 $ 12,898
as of September 30
Consolidated Balance Sheets (Unaudited)
(Millions of yen, millions of U.S. dollars)
September 30 March 31 September 30 September 30
2003 2004 2004 2004
ASSETS
Current assets:
Cash and cash Y 638,037 Y 849,211 Y 449,626 $ 4,051
equivalents
Time deposits 7,307 4,662 3,325 30
Marketable
securities 264,997 274,748 533,373 4,805
Notes and accounts
receivable, trade 1,178,387 1,123,863 1,133,252 10,209
Allowance for doubtful (94,081) (112,674) (76,966) (693)
accounts and sales
returns
Inventories 798,448 666,507 781,361 7,039
Deferred income taxes 132,105 125,532 128,595 1,159
Prepaid expenses and 559,220 431,506 463,670 4,177
and other current assets
3,484,420 3,363,355 3,416,236 30,777
Film costs 280,535 256,740 270,090 2,433
Investments and advances:
Affiliated companies 78,511 86,253 252,966 2,279
Securities investments 2,129,524 2,426,697 2,410,396 21,715
and other
2,208,035 2,512,950 2,663,362 23,994
Property, plant
and equipment:
Land 195,996 189,785 186,168 1,677
Buildings 950,570 930,983 929,142 8,371
Machinery and 2,070,117 2,053,085 2,096,564 18,888
equipment
Construction in progress 70,764 98,480 144,570 1,302
Less-Accumulated (1,929,498)(1,907,289) (1,973,005) (17,775)
depreciation
1,357,949 1,365,044 1,383,439 12,463
Other assets:
Intangibles, net 251,525 248,010 208,251 1,876
Goodwill 288,805 277,870 274,662 2,474
Deferred insurance 335,762 349,194 366,983 3,306
acquisition costs
Deferred income taxes 237,444 203,203 177,973 1,603
Other 460,386 514,296 492,160 4,436
1,573,922 1,592,573 1,520,029 13,695
Y 8,904,861 Y9,090,662 Y 9,253,156 $ 83,362
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Short-term Y 240,279 Y 91,260 Y 158,151 $ 1,425
borrowings
Current portion of 41,823 383,757 452,986 4,081
long-term debt
Notes and accounts 961,122 778,773 826,719 7,448
payable, trade
Accounts payable, 812,872 812,175 731,145 6,587
other and accrued
expenses
Accrued income and 92,483 57,913 42,968 387
other taxes
Deposits from customers 319,301 378,851 451,231 4,065
in the banking business
Other 365,779 479,486 371,978 3,351
2,833,659 2,982,215 3,035,178 27,344
Long-term liabilities:
Long-term debt 877,297 777,649 677,262 6,101
Accrued pension and 518,940 368,382 325,664 2,934
severance costs
Deferred income taxes 79,588 96,193 67,470 608
Future insurance 2,050,004 2,178,626 2,314,369 20,850
policy benefits
and other
Other 253,665 286,737 267,809 2,413
3,779,494 3,707,587 3,652,574 32,906
Minority interest in 19,219 22,858 24,171 218
consolidated subsidiaries
Stockholders' equity:
Capital stock 480,262 480,267 480,293 4,327
Additional paid-in 993,180 992,817 992,501 8,941
capital
Retained earnings 1,324,181 1,367,060 1,431,719 12,898
Accumulated other (517,012) (449,959) (357,467) (3,220)
comprehensive
income
Treasury stock, at (8,122) (12,183) (5,813) (52)
cost
2,272,489 2,378,002 2,541,233 22,894
Y 8,904,861 Y9,090,662 Y 9,253,156 $ 83,362
Consolidated Statements of Cash Flows (Unaudited)
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
2003 2004 2004
Cash flows from operating
activities:
Net income Y 34,047 Y 76,474 $ 689
Adjustments to
reconcile net income to net
cash provided by operating
activities
Depreciation 171,701 176,704 1,592
and amortization, including
amortization of deferred
insurance acquisition costs
Amortization 134,955 127,305 1,147
of film costs
Accrual for 25,462 11,269 102
pension and severance costs,
less payments
Loss on sale, 3,347 12,726 115
disposal or impairment of
assets, net
Gain on sales (11,396) (2,026) (18)
of securities investments,
net
Gain on - (13,495) (122)
change in interest in
subsidiaries and equity
investee
Deferred 11,079 (11,274) (102)
income taxes
Equity in net 7,661 (25,661) (231)
(income) loss of affiliated
companies, net of dividends
Cumulative 2,117 4,713 42
effect of an accounting
change
Changes in
assets and liabilities:
Increase (114,906) (43,346) (391)
in notes and accounts
receivable, trade
Increase (192,568) (109,507) (987)
in inventories
Increase (139,596) (127,647) (1,150)
in film costs
Increase 271,137 48,286 435
in notes and accounts
payable, trade
Decrease (13,148) (13,669) (123)
in accrued income and other
taxes
Increase 135,594 63,841 575
in future insurance policy
benefits and other
Increase (32,046) (32,597) (294)
in deferred insurance
acquisition costs
Increase - (16,270) (146)
in marketable securities
held in the financial
service business for
trading purpose
Increase (161,025) (47,262) (426)
in other current assets
Decrease (4,326) (20,970) (189)
in other current liabilities
Other 12,676 54,313 490
Net cash provided by 140,765 111,907 1,008
operating activities
Cash flows from investing
activities:
Payments for purchases (199,503) (251,558) (2,266)
of fixed assets
Proceeds from sales of 22,413 18,397 166
fixed assets
Payments for (586,618) (723,732) (6,520)
investments and advances by
financial service business
Payments for (22,380) (136,082) (1,226)
investments and advances
(other than financial
service business)
Proceeds from 391,239 401,202 3,614
maturities of marketable
securities, sales of
securities investments and
collections of advances by
financial service business
Proceeds from 18,339 19,973 180
maturities of marketable
securities, sales of
securities investments and
collections of advances
(other than financial service
business)
(Increase) decrease in (3,902) 1,046 9
time deposits
Cash assumed upon 3,634 - -
acquisition by stock
exchange offering
Net cash used in (376,778) (670,754) (6,043)
investing
activities
Cash flows from financing
activities:
Proceeds from issuance 2,326 9,589 86
of long-term debt
Payments of long-term (6,426) (53,511) (482)
debt
Increase in short-term 111,355 31,221 281
borrowings
Increase in deposits 70,369 129,335 1,165
from customers in the
financial service business
Dividends paid (11,552) (11,441) (103)
Other 13,316 36,165 327
Net cash provided by 179,388 141,358 1,274
financing activities
Effect of exchange rate (18,396) 17,904 161
changes on cash and cash
equivalents
Net decrease in cash and (75,021) (399,585) (3,600)
cash equivalents
Cash and cash equivalents at 713,058 849,211 7,651
beginning of the fiscal
year
Cash and cash equivalents at Y 638,037 Y 449,626 $ 4,051
September 30
(Notes)
1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of Y111 = U.S. $1, the approximate Tokyo foreign exchange market rate as of September 30, 2004.
2. As of September 30, 2004, Sony had 918 consolidated subsidiaries (including variable interest entities). It has applied the equity accounting method in respect to 57 affiliated companies.
3. Sony calculates and presents per share data separately for Sony's common stock and for the subsidiary tracking stock which is linked to the economic value of Sony Communication Network Corporation, based on Statement of Financial Accounting Standards ("FAS") No.128, "Earnings per Share". The holders of the tracking stock have the right to participate in earnings, together with common stock holders. Accordingly, Sony calculates per share data by the "two-class" method based on FAS No.128. Under this method, basic net income per share for each class of stock is calculated based on the earnings allocated to each class of stock for the applicable period, divided by the weighted-average number of outstanding shares in each class during the applicable period. The earnings allocated to the subsidiary tracking stock are determined based on the subsidiary tracking stockholders' economic interest in the targeted subsidiary's earnings available for dividends or change in accumulated losses that do not include those of the targeted subsidiary's subsidiaries. The earnings allocated to common stock are calculated by subtracting the earnings allocated to the subsidiary tracking stock from Sony's net income for the period.
Weighted-average shares used for computation of earnings per share of common stock are as follows. The dilutive effect in the weighted-average shares for the three months and six months ended September 30, 2003 and 2004 mainly resulted from convertible bonds.
Weighted-average shares (Thousands of shares)
Three months ended September 30
2003 2004
Income before cumulative
effect of an accounting
change and net income
- Basic 923,326 925,227
- Diluted 1,000,749 1,000,494
Weighted-average shares (Thousands of shares)
Six months ended September 30
2003 2004
Income before cumulative
effect of an accounting
change and net income
- Basic 922,537 925,091
- Diluted 1,000,507 1,000,404
Weighted-average shares used for computation of earnings per share of the subsidiary tracking stock for the three months and six months ended September 30, 2003 and 2004 are 3,072 thousand shares. There were no potentially dilutive securities or options granted for earnings per share of the subsidiary tracking stock.
4. Sony's comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes changes in unrealized gains or losses on securities, unrealized gains or losses on derivative instruments, minimum pension liabilities adjustments and foreign currency translation adjustments. Net income, other comprehensive income and comprehensive income for the three months and six months ended September 30, 2003 and 2004 were as follows:
(Millions of yen, millions of U.S. dollars)
Three months ended Six months ended
September 30 September 30
2003 2004 2004 2003 2004 2004
Net Y 32,926 Y 53,210 $ 479 Y 34,047 Y 76,474 $ 689
income
Other
comprehensive
income
(loss):
Unrealized 12,863 2,649 24 29,881 (12,514) (113)
gains
(losses)
on securities
Unrealized 5,548 (151) (1) 6,194 (2,413) (22)
gains
(losses)
on
derivative
instruments
Minimum 1,234 21,316 192 (2,984) 20,953 189
pension
liabilities
adjustments
Foreign (105,806) 56,243 506 (78,125) 86,466 779
currency
translation
adjustments
(86,161) 80,057 721 (45,034) 92,492 833
Compre-
hensive Y(53,235) Y133,267 $1,200 Y(10,987) Y168,966 $1,522
income
(loss)
5. As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. In connection with the establishment of this joint venture, the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to "Other" category in the Electronics segment. Results for the same period of the previous year in the Electronics and Music segments have been restated to conform to the presentation for this year.
6. In July 2004, in order to establish a more efficient and coordinated semiconductor supply structure, the Sony group has integrated its semiconductor manufacturing business by transferring Sony Computer Entertainment's semiconductor manufacturing operation from the Game segment to the Electronics segment. As a result of this transfer, sales revenue and expenditures associated with this operation are now recorded within the "Semiconductor" category in the Electronics segment.
The results for the same period of the previous fiscal year have not been restated as such comparable figures cannot be practicably obtained given that it was not operated as a separate line of business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony's semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game business within the Sony group as a whole.
7. Commencing April 1, Sony has partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous year have been reclassified. The primary changes are as follows:
Main Product Previous Product Category New Product Category
AIWA "Other" "Audio" or "Video"
or "Televisions"
Set-top box "Video" "Televisions"
8. In January 2003, the FASB issued FASB Interpretation ("FIN") No.46, "Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletins ("ARB") No.51", and the revised FIN No.46 was issued in December 2003. This interpretation addresses consolidation by a primary beneficiary of a variable interest entity ("VIE"). FIN No.46 is effective immediately for all new VIEs created or acquired after January 31, 2003. Sony has not entered into any new arrangements with VIEs on or after February 1, 2003. For VIEs created or acquired prior to February 1, 2003, Sony adopted FIN No.46 on July 1, 2003. As a result of the adoption of FIN No.46, Sony recognized Y2,117 million of loss as the cumulative effect of accounting change. Additionally, Sony's assets and liabilities increased as non-cash transactions, which resulted in no cash flows, by Y95,255 million and Y97,950 million, respectively, as well as cash and cash equivalents of Y1,521 million.
9. Adoption of New Accounting Standards
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts". SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP03-1, Sony's operating income decreased by Y2,248 million ($20 million) and Y3,216 million ($29 million) for the three months and six months ended September 30, 2004, respectively. Additionally, on April 1, 2004, Sony recognized Y4,713 million ($42 million) of loss (net of income taxes of Y2,675 million) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in "Security investments and other" on the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the separate account assets are now treated as general accounts and included in "Marketable securities" on the consolidated balance sheet.
Other Consolidated Financial Data
(Millions of yen, millions of U.S. dollars)
Three months ended September 30
2003 2004 Change 2004
Capital Y 90,016 Y 90,051 +0.0% $ 811
expenditures
(additions
to property,
plant and
equipment)
Depreciation 87,424 91,173 +4.3 821
and
amortization
expenses*
(Depreciation (70,120) (72,579) (+3.5) (654)
expenses for
tangible
assets)
Research and 136,191 127,018 -6.7 1,144
development
expenses
Six months ended September 30
2003 2004 Change 2004
Capital Y 171,033 Y 178,122 +4.1% $ 1,605
expenditures
(additions
to property,
plant and
equipment)
Depreciation 171,701 176,704 +2.9 1,592
and
amortization
expenses*
(Depreciation (135,756) (141,486) (+4.2) (1,275)
expenses
for
tangible
assets)
Research 250,355 250,600 +0.1 2,258
and
development
expenses
* Including amortization expenses for intangible assets and for deferred insurance acquisition costs
Condensed Financial Services Financial Statements (Unaudited)
The results of the Financial Services segment are included in Sony's consolidated financial statements. The following schedules show unaudited condensed financial statements for the Financial Services segment and all other segments excluding Financial Services. These presentations are not required under U.S. GAAP, which is used in Sony's consolidated financial statements. However, because the Financial Services segment is different in nature from Sony's other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony's consolidated financial statements.
Transactions between the Financial Services segment and Sony without Financial Services are eliminated in the consolidated figures shown below.
(Millions of yen, millions of U.S. dollars)
Condensed Three months ended September 30
Statements
of Income
Financial 2003 2004 Change 2004
Services %
Financial Y 154,414 Y 125,862 -18.5 $ 1,134
service
revenue
Financial 143,158 110,981 -22.5 1,000
service
expenses
Operating 11,256 14,881 +32.2 134
income
Other (102) 8,955 - 81
income
(expenses),
net
Income 11,154 23,836 +113.7 215
before
income
taxes
Income 2,808 9,632 +243.0 87
taxes and
other
Net income Y 8,346 Y 14,204 +70.2 $ 128
(Millions of yen, millions of U.S. dollars)
Three months ended September 30
Sony 2003 2004 Change 2004
without %
Financial
Services
Net sales Y 1,651,008 Y 1,584,969 -4.0 $ 14,279
and
operating
revenue
Costs and 1,629,016 1,556,733 -4.4 14,025
expenses
Operating 21,992 28,236 +28.4 254
income
Other 20,304 17,688 -12.9 160
income
(expenses),
net
Income 42,296 45,924 +8.6 414
before
income
taxes
Income 6,222 418 -93.3 4
taxes and
other
Income 36,074 45,506 +26.1 410
before
cumulative
effect of
an
accounting
change
Cumulative (2,117) - - -
effect of
an
accounting
change
Net Y 33,957 Y 45,506 +34.0 $ 410
income
(Millions of yen, millions of U.S. dollars)
Three months ended September 30
Consolidated 2003 2004 Change 2004
%
Financial Y 147,785 Y 119,643 -19.0 $ 1,078
service
revenue
Net sales 1,649,234 1,582,629 -4.0 14,258
and
operating
revenue
1,797,019 1,702,272 -5.3 15,336
Costs and 1,763,805 1,658,887 -5.9 14,945
expenses
Operating 33,214 43,385 +30.6 391
income
Other income 10,845 19,876 +83.3 179
(expenses),
net
Income 44,059 63,261 +43.6 570
before
income taxes
Income taxes 9,016 10,051 +11.5 91
and other
Income 35,043 53,210 +51.8 479
before
cumulative
effect of an
accounting
change
Cumulative (2,117) - - -
effect of an
accounting
change
Net income Y 32,926 Y 53,210 +61.6 $ 479
(Millions of yen, millions of U.S. dollars)
Condensed Six months ended September 30
Statements
of Income
Financial 2003 2004 Change 2004
Services %
Financial Y 304,061 Y 259,486 -14.7 $ 2,338
service
revenue
Financial 278,758 234,202 -16.0 2,110
service
expenses
Operating 25,303 25,284 -0.1 228
income
Other (88) 8,893 - 80
income
(expenses),
net
Income 25,215 34,177 +35.5 308
before
income
taxes
Income 9,866 13,458 +36.4 122
taxes and
other
Income 15,349 20,719 +35.0 186
before
cumulative
effect of
an
accounting
change
Cumulative - (4,713) - (42)
effect of
an
accounting
change
Net income Y 15,349 Y 16,006 +4.3 $ 144
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
Sony 2003 2004 Change 2004
without %
Financial
Services
Net sales Y 3,113,826 Y 3,071,378 -1.4 $ 27,670
and
operating
revenue
Costs and 3,088,978 3,043,660 -1.5 27,420
expenses
Operating 24,848 27,718 +11.6 250
income
Other 39,159 14,479 -63.0 130
income
(expenses),
net
Income 64,007 42,197 -34.1 380
before
income
taxes
Income 33,910 (24,771) - (223)
taxes and
other
Income 30,097 66,968 +122.5 603
before
cumulative
effect of
an
accounting
change
Cumulative (2,117) - - -
effect of
an
accounting
change
Net Y 27,980 Y 66,968 +139.3 $ 603
income
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
Consolidated 2003 2004 Change 2004
%
Financial Y 290,754 Y 247,349 -14.9 $ 2,228
service
revenue
Net sales 3,110,045 3,067,061 -1.4 27,632
and
operating
revenue
3,400,799 3,314,410 -2.5 29,860
Costs and 3,350,913 3,261,251 -2.7 29,381
expenses
Operating 49,886 53,159 +6.6 479
income
Other income 29,944 16,716 -44.2 151
(expenses),
net
Income 79,830 69,875 -12.5 630
before
income taxes
Income taxes 43,666 (11,312) - (101)
and other
Income 36,164 81,187 +124.5 731
before
cumulative
effect of an
accounting
change
Cumulative (2,117) (4,713) - (42)
effect of an
accounting
change
Net income Y 34,047 Y 76,474 +124.6 $ 689
Condensed Balance Sheets
(Millions of yen, millions of U.S. dollars)
Financial September March 31 September September
Services 30 30 30
ASSETS 2003 2004 2004 2004
Current assets:
Cash Y 286,054 Y 256,316 Y 159,523 $ 1,437
and cash
equivalents
Marketable 260,098 270,676 529,302 4,768
securities
Notes 68,380 72,273 72,144 650
and
accounts
receivable,
trade
Other 107,698 100,433 92,775 836
722,230 699,698 853,744 7,691
Investments and 1,941,130 2,274,510 2,297,300 20,696
advances
Property, plant 40,603 40,833 39,828 359
and equipment
Other assets:
Deferred 335,762 349,194 366,983 3,306
insurance
acquisition
costs
Other 106,974 110,804 102,369 923
442,736 459,998 469,352 4,229
Y 3,146,699 Y 3,475,039 Y 3,660,224 $ 32,975
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current
liabilities:
Short-term Y 77,222 Y 86,748 Y 117,715 $ 1,060
borrowings
Notes 6,752 7,847 7,378 66
and
accounts
payable,
trade
Deposits 319,301 378,851 451,231 4,065
from
customers
in the
banking
business
Other 90,494 175,357 96,269 868
493,769 648,803 672,593 6,059
Long-term
liabilities:
Long-term 138,622 135,811 137,249 1,236
debt
Accrued 9,671 10,183 11,163 101
pension
and
severance
costs
Future 2,050,004 2,178,626 2,314,369 20,850
insurance
policy
benefits
and
other
Other 112,968 126,349 130,237 1,174
2,311,265 2,450,969 2,593,018 23,361
Minority - - 5,567 50
interest in
consolidated
subsidiaries
Stockholders' 341,665 375,267 389,046 3,505
equity
Y3,146,699 Y 3,475,039 Y 3,660,224 $ 32,975
(Millions of yen, millions of U.S. dollars)
Sony without September March 31 September September
Financial 30 30 30
Services
ASSETS 2003 2004 2004 2004
Current assets:
Cash Y 351,983 Y 592,895 Y 290,103 $ 2,614
and
cash
equivalents
Marketable 4,899 4,072 4,071 37
securities
Notes 1,019,412 943,590 989,216 8,912
and
accounts
receivable,
trade
Other 1,415,405 1,151,879 1,294,395 11,660
2,791,699 2,692,436 2,577,785 23,223
Film costs 280,535 256,740 270,090 2,433
Investments and 387,175 358,629 500,041 4,505
advances
Investments in 176,905 176,905 187,400 1,688
Financial
Services, at
cost
Property, plant 1,317,345 1,324,211 1,343,611 12,104
and equipment
Other assets 1,241,671 1,251,901 1,165,449 10,501
Y 6,195,330 Y 6,060,822 Y 6,044,376 $ 54,454
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current
liabilities:
Short-term Y 234,975 Y 409,766 Y 508,649 $ 4,582
borrowings
Notes 956,592 773,221 822,333 7,408
and
accounts
payable,
trade
Other 1,190,519 1,190,563 1,057,377 9,527
2,382,086 2,373,550 2,388,359 21,517
Long-term
liabilities:
Long-term 873,750 775,233 671,067 6,046
debt
Accrued 509,269 358,199 314,500 2,833
pension
and
severance
costs
Other 300,875 348,946 302,589 2,725
1,683,894 1,482,378 1,288,156 11,604
Minority 13,590 17,554 18,704 169
interest in
consolidated
subsidiaries
Stockholders' 2,115,760 2,187,340 2,349,157 21,164
equity
Y 6,195,330 Y 6,060,822 Y 6,044,376 $ 54,454
(Millions of yen, millions of U.S. dollars)
Consolidated September 30 March 31 September 30 September 30
ASSETS 2003 2004 2004 2004
Current assets:
Cash Y 638,037 Y 849,211 Y 449,626 $ 4,051
and
cash
equivalents
Marketable 264,997 274,748 533,373 4,805
securities
Notes 1,084,306 1,011,189 1,056,286 9,516
and
accounts
receivable,
trade
Other 1,497,080 1,228,207 1,376,951 12,405
3,484,420 3,363,355 3,416,236 30,777
Film costs 280,535 256,740 270,090 2,433
Investments and 2,208,035 2,512,950 2,663,362 23,994
advances
Property, plant 1,357,949 1,365,044 1,383,439 12,463
and equipment
Other assets:
Deferred 335,762 349,194 366,983 3,306
insurance
acquisition
costs
Other 1,238,160 1,243,379 1,153,046 10,389
1,573,922 1,592,573 1,520,029 13,695
Y 8,904,861 Y 9,090,662 Y 9,253,156 $ 83,362
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current
liabilities:
Short-term Y 282,102 Y 475,017 Y 611,137 $ 5,506
borrowings
Notes 961,122 778,773 826,719 7,448
and
accounts
payable,
trade
Deposits 319,301 378,851 451,231 4,065
from
customers
in the
banking
business
Other 1,271,134 1,349,574 1,146,091 10,325
2,833,659 2,982,215 3,035,178 27,344
Long-term
liabilities:
Long-term 877,297 777,649 677,262 6,101
debt
Accrued 518,940 368,382 325,664 2,934
pension
and
severance
costs
Future 2,050,004 2,178,626 2,314,369 20,850
insurance
policy
benefits
and
other
Other 333,253 382,930 335,279 3,021
3,779,494 3,707,587 3,652,574 32,906
Minority 19,219 22,858 24,171 218
interest in
consolidated
subsidiaries
Stockholders' 2,272,489 2,378,002 2,541,233 22,894
equity
Y 8,904,861 Y 9,090,662 Y 9,253,156 $ 83,362
(Millions of yen, millions of U.S. dollars)
Condensed Six months ended September 30
Statements of
Cash Flows
Financial 2003 2004 2004
Services
Net cash Y 149,975 Y 83,562 $ 753
provided by
operating
activities
Net cash used (213,128) (344,674) (3,105)
in investing
activities
Net cash 74,664 164,319 1,480
provided by
financing
activities
Net increase 11,511 (96,793) (872)
(decrease) in
cash and cash
equivalents
Cash and cash 274,543 256,316 2,309
equivalents at
beginning of
the fiscal
year
Cash and cash Y 286,054 Y 159,523 $ 1,437
equivalents at
September 30
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
Sony without 2003 2004 2004
Financial
Services
Net cash Y 307 Y 34,975 $ 315
provided by
operating
activities
Net cash used (162,656) (330,078) (2,973)
in investing
activities
Net cash 94,213 (25,593) (231)
provided by
(used in)
financing
activities
Effect of (18,396) 17,904 161
exchange rate
changes on cash
and cash
equivalents
Net decrease in (86,532) (302,792) (2,728)
cash and cash
equivalents
Cash and cash 438,515 592,895 5,342
equivalents at
beginning of
the fiscal
year
Cash and cash Y 351,983 Y 290,103 $ 2,614
equivalents at
September 30
(Millions of yen, millions of U.S. dollars)
Six months ended September 30
Consolidated 2003 2004 2004
Net cash Y 140,765 Y 111,907 $ 1,008
provided by
operating
activities
Net cash used (376,778) (670,754) (6,043)
in investing
activities
Net cash 179,388 141,358 1,274
provided by
financing
activities
Effect of (18,396) 17,904 161
exchange rate
changes on cash
and cash
equivalents
Net decrease in (75,021) (399,585) (3,600)
cash and cash
equivalents
Cash and cash 713,058 849,211 7,651
equivalents at
beginning of
the fiscal
year
Cash and cash Y 638,037 Y 449,626 $ 4,051
equivalents at
September 30
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