20-F 1 d358485d20f.htm FORM 20-F FORM 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from/to

or

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report:

Commission file number 1-6439

Sony Kabushiki Kaisha

(Exact Name of Registrant as specified in its charter)

SONY CORPORATION

(Translation of Registrant’s name into English)

Japan

(Jurisdiction of incorporation or organization)

7-1, KONAN 1-CHOME, MINATO-KU,

TOKYO 108-0075 JAPAN

(Address of principal executive offices)

J. Justin Hill, Senior Vice President, Investor Relations

Sony Corporation of America

25 Madison Avenue, 26th Floor

New York, NY 10010-8601

Telephone: 212-833-6722

E-mail: ir.sony@am.sony.com

(Name, Telephone, E-mail and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares*   New York Stock Exchange
Common Stock**   New York Stock Exchange
* American Depositary Shares evidenced by American Depositary Receipts.
     Each American Depositary Share represents one share of Common Stock.
** No par value per share.
     Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

     Outstanding as of  
     March 31, 2017      March 31, 2017  

Title of Class

   (Tokyo Time)      (New York Time)  

Common Stock

     1,262,690,438     

American Depositary Shares

        106,342,079  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☑    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☑

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

☑  Large accelerated filer

   ☐  Accelerated filer    ☐  Non-accelerated filer    ☐  Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP  ☑

   International Financial Reporting Standards as issued by the International Accounting Standards Board  ☐    Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17  ☐

     Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ☐

     No  ☑

 

 

 


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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,” “aim,” “intend,” “seek,” “may,” “might,” “could” or “should,” 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, judgments and beliefs in light of the information currently available to it. Sony cautions investors 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 investors should not place undue reliance on them. Investors 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 and political environment in which Sony operates and the economic and political conditions in Sony’s markets, particularly levels of consumer spending;

 

  (ii) foreign exchange rates, particularly between the yen and the U.S. dollar, the euro and other currencies in which Sony makes significant sales and incurs production costs, or in which Sony’s assets and liabilities are denominated;

 

  (iii) Sony’s ability to continue to design and develop and win acceptance of, as well as achieve sufficient cost reductions for, its products and services, including image sensors, game and network platforms, smartphones and televisions, which are offered in highly competitive markets characterized by severe price competition and continual new product and service introductions, rapid development in technology and subjective and changing customer preferences;

 

  (iv) Sony’s ability and timing to recoup large-scale investments required for technology development and production capacity;

 

  (v) Sony’s ability to implement successful business restructuring and transformation efforts under changing market and regulatory conditions;

 

  (vi) changes in laws, regulations and government policies in the markets in which Sony operates, including those related to taxation and corporate social responsibility;

 

  (vii) Sony’s ability to implement successful hardware, software, and content integration strategies, and to develop and implement successful sales and distribution strategies in light of new technologies and distribution platforms;

 

  (viii) Sony’s continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to prioritize investments correctly (particularly in the electronics businesses);

 

  (ix) Sony’s ability to maintain product quality and customer satisfaction with its products and services;

 

  (x) the effectiveness of Sony’s strategies and their execution, including but not limited to the success of Sony’s acquisitions, joint ventures and other strategic investments;

 

  (xi) significant volatility and disruption in the global financial markets or a ratings downgrade;

 

  (xii) Sony’s ability to forecast demands, manage timely procurement and control inventories;

 

  (xiii) Sony’s reliance on external business partners, including for the procurement of parts, components, software and network services for its products or services, the manufacturing, supply and distribution of its products, and its other business operations;

 

  (xiv) the outcome of pending and/or future legal and/or regulatory proceedings;

 

  (xv) shifts in customer demand for financial services such as life insurance and Sony’s ability to conduct successful asset liability management in the Financial Services segment;

 

  (xvi) the impact of changes in interest rates and unfavorable conditions or developments (including market fluctuations or volatility) in the Japanese equity markets on the revenue and operating income of the Financial Services segment;

 

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  (xvii) the ability of Sony, its third-party service providers or business partners to anticipate and manage cybersecurity risk, including the risk of unauthorized access to Sony’s business information, potential business disruptions or financial losses; and

 

  (xviii) risks related to catastrophic disasters or similar events.

Risks and uncertainties also include the impact of any future events with material adverse impact.

Important information regarding risks and uncertainties is also set forth elsewhere in this annual report, including in “Risk Factors” included in “Item 3. Key Information,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” “Legal Proceedings” included in “Item 8. Financial Information,” Sony’s consolidated financial statements referenced in “Item 8. Financial Information” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

In this document, Sony Corporation and its consolidated subsidiaries are together referred to as “Sony” or “Sony Group.” In addition, sales and operating revenue are referred to as “sales” in the narrative description except in the consolidated financial statements.

 

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TABLE OF CONTENTS

 

Item 1. Identity of Directors, Senior Management and Advisers

     6  

Item 2. Offer Statistics and Expected Timetable

     6  

Item 3. Key Information

     6  

A. Selected Financial Data

     6  

B. Capitalization and Indebtedness

     7  

C. Reasons for the Offer and Use of Proceeds

     7  

D. Risk Factors

     7  

Item 4. Information on the Company

     23  

A. History and Development of the Company

     23  

B. Business Overview

     25  

C. Organizational Structure

     34  

D. Property, Plant and Equipment

     35  

Item 4A. Unresolved Staff Comments

     36  

Item 5. Operating and Financial Review and Prospects

     37  

A. Operating Results

     37  

B. Liquidity and Capital Resources

     61  

C. Research and Development

     63  

D. Trend Information

     64  

E. Off-balance Sheet Arrangements

     68  

F. Contractual Obligations, Commitments, and Contingent Liabilities

     69  

Critical Accounting Policies and Estimates

     70  

Recently Adopted Accounting Standards

     76  

Recent Accounting Pronouncements

     76  

Item 6. Directors, Senior Management and Employees

     76  

A. Directors and Senior Management

     76  

B. Compensation

     83  

C. Board Practices

     88  

D. Employees

     92  

E. Share Ownership

     93  

Item 7. Major Shareholders and Related Party Transactions

     94  

A. Major Shareholders

     94  

B. Related Party Transactions

     94  

C. Interests of Experts and Counsel

     94  

Item 8. Financial Information

     95  

A. Consolidated Statements and Other Financial Information

     95  

Legal Proceedings

     95  

Dividend Policy

     95  

B. Significant Changes

     96  

Item 9. The Offer and Listing

     96  

A. Offer and Listing Details

     96  

B. Plan of Distribution

     96  

C. Markets

     97  

D. Selling Shareholders

     97  

E. Dilution

     97  

F. Expenses of the Issue

     97  

Item 10. Additional Information

     97  

A. Share Capital

     97  

B. Memorandum and Articles of Association

     97  

C. Material Contracts

     105  

D. Exchange Controls

     105  

E. Taxation

     106  

F. Dividends and Paying Agent

     108  

G. Statement by Experts

     108  

H. Documents on Display

     108  

I. Subsidiary Information

     109  

Item 11. Quantitative and Qualitative Disclosures about Market Risk

     109  

Item 12. Description of Securities Other Than Equity Securities

     110  

A. Debt Securities

     110  

 

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B. Warrants and Rights

     110  

C. Other Securities

     110  

D. American Depositary Shares

     110  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     111  

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     112  

Item 15. Controls and Procedures

     112  

Item 16. [Reserved]

     113  

Item 16A. Audit Committee Financial Expert

     113  

Item 16B. Code of Ethics

     113  

Item 16C. Principal Accountant Fees and Services

     113  

Audit and Non-Audit Fees

     113  

Audit Committee’s Pre-Approval Policies and Procedures

     113  

Item 16D. Exemptions from the Listing Standards for Audit Committees

     114  

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     114  

Item 16F. Change in Registrant’s Certifying Accountant

     114  

Item 16G. Disclosure About Differences in Corporate Governance

     115  

Item 16H. Mine Safety Disclosure

     120  

Item 17. Financial Statements

     120  

Item 18. Financial Statements

     120  

Item 19. Exhibits

     121  

Signatures

     122  

 

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Item  1. Identity of Directors, Senior Management and Advisers

Not Applicable

 

Item  2. Offer Statistics and Expected Timetable

Not Applicable

 

Item  3. Key Information

 

A. Selected Financial Data

 

     Fiscal year ended March 31  
     2013     2014     2015     2016     2017  
     (Yen in millions, yen per share amounts)  

Income statement data:

          

Sales and operating revenue

     6,795,504       7,767,266       8,215,880       8,105,712       7,603,250  

Equity in net income (loss) of affiliated companies

     (6,948     (7,374     3,921       2,238       3,563  

Operating income

     226,503       26,495       68,548       294,197       288,702  

Income before income taxes

     242,084       25,741       39,729       304,504       251,619  

Income taxes

     140,398       94,582       88,733       94,789       124,058  

Net income (loss) attributable to Sony Corporation’s stockholders

     41,540       (128,369     (125,980     147,791       73,289  

Comprehensive income (loss)

     325,798       121,978       34,317       (44,915     143,652  

Data per share of Common Stock:

          

Net income (loss) attributable to Sony Corporation’s stockholders*

          

— Basic

     41.32       (124.99     (113.04     119.40       58.07  

— Diluted

     38.79       (124.99     (113.04     117.49       56.89  

Cash dividends declared Interim

     12.50       12.50             10.00       10.00  
     (15.18 cents     (12.12 cents           (8.09 cents     (8.79 cents

Cash dividends declared Fiscal year-end

     12.50       12.50             10.00       10.00  
     (12.46 cents     (12.19 cents           (9.01 cents     (9.13 cents

Balance sheet data:

          

Sony Corporation’s stockholders’ equity

     2,192,262       2,258,137       2,317,077       2,463,340       2,497,246  

Common stock

     630,923       646,654       707,038       858,867       860,645  

Net assets

     2,672,004       2,783,141       2,928,469       3,124,410       3,135,422  

Total assets

     14,211,033       15,333,720       15,834,331       16,673,390       17,660,556  

Number of shares issued at fiscal year-end (thousands of shares of common stock)

     1,011,950       1,044,708       1,169,773       1,262,494       1,263,764  

Sony Corporation’s stockholders’ equity per share of common stock

     2,168.62       2,163.63       1,982.54       1,952.79       1,977.72  

* Refer to Note 22 of the consolidated financial statements.

 

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     Average      High      Low      Period-end  
     (Yen)  

Yen exchange rates per U.S. dollar:

           

Fiscal year ended March 31

           

2013

     82.96        96.16        77.41        94.16  

2014

     100.15        105.25        92.96        102.98  

2015

     109.75        121.50        101.26        119.96  

2016

     120.04        125.58        111.30        112.42  

2017

     108.25        118.32        100.07        111.41  

2017

           

January

            117.68        112.72        112.72  

February

            114.34        111.74        112.06  

March

            115.02        110.48        111.41  

April

            111.52        108.40        111.44  

May

            114.19        110.68        110.71  

June (through June 9)

            111.24        109.34        110.61  

The yen exchange rates represent noon buying rates for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York for the business days in the respective periods.

 

B. Capitalization and Indebtedness

Not Applicable

 

C. Reasons for the Offer and Use of Proceeds

Not Applicable

 

D. Risk Factors

This section contains forward-looking statements that are subject to the Cautionary Statement appearing on page 2 of this annual report. Risks to Sony are also discussed elsewhere in this annual report, including, without limitation in the other sections of this annual report referred to in the Cautionary Statement.

Sony must overcome increasingly intense competition, especially in its electronics businesses.

Sony’s electronics businesses compete against competitors, including new entrants, on the basis of various factors including price and function. Even for those products where Sony believes it has a strong competitive advantage, such as image sensors, it is possible that its competitors’ technological capabilities will catch up with Sony’s, and Sony will be unable to maintain its advantageous market position. In its consumer electronics businesses, in order to produce products that appeal to changing and increasingly diverse consumer preferences or to overcome the fact that a relatively high percentage of consumers already possess products similar to those that Sony offers, Sony must develop superior technology, anticipate consumer tastes and rapidly develop attractive and differentiated products with competitive selling prices and features. Sony faces increasingly intense pricing pressure from competitors, retailer consolidation, and shorter product cycles in a variety of consumer product categories. Sony’s operating results depend on Sony’s ability to continue to efficiently develop and offer products at competitive prices, through multiple sales channels, that meet changing and increasingly diverse consumer preferences. If Sony is unable to maintain its advantageous market position in the fields in which it has a technological or other competitive advantage, if Sony is unable to effectively anticipate and counter the ongoing price erosion that frequently affects its consumer products, if there is a change in existing business models or consumer preferences, or if the average selling prices of its consumer products decrease faster than Sony is able to reduce its manufacturing costs, Sony’s operating results and financial condition may be adversely impacted.

To remain competitive and stimulate customer demand, Sony must successfully manage frequent introductions of, and transitions to, new products, semiconductors, components, and services, while managing the impact on the sales of Sony’s existing products, semiconductors, components, and services.

Due to the highly volatile and competitive nature of the consumer electronics, network services and mobile communication industries, Sony must continually introduce, enhance and stimulate customer demand for products, semiconductors (including image sensors), components, services and technologies in both mature and

 

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developing markets. The successful introductions of, and transitions to, new products, semiconductors, components, and services depend on a number of factors, such as the timely and successful completion of development efforts, market acceptance, Sony’s ability to plan and execute an effective marketing strategy, Sony’s ability to manage the risks associated with new products and production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities to meet anticipated demand, and the risk that new products, semiconductors, components, and services may have quality or other issues in the early stages of introduction.

Additionally, markets for existing products and services such as smartphones, and the image sensors within, or game consoles might contract as consumer preferences shift, or new, competing technologies are introduced. Under these circumstances, Sony must respond to changing consumer demands with appealing new products and services as well as continue to improve the value of its existing products and services.

Accordingly, if Sony cannot adequately manage frequent introductions of, and transitions to, new products, semiconductors, components and services, Sony’s operating results and financial condition may be adversely impacted.

Sony is subject to competition from firms that may be more specialized or have greater resources.

Sony has several business segments in different industries with many product and service categories, which cause it to compete with many existing and new competitors ranging from large multinational companies to highly specialized entities that focus on only a few businesses. In addition, outsourced manufacturing services partners may enter and compete with Sony in markets in which they currently supply products to Sony. Furthermore, current and future competitors may have greater financial, technical, labor and marketing resources available to them than those available to the businesses of Sony, and Sony may not be able to fund or invest in certain areas of its businesses to the same degree as its competitors or match competitor pricing. A failure to efficiently anticipate and respond to these established and new competitors may adversely impact Sony’s operating results.

Sony’s investments in research and development may not yield the expected results.

Sony’s businesses operate in intensely competitive markets characterized by changing consumer preferences and rapid technological innovation. Due to advanced technological innovation and the relative ease of technology imitation, new products and services tend to become standardized more rapidly, leading to more intense competition and ongoing price erosion. In order to strengthen the competitiveness of its products in this environment, Sony continues to invest heavily in research and development(“R&D”), particularly in growth areas such as image sensors and the Game & Network Services (“G&NS”) segment, and intends to limit its expenses in markets it deems mature or as having limited growth potential. However, Sony may not be successful in identifying growth potential and evaluating major market trends, its investments may not yield the innovation or the expected results quickly enough, or competitors may lead Sony in technological innovation. This may hinder Sony’s ability to commercialize, in a timely manner, new and competitive products and services that meet the needs of the market, which consequently may adversely impact Sony’s operating results as well as its reputation.

Sony’s business restructuring and transformation efforts are costly and may not attain their objectives.

Sony is implementing restructuring initiatives that focus on profitability, business autonomy, shareholder value and the clear positioning of each business within the overall business portfolio. Restructuring charges in the amount of 98.0 billion yen, 38.3 billion yen and 60.2 billion yen were recorded in the fiscal years ended March 31, 2015, 2016 and 2017, respectively. Restructuring charges for the fiscal year ended March 31, 2017 include an impairment charge of 42.3 billion yen resulting from the planned transfer of the battery business. While Sony anticipates recording approximately 15.0 billion yen of restructuring charges in the fiscal year ending March 31, 2018, significant additional or future restructuring charges may be recorded due to reasons such as the impact of economic downturns or exiting from unprofitable businesses, including the potential sale of certain businesses. An example of such additional restructuring charges occurred during the fiscal year ended March 31, 2017, in which restructuring charges were initially estimated to be approximately 12.0 billion yen; however, the actual restructuring charges incurred were 60.2 billion yen due to the decision to sell the battery business. Restructuring charges are recorded primarily in cost of sales, selling, general and administrative (“SGA”) expenses and other operating (income) expense, net, and thus adversely affect Sony’s operating income (loss) and net income (loss) attributable to Sony’s stockholders (refer to Note 19 of the consolidated financial statements). Sony continues to take initiatives to optimize its manufacturing operations, utilize outsourced

 

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manufacturing, reduce SGA expenses across the Sony group, outsource support functions and information processing operations, and optimize business process across functions, including sales and marketing, manufacturing, logistics, procurement, quality and R&D.

Due to internal or external factors, efficiencies and cost savings from the above-mentioned and other restructuring and transformation initiatives may not be realized as scheduled and, even if those benefits are realized, Sony may not be able to achieve the expected level of profitability due to market conditions worsening beyond expectations. Possible internal factors may include, for example, changes in restructuring and transformation plans, an inability to implement the initiatives effectively with available resources, an inability to coordinate effectively across different business groups, delays in implementing the new business processes or strategies, or an inability to effectively manage and monitor the post-transformation performance of the operation. Possible external factors may include, for example, delays in obtaining necessary regulatory approvals, as well as increased or unanticipated burdens from local legal or regulatory restrictions, including labor regulations and labor union agreements, or from customary Japanese labor practices that may prevent Sony from executing its restructuring initiatives as planned. The inability to fully and successfully implement restructuring and transformation programs may adversely affect Sony’s operating results and financial condition. Additionally, operating cash flows may be reduced as a result of payments for restructuring charges. For example, it had been anticipated that no operating losses or exit costs related to the planned transfer of the battery business to Murata Manufacturing Co., Ltd. would be incurred during the fiscal year ending March 31, 2018 because the planned transfer was originally scheduled to close during the fiscal year ended March 31, 2017. However, the timing of this planned transfer changed due to the timing of the regulatory approvals, and as a result Sony expects to incur losses and expenses during the fiscal year ending March 31, 2018.

Sony’s acquisitions, joint ventures and investments may not be successful.

Sony actively engages in acquisitions, joint ventures and other strategic investments in order to acquire new technologies, efficiently develop new businesses, and enhance its business competitiveness. For example, in February 2016, Sony completed the acquisition of Altair Semiconductor, which develops and sells products focused on LTE (Long Term Evolution) technologies. Additionally, in February 2017, Sony completed the first phase of a two-phase acquisition of the TEN Sports Network, which owns leading sports networks both within and outside of India. Furthermore, Sony has previously engaged in joint ventures with third parties in order to reduce its capital investment, reduce operating costs and share risk with its joint venture partners, and may do so again in the future. Moreover, Sony may sell its equity interest in a joint venture or buy out the joint venture partner’s equity due to the achievement of its original objectives or other reasons. For example, in September 2016, Sony acquired the 50% equity interest in Sony/ATV Music Publishing LLC (“Sony/ATV”) held by the Estate of Michael Jackson (the “Estate”) and Sony/ATV became a wholly-owned subsidiary of Sony. Sony/ATV was Sony’s joint venture with the Estate in the music publishing business.

Sony may incur significant expenses to acquire and integrate businesses. Additionally, Sony may not achieve strategic objectives, planned revenue improvements and cost savings, and may not retain key personnel of the acquired businesses. Sony’s operating results may also be adversely affected by the assumption of liabilities related to any acquired businesses.

Sony currently has investments in several joint ventures and strategic partnerships, and may engage in new investments in the future. If Sony and its partners are unable to reach their common financial objectives successfully due to changes in the competitive environment, strategic or cultural differences, failure to achieve synergies or other reasons, Sony’s operating results may be adversely affected. Sony’s operating results may also be adversely affected in the short- and medium-term during a partnership, even if Sony and its partners remain on course to achieve their common financial objectives. In addition, by participating in joint ventures or other strategic investments, Sony may encounter conflicts of interest, may not maintain sufficient control over these relationships, including over cash flow, and may be faced with an increased risk of the loss of proprietary technology or know-how. Sony’s reputation may be harmed by the actions or activities of a joint venture that uses the Sony brand. Sony may also be required to provide additional funding or debt guarantees to a joint venture, or to buy-out a joint venture partner, sell its share or dissolve a joint venture, whether as a result of financial performance, or otherwise. Moreover, if the value of any of Sony’s investments in an affiliate accounted for under the equity method declines below the carrying value of Sony’s investment, and such decrease is judged to be other than temporary, Sony will be required to record an impairment loss, and the loss may increase if Sony is unable to dispose of such investments due to contractual or other reasons.

 

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Sony may not be able to recoup the capital expenditures or investments it makes to increase production capacity.

Sony continues to invest in production facilities and equipment in its electronics businesses, including image sensor fabrication facilities to meet the demand for image sensors, particularly for use in smartphones. For example, in the fiscal year ended March 31, 2016, Sony signed an agreement with Toshiba Corporation (“Toshiba”) to acquire semiconductor fabrication facilities, equipment and related assets for 19.0 billion yen, of which a majority was acquired by March 2017. Sony invested approximately 45 billion yen of capital in the fiscal year ended March 31, 2017 and expects to invest approximately 110 billion yen of capital in the fiscal year ending March 31, 2018, in order to increase image sensor production capacity. However, if market changes and corresponding declines in demand result in a mismatch between sales volume and anticipated production volumes, or if unit sales prices decline due to market oversupply, Sony may not be able to recover its capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take longer than expected. In particular, with respect to image sensors, much of Sony’s sales depends on smartphones, and it is possible that Sony will not be able to achieve its expected sales volume, based on factors such as consumer demand and the competitive environment in the smartphone market, or the business decisions, operating results, or financial condition of Sony’s major customers. As a result of these factors, the carrying value of the related assets may be subject to an impairment charge, which may adversely affect Sony’s profitability.

Sony’s sales and profitability may be affected by the operating performance of wholesalers, retailers and other resellers.

Sony is dependent for the distribution of its products on wholesalers, retailers and other resellers, many of whom also distribute competitors’ products. For example, Sony Mobile Communications Inc. (“Sony Mobile”) is dependent on cellular network carriers’ distribution channels for distribution of its smartphone products in many countries. The operating results and financial condition of many wholesalers, retailers and other resellers have been adversely impacted by competition from online retailers and weak economic conditions.

Sony invests in programs to incentivize wholesalers, retailers, and other resellers to position and promote Sony’s products, but there is no assurance that these programs will provide a significant return or incremental revenue by persuading consumers to buy Sony products instead of competitors’ products. In some cases, Sony’s smartphones sold through cellular network carriers are subsidized by the carriers. There is no assurance that such subsidies will be continued at all or in the same amounts upon renewal of Sony’s agreements with these carriers or in agreements Sony enters into with new carriers.

Sony also sells many of its products directly to consumers through its online and retail stores. Some wholesalers and retailers may perceive Sony’s direct sales as conflicting with their business interests as distributors and resellers of Sony’s products. Such a perception could discourage resellers from investing resources in the distribution and sale of Sony’s products or lead them to limit or cease distribution of those products.

Sony’s operating results and financial condition may be adversely affected if the financial condition of these wholesalers, retailers, and other resellers weakens, if they stop distributing Sony’s products, or if uncertainty regarding demand for Sony’s products or other factors cause them to reduce their ordering, marketing, subsidizing, and distribution of Sony’s products.

As a global company, Sony is subject to a wide range of laws and regulations and a growing consumer focus on corporate social responsibility and sourcing practices in the countries where it does business. Those laws and regulations, as well as consumer focus, might change in significant ways, leading to an increase in the costs of Sony’s operations, a curtailment of Sony’s activities, and/or an adverse effect on Sony’s reputation.

Sony is subject to laws and regulations affecting its operations in a number of areas including advertising, data protection, consumer protection, import and export requirements, anti-corruption, anti-competition, environmental protection, occupational health and safety, labor practices and human rights. These include laws and regulations relating to greenhouse gas emission reduction, air pollution, water pollution, and the use of hazardous substances in manufacturing and non-manufacturing sites; energy efficiency of certain products and recycling of products, batteries and packaging materials; sourcing of raw materials; modern slavery; as well as laws relating to the collection, use, retention, security and transfer of personally identifiable information (“PII”). For example, the European Union’s (“EU”) General Data Protection Regulation, which will become effective in May 2018, will impose significant new worldwide obligations on the handling of PII of EU residents. In many cases, these laws apply not only to customer data but also may restrict transfers of employee PII among Sony’s subsidiaries.

 

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Compliance with these laws, regulations and similar requirements may be onerous and expensive. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may increase in the future as a result of changes in these laws and regulations, or in their interpretation, could individually or in the aggregate make Sony’s products less attractive to its customers, delay introduction of new products in one or more regions or cause Sony to change or limit its business practices. Sony has implemented policies and procedures designed to ensure compliance with applicable laws and regulations but there is no assurance that Sony’s employees, contractors or agents will not violate such laws or Sony’s policies and procedures, and subject Sony to fines, penalties, legal judgments, restrictions on business operations and/or reputational damage.

Additionally, there is a growing global regulatory and consumer focus on corporate social responsibility and sourcing practices and increasing regulatory obligations of public disclosure regarding these matters. In particular, there is an interest regarding labor practices, including work environments at electronic component manufacturers and original design manufacturing/original equipment manufacturing (“ODM/OEM”) product manufacturers operating in Asia. Increased regulation and public pressure in this area could cause Sony’s compliance costs to increase, particularly since Sony uses many components and materials to manufacture its products and relies on suppliers to provide these components and materials but does not directly control the suppliers’ procurement or employment practices. A finding of non-compliance, or the perception that Sony has not responded appropriately to growing consumer concern for such issues, whether or not Sony is legally required to do so, may adversely affect Sony’s operating results and financial condition if that finding or that perception causes consumers to choose products of other companies.

Increased reliance on external business partners may increase financial, brand image, reputational and other risks to Sony.

With the increasing necessity of pursuing quick business development and high operating efficiency with limited managerial resources, Sony increasingly relies on third-party suppliers and business partners for parts and components, software and network services. Sony also relies on other business partners to provide software technologies, such as the Android OS for mobile products and televisions, and services. As a result, Sony’s products or services may be affected by quality issues caused by the failure of third-party parts and components, software, or network services. In addition, reliance on third-party software technologies may make it increasingly difficult for Sony to differentiate its products from competitors’ products. Moreover, third-party parts and components, software and network services used in Sony products or services may be subject to copyright or patent infringement claims. Particularly in Sony’s electronics businesses, the uncertain economic environment surrounding Sony is compounded by continued, intense pricing pressure from competitors, shrinking markets for certain key products and shorter product cycles. In this environment, third-party business partners may also discontinue support or otherwise change business terms for Sony’s products and services, or prioritize the products and services of Sony’s competitors or customers outside the electronics industry. Such issues resulting from reliance on third-party suppliers and business partners for parts and components, software, and network services may adversely affect Sony’s operating results, brand image or reputation. Sony also utilizes outsourced manufacturing services for product and component supply in its consumer electronics businesses. If Sony cannot adequately manage these outsourcing relationships, or if natural disasters, cyber-attacks or other events affect Sony’s business partners, Sony’s production operations may be adversely affected. Sony may not be able to achieve target volume or quality levels, and may risk losing proprietary technology or know-how. Sony also outsources activities, including certain procurement, logistics, sales, data processing, human resources, accounting, and other services, to external business partners. Sony’s operations may be affected if the external business partners do not comply with applicable laws or regulations, or if they infringe third-party intellectual property rights, or if they are subject to business or service interruption caused by accidents, natural disasters, cyber-attacks or bankruptcies. Furthermore, a breach of a business partner’s information security may result in unauthorized access to Sony’s business information, including proprietary information, intellectual property, employee information and data related to Sony’s customers, suppliers and other business partners.

Sony must efficiently manage its procurement of parts and components and control its inventory of products, parts, and components within volatile markets.

In Sony’s electronics businesses, Sony uses a large volume of parts and components, such as semiconductors including chipsets for mobile products, and liquid crystal display (“LCD”) panels, for its products. Fluctuations in the availability and pricing of parts and components can adversely affect Sony’s operating results. For instance, shortages of parts or components or fluctuations in the prices of raw materials may result in sharply higher prices and an increase in the cost of goods sold. Also, shortages or delayed

 

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shipments of critical parts or components, particularly where Sony is substantially reliant on one supplier, where there is limited production capacity for custom components, or where there are initial manufacturing capacity constraints for products or components which use new technologies, may result in a reduction or suspension of production at Sony’s or its business partners’ manufacturing sites.

Sony places orders for parts and components in line with production and inventory plans determined in advance based on its forecast of consumer demand, which is highly volatile and difficult to predict. Inaccurate forecasts of consumer demand or inadequate business planning can lead to a shortage or excess of inventory, which can disrupt production plans and result in lost sales opportunities or inventory adjustments. Sony writes down the value of its inventory when the underlying parts, components or products have become obsolete, when inventory levels exceed the amount expected to be used, or when the value of the inventory is otherwise recorded at a value higher than net realizable value. For example, in the fiscal year ended March 31, 2015, Sony recorded an 11.2 billion yen write-down of PlayStation®Vita (“PS Vita”) and PlayStation TV (“PS TV”) components because the latest forecast of PS TV unit sales did not reach Sony’s original forecast. Additionally, Sony recorded a 6.5 billion yen inventory write-down of certain image sensors for mobile products in the Semiconductors segment in the fiscal year ended March 31, 2017. Sony has experienced shortages of certain parts and components as a result of the damage to its suppliers caused by natural disasters, and may experience such shortages due to similar circumstances again in the future. Such lost sales opportunities, inventory adjustments, or shortages of parts and components have had and may have an adverse impact on Sony’s operating results and financial condition.

Sony’s sales and profitability are sensitive to economic trends in Sony’s major markets.

Sony’s sales and profitability are sensitive to economic trends in each of the major markets in which Sony operates. These markets may be subject to significant economic downturns, resulting in an adverse impact on Sony’s operating results and financial condition. In the fiscal year ended March 31, 2017, 31.5%, 22.0% and 21.5% of Sony’s sales were attributable to Japan, the U.S. and Europe, respectively.

Sony’s operating results depend on the demand from consumers and commercial customers and the performance of retailers, wholesalers and other resellers. An actual or expected deterioration of economic conditions in any of Sony’s major markets may depress consumer confidence and spending, resulting in an actual decline in consumption. Commercial customers and other business partners may experience deterioration in their own businesses mainly due to cash flow shortages, difficulty in obtaining financing and reduced end-user demand, resulting in reduced demand for Sony’s products and services. Commercial customers’ difficulty in fulfilling their obligations to Sony may also have an adverse impact on Sony’s operating results and cash flows. Sony’s suppliers are also susceptible to similar conditions that may impact their ability to fulfill their contractual obligations and may adversely impact Sony’s operating results if products and services cannot be obtained at competitive prices.

Global economic conditions may also affect Sony in other ways. For example, further restructuring charges, higher pension and other post-retirement benefit costs or funding requirements, and additional asset impairment charges, among other factors, have had and may have an adverse impact on Sony’s operating results, financial condition and cash flows.

Foreign exchange rate fluctuations can affect Sony’s operating results and financial condition.

Sony’s operating results and financial condition are sensitive to foreign exchange rate fluctuations because many of Sony’s products are sold in countries other than the ones in which they were developed and/or manufactured. For example, within Sony’s electronics businesses, research and development and headquarters’ overhead costs are incurred mainly in yen, and manufacturing costs, including material costs, costs of procurement of parts and components, and costs of outsourced manufacturing services, are incurred mainly in the U.S. dollar and yen. Sales are dispersed and recorded in Japanese yen, the U.S. dollar, euro, Chinese renminbi, and local currencies of other areas, including emerging markets. Consequently, foreign exchange rate fluctuations have had and may have an adverse impact on Sony’s operating results, especially when the yen or the euro weaken significantly against the U.S. dollar, when the yen strengthens significantly against the euro, or when the U.S. dollar strengthens against emerging market currencies. Sony’s operating results may also be adversely impacted by foreign exchange rate fluctuations since Sony’s consolidated statements of income are prepared by translating the local currency denominated operating results of its subsidiaries around the world into yen. Furthermore, as Sony’s businesses have expanded in China and other areas, including emerging markets, the impact of fluctuations of foreign currency exchange rates in these areas against the U.S. dollar and yen has increased. Mid- to long-term changes in exchange rate levels may interfere with Sony’s global allocation of

 

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resources and hinder Sony’s ability to engage in research and development, procurement, production, logistics, and sales activities in a manner that is profitable after the effect of such exchange rate changes.

Although Sony hedges most of the net short-term foreign currency exposure resulting from import and export transactions shortly before they are projected to occur, such hedging activity cannot entirely eliminate the risk of adverse exchange rate fluctuations.

Moreover, since Sony’s consolidated balance sheet is prepared by translating the local currency denominated assets and liabilities of its subsidiaries around the world into yen, Sony’s equity capital may be adversely impacted when the yen strengthens significantly against the U.S. dollar, the euro and/or other foreign currencies.

Ratings downgrades or significant volatility and disruption in the global financial markets may adversely affect the availability and cost of Sony’s funding.

Sony’s credit ratings may be adversely impacted by unfavorable operating results and a decline in its financial condition. Any credit rating downgrades may, in turn, result in an increase in Sony’s cost of funding and may have an adverse impact on Sony’s ability to access commercial paper or mid- to long-term debt markets on acceptable terms.

Additionally, global financial markets may experience significant levels of volatility and disruption, generally putting downward pressure on financial and other asset prices and impacting credit availability. Historically, Sony’s primary sources of funds have been cash flows from operations, the issuance of commercial paper and other debt securities such as term debt as well as borrowings from banks and other institutional lenders. There can be no assurance that such sources will continue to be available at acceptable terms or be sufficient to meet Sony’s needs.

As a result, Sony may seek other sources of financing to fund operations, such as the draw-down of funds from contractually committed lines of credit from financial institutions or the sale of assets, in order to repay commercial paper and mid- to long-term debt as they become due, and to meet other operational and liquidity needs. However, such funding sources may also not be available at acceptable terms or be sufficient to meet Sony’s requirements. As a result, Sony’s operating results, financial condition and liquidity may be adversely affected.

Sony is subject to the risks of operations in different countries.

Sony’s operations are conducted in many countries around the world, and these international operations can create challenges. For example, in Sony’s electronics businesses, production and procurement of products, parts and components in China and other Asian countries increase the time necessary to supply products to other markets worldwide, which can make it more difficult to meet changing customer demand. Further, in certain countries, Sony may encounter difficulty in planning and managing operations due to unfavorable political or economic factors, such as armed conflicts, deterioration in foreign relations, domestic cultural and religious conflicts, non-compliance with expected business conduct, local regulations, trade policies and taxation laws and a lack of adequate infrastructure. Moreover, changes in local regulations, trade policies and taxation laws, such as local content regulations, business or investment permit approval requirements, foreign exchange controls, import or export controls, or the nationalization of assets or restrictions on the repatriation of income from foreign operations and investments in major markets and regions may affect Sony’s operating results. For example, a labor dispute or a change in labor regulations or policies may significantly change local labor environments. Such a condition in China or another country in which Sony or a partner manufactures could cause interruptions in production and shipping of Sony’s products and parts, a sharp rise in local labor costs, or a shortage of well-trained employees, which may adversely affect Sony’s operating results. If international or domestic political and military instability disrupts Sony’s business operations or those of its business partners, or depresses consumer confidence, Sony’s operating results and financial condition may be adversely affected. In addition, the time required to recover from disruptions, whether caused by these factors or other causes, such as natural disasters or pandemics, may be greater in certain countries. Moreover, Sony’s susceptibility to the above-mentioned risks may be greater in certain emerging markets that continue to be important to its operations, and this may have an adverse impact on its operating results and financial condition.

Sony’s success depends on the ability to recruit and retain skilled technical employees and management professionals.

In order to successfully continue to develop, design, manufacture, market, and sell products and services, including networked products, game hardware and software, film, television and music content as well as

 

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financial instruments in increasingly competitive markets, Sony must attract and retain key personnel, including its executive team, other management professionals, creative talent and skilled employees such as hardware and software engineers. However, there is high demand for such skilled employees, and Sony may be unable to attract or retain qualified employees to meet future business needs. In addition, business divestitures, restructuring or other transformation initiatives may lead to an unintended loss of experienced human resources or know-how. If this should happen, it may adversely affect Sony’s operating results and financial condition.

Sony may not be successful in integrating its business strategies and operations across different business units to increase the competitiveness of hardware, software, entertainment content and network services.

Sony believes that integrating its hardware, software, entertainment content and network services is essential in differentiating itself in the marketplace and in generating revenue growth and profitability. For example, in April 2016, Sony Computer Entertainment Inc. (“SCEI”) and Sony Network Entertainment International LLC (“SNEI”) founded Sony Interactive Entertainment LLC (“SIE”), a new company that combined all the business units belonging to SCEI and SNEI, including hardware, software, content and network services operations. However, this strategy depends on the continuing development (both inside and outside of Sony) of network services technologies, strategic and operational coordination and prioritization among Sony’s various business units and sales channels, and the standardization of technological and interface specifications industry-wide and across Sony’s networked products and business groups. Furthermore, in such a competitive business environment, which continuously changes with new entrants, it is critical for Sony to continuously introduce enhanced and competitively priced hardware that is seamlessly connected to network platforms, with user interfaces that are innovative and attractive to consumers. Sony also believes that it is essential to provide competitive and differentiated content-based service offerings that include Sony and third-party licensed audio, video and game content from major motion picture and television studios, music labels and game publishers. If Sony is not successful in implementing this strategy, it may adversely affect Sony’s reputation, competitiveness and profitability.

Sony’s online activities are subject to laws and regulations that can increase the costs of operations or limit its activities.

Sony engages in a wide array of online activities, including the sale and marketing of electronics and entertainment products, entertainment network services and financial services, as well as serving as an Internet Services Provider (ISP), and is thus subject to a broad range of related laws and regulations including those relating to privacy, consumer protection, critical infrastructure protection, breach disclosure, data retention and data protection, trans-border data flows, content and broadcast regulation, defamation, age verification and other online child protections, accessibility, installation of cookies or other software on the end-user’s computers or other devices, pricing, advertising to both children and adults, taxation, copyright and trademark, promotions, and billing. The application of such laws and regulations created to address online activities, or for other purposes, including those passed prior to the popular use of the Internet that may be applied to online activities, varies among jurisdictions, may be unclear or unsettled in many instances, and is subject to change. Sony may incur substantial costs to comply with these laws and regulations and may incur substantial penalties, other liabilities, or damage to its reputation if it fails to comply with them. Compliance with these laws and regulations also may cause Sony to change or limit its online activities in a manner that may adversely affect operating results. In addition, Sony’s failure to anticipate changes to relevant laws and regulations, changes in laws that provide protections that Sony relies on in conducting its online activities, or judicial interpretations narrowing such protections, may subject Sony to greater risk of liability, increase the costs of compliance, or limit Sony’s ability to engage in certain online activities.

Sales of Sony’s consumer products including game hardware and peripherals are particularly sensitive to the seasonality of consumer demand.

Sony’s G&NS segment offers a relatively small range of game hardware and peripherals and a significant portion of overall demand for these and other products is weighted towards the year-end holiday season. Sony’s other consumer products are also dependent upon demand during the year-end holiday season. As a result, changes in the competitive environment, changes in market conditions, delays in the release of consumer products, including highly anticipated game software titles, and insufficient supply of hardware and peripherals during the year-end holiday season can adversely impact Sony’s operating results.

 

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The sales and profitability of Sony’s G&NS segment mainly depend on the penetration of its gaming platforms, which is sensitive to software line-ups, including software produced by Sony or third-party developers and publishers.

In Sony’s G&NS segment, the penetration of gaming platforms is a significant factor driving sales and profitability, which is affected by the ability to provide customers with attractive software line-ups, including software produced by Sony or third-party game software developers and publishers, and with online services, including network and cloud-based gaming and digital content delivery. There is no assurance that third-party game software developers and publishers will continue to develop and release software regularly or at all. Discontinuance or delay of software development or delays in the delivery of new online services may adversely affect Sony’s operating results.

Sony’s content businesses, including the Pictures, Music and G&NS segments, and other businesses, are subject to digital theft and illegal downloading.

Digital technology, the availability of digital media, and global Internet penetration have created risks with respect to Sony’s ability to protect copyrighted content, including pre-release content, of the Pictures, Music and G&NS segments and other businesses from digital theft and counterfeiting. In particular, software and technologies that enable the duplication, transfer or downloading of digital media files from the Internet and other sources without authorization from the owners of the rights to such content have adversely impacted and continue to threaten the conventional copyright-based business model by making it easier to create, transmit, and redistribute high-quality, unauthorized digital media files. The availability of unauthorized content significantly contributes to a decrease in legitimate product sales and puts pressure on the price of legitimate products, which may adversely affect Sony’s operating results. Sony has incurred and will continue to incur expenses to help protect its intellectual property, to develop new services for the authorized digital distribution of motion pictures, television programming, music, and games, and to combat unauthorized digital distribution of its copyrighted content. These initiatives will increase Sony’s near-term expenses and may not achieve their intended result.

Operating results for Sony’s Pictures and Music segments vary according to worldwide consumer acceptance and the availability of competing products and entertainment alternatives.

Operating results for the Pictures and Music segments can fluctuate depending upon worldwide consumer acceptance of their products, which is difficult to predict. Moreover, the Pictures segment must invest substantial amounts in motion picture and television productions and broadcast programming before learning the extent to which these products will earn consumer acceptance. Similarly, the Music segment must make significant upfront investments in artists before being able to determine how those artists and their recordings will be received by consumers. Further, the commercial success of Sony’s Pictures and Music segments’ products may be impacted by other competing products released at or near the same time, and alternative forms of entertainment and leisure activities available to consumers. Underperformance of a motion picture or television production, especially an “event” or “tent-pole” film, may have an adverse effect on the Pictures segment’s operating results in the year of release or exhibition, and in future years given the high correlation between a product’s level of success from its initial release or exhibition and subsequent revenue from other distribution markets, such as home entertainment and television. Similarly, the underperformance of a recorded music release may have an adverse effect on the Music segment’s operating results in the fiscal year of release.

Increases in the costs of producing, acquiring, or marketing entertainment content may adversely affect operating results in Sony’s Music and Pictures segments.

The success of Sony’s Music segment is highly dependent on finding and establishing artists, songwriters and music publishing catalogs that appeal to customers over the long term. If the Music segment is unable to find and establish new talented artists and songwriters or sign established artists and songwriters, its operating results may be adversely affected. Competition to identify, sign and retain such talent is intense as is the competition to sell their music. In the Pictures segment, high demand for top talent continues to contribute to increases in the cost of producing motion pictures and television programming. Competition to acquire motion pictures and television programming is intense and could result in increased acquisition-related spending. Overall increases in production and acquisition costs of the Pictures segment’s products, as well as increases in the costs to market these products, may also adversely impact the segment’s operating results.

 

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Changes in consumer behavior resulting from new technologies and distribution platforms may adversely affect operating results in Sony’s Music and Pictures segments.

Rapid changes in technology and the adoption of new technology by consumers have impacted the timing and manner in which consumers acquire and view entertainment products. Industry-wide trends such as the general maturation of physical media formats, including CD, DVD and Blu-ray Disc™ formats, the shift to digital distribution of audio and video content, and increased competition for retailer shelf space have contributed to and may continue to contribute to an industry-wide decline in the worldwide sales of physical media formats. Revenue from digital distribution, such as subscription streaming services and digital downloads, may not be sufficient to offset the decline in physical media sales that has affected and may continue to affect the operating results of Sony’s Music and Pictures segments and disc manufacturing business. For example, in fiscal year ended March 31, 2017, Sony recorded an impairment charge against the goodwill of the Pictures segment of 112.1 billion yen due to a downward revision in the future profitability projection for the Motion Pictures business within the Pictures segment. The downward revision was primarily due to a lowering of previous expectations regarding the home entertainment business (including packaged media such as DVD and Blu-ray Disc™ formats as well as digital downloads), mainly driven by an acceleration of market decline. The future profitability projection for the Motion Pictures business also reflected a reduction in the underlying profitability projections of film performance largely mitigated by measures identified to improve the profitability of the Motion Pictures business. Furthermore, the music industry has continued to see a year-over-year decline in digital download sales. If streaming services cannot attract sufficient subscribers to offset this decline, the operating results of Sony’s Music segment could be negatively impacted.

Operating results of Sony’s Pictures segment may be adversely affected by changes in advertising markets or by the failure to renew, or renewal on less favorable terms of, television carriage contracts (broadcasting agreements).

The strength of the advertising market can fluctuate in response to the economic prospects of specific advertisers or industries, advertisers’ current spending priorities and the economy in general, and this may adversely affect the Pictures segment’s television revenues. The Pictures segment’s television operations, including its worldwide television networks, derive substantial revenues from the sale of advertising on a variety of platforms. A decline in overall spending within the advertising market may have a direct adverse effect on the Pictures segment’s Media Networks’ revenues. The Pictures segment also recognizes sales from the licensing of its motion picture and television content to U.S. and international television network customers. A decline in the advertising market may also adversely affect third-party television networks’ ability to generate revenues, which may result in lower license fees paid by these networks for Sony’s content.

The Pictures segment also depends on third-party cable, satellite and other distribution systems to distribute its worldwide television networks. The failure to renew or renewal on less favorable terms of television carriage contracts (broadcasting agreements) with these third-party distributors may adversely affect the Pictures segment’s ability to generate advertising and subscription sales through its worldwide television networks.

Sony’s Pictures segment is particularly subject to labor interruption.

The Pictures segment and certain of its suppliers are dependent upon highly specialized union members, including writers, directors, actors and other talent, and trade and technical employees, who are covered by union contracts and are essential to the development and production of motion pictures and television programming. A strike by one or more of these unions, or the possibility of a strike, work slowdown or work stoppage caused by uncertainties about, or the inability to reach agreement on, a new contract could delay or halt production activities. Such a delay or halt, depending on the length of time involved, could cause a delay or interruption in the release of new motion pictures and television programming and thereby may adversely affect operating results and cash flows in the Pictures segment. An inability to reach agreement on one or more of these union contracts or renewal on less favorable terms may also increase costs within Sony’s Pictures segment and have an adverse effect on operating results.

New rules, regulations and regulatory initiatives by government authorities may adversely affect the flexibility and the operating results of Sony’s Financial Services segment.

Sony’s Financial Services segment operates in highly regulated industries subject to comprehensive regulation and supervision, including the Japanese insurance and banking industries. Future developments or changes in laws, regulations, or policies and their effects are unpredictable and may lead to increased compliance costs or limitations on operations in the Financial Services segment. Due to Sony’s common branding strategy,

 

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compliance failures in any of its businesses within the Financial Services segment may have an adverse impact on the overall business reputation of the Financial Services segment. Furthermore, additional compliance costs may adversely affect the operating results of the Financial Services segment. In addition, Sony Corporation’s ability to receive funds from its affiliate Sony Financial Holdings Inc. (“SFH”) in the form of financial support or loans is restricted by guidelines issued by regulatory agencies in Japan. If these regulations change, it may further reduce Sony Corporation’s ability to receive funds for its use.

Changes in interest rates may adversely affect the operating results and financial condition of Sony’s Financial Services segment.

Sony’s Financial Services segment engages in asset-liability management (“ALM”) in an effort to manage its investment assets in a manner appropriate to its liabilities, which arise from the insurance policies that Sony’s Financial Services segment underwrites in both its life insurance and non-life insurance businesses and the deposits, borrowings and other liabilities in its banking business. ALM considers the long-term balance between assets and liabilities in an effort to ensure stable returns. Any failure to appropriately conduct its ALM activities, or any significant changes in market conditions beyond what its ALM may reasonably address, may have an adverse effect on the financial condition and operating results of the Financial Services segment. In particular, because Sony Life Insurance Co., Ltd. (“Sony Life”)’s liabilities to policyholders generally have longer durations than its investment assets, which are concentrated in long-term Japanese national government bonds, lower or negative interest rates tend to reduce yields on Sony Life’s investment portfolio while guaranteed yields (assumptions used for calculation of insurance premiums) remain generally unchanged on outstanding policies. As a result, Sony Life’s profitability and long-term ability to meet policy commitments may be adversely affected. In addition, declines in the yield of Sony Life’s investments resulting from changes in interest rates, particularly those held in respect of interest rate-sensitive whole life insurance policies, may result in additional policy reserves being recorded and the accelerated amortization of deferred acquisition costs, since the review of actuarial assumptions used for the valuation of policy reserves and deferred acquisition costs is required at least annually. Additional policy reserves and accelerated amortization of deferred acquisition costs may have an adverse impact on Sony’s operating results and financial condition.

Declines in the value of equity securities may have an adverse impact on Sony’s operating results and financial condition, particularly in Sony’s Financial Services segment.

In the Financial Services segment, declines in the yield of Sony Life’s separate account assets, resulting from the factors such as declines in the value of equity securities, may result in additional policy reserves being recorded and the accelerated amortization of deferred acquisition costs, since the review of actuarial assumptions used for the valuation of policy reserves concerning minimum death guarantees for variable life insurance and deferred acquisition costs is required at least annually. Additional policy reserves and accelerated amortization of deferred acquisition costs may have an adverse impact on Sony’s operating results and financial condition. Sony Life engages in derivative transactions to hedge the risk of declines in the value of equity securities pertaining to minimum death guarantees for variable life insurance. However, if the derivative transactions do not produce the desired effect, Sony Life could record or face an increase in losses as a result.

For equity securities held by Sony outside of the Financial Services segment, a decrease in fair value could result in a non-cash impairment charge. Any such charge may adversely affect Sony’s operating results and financial condition.

The investment portfolio within Sony’s Financial Services segment exposes Sony to a number of additional risks other than the risks related to declines in the value of equity securities and changes in interest rates.

In the Financial Services segment, generating stable investment income is important to its operations, and the Financial Services segment’s investments are concentrated in long-term Japanese national government bonds, although it also has investments in a variety of asset classes, including shorter-term Japanese national government bonds, Japanese local government and corporate bonds, foreign government and corporate bonds, Japanese stocks, loans and real estate. In addition to risks related to changes in interest rates and the value of equity securities, the Financial Services segment’s investment portfolio is exposed to a variety of other risks, including foreign exchange risk, credit risk and real estate investment risk, any or all of which may have an adverse effect on the operating results and financial condition of the Financial Services segment. For example, mortgage loans account for 94.3% of the total loan balance, or 59.8% of the total assets of Sony Bank Inc. (“Sony Bank”), as of March 31, 2017. An increase in non-performing loans or a decline in the prices of real estate, the collateral for these mortgage loans provided by Sony Bank, may result in an increase in the allowance for doubtful accounts.

 

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Differences between actual and assumed policy benefits and claims may require Sony’s Financial Services segment to increase policy reserves in the future.

The life insurance and non-life insurance businesses of the Financial Services segment establish policy reserves for future benefits and claims. These reserves are calculated based on many assumptions and estimates, including the frequency and timing of the event covered by the policy, the amount of benefits or claims to be paid and the investment returns on the assets these businesses purchase with the premiums received. These assumptions and estimates are inherently uncertain, and the Financial Services segment cannot determine with precision the ultimate amounts that it will be required to pay for, or the timing of payment of, actual benefits and claims, or whether the assets supporting the policy liabilities will grow at the level assumed prior to the payment of benefits or claims. The frequency and timing of an event covered by a policy and the amount of benefits or claims to be paid are subject to a number of risks and uncertainties, many of which are outside of its control, including:

 

   

changes in trends underlying its assumptions and estimates, such as mortality and morbidity rates;

 

   

the availability of sufficient reliable data and its ability to correctly analyze the data;

 

   

the selection and application of appropriate pricing and rating techniques; and

 

   

changes in legal standards, claim settlement practices and medical care expenses.

If the actual experience of the insurance businesses becomes significantly less favorable than their assumptions or estimates, their policy reserves may be inadequate. Any changes in regulatory guidelines or standards with respect to the required level of policy reserves may also require that the insurance businesses establish policy reserves based on more stringent assumptions, estimates or actuarial calculations. Such events may result in a need to increase provisions for policy reserves, which may have an adverse effect on the operating results and financial condition of the Financial Services segment.

Furthermore, if actual insurance claims are higher than the estimated provision for policy reserves due to the occurrence of catastrophic events such as earthquakes or pandemic diseases in Japan, the operating results and financial condition of the Financial Services segment may be adversely impacted.

Sony’s physical facilities and information systems are subject to damage as a result of catastrophic disasters, outages, malfeasance or similar events. Such an unexpected catastrophic event may also lead to supply chain and production disruptions as well as lower demand from commercial customers, resulting in an adverse impact on Sony’s operating results.

Sony’s headquarters and many of Sony’s most advanced device manufacturing facilities, including those for semiconductors, are located in Japan, where the risk of earthquakes is relatively high compared to other parts of the world. A major earthquake in Japan, especially in Tokyo where Sony headquarters are located, the Tokai area where certain product manufacturing sites are located, or the Kyushu and Tohoku areas, where Sony’s semiconductor manufacturing sites are located, could cause substantial damage to Sony’s business operations, including damage to buildings, machinery, equipment and inventories, and the interruption to production at manufacturing facilities. For example, the earthquake of April 14, 2016 and subsequent earthquakes in the Kumamoto region in Japan caused damage to the buildings, machinery, equipment and inventories of a semiconductor manufacturing site, and production at the site was interrupted. As a result of the delay in the supply of semiconductor components, sales in the Semiconductors and IP&S segments in the fiscal year ended March 31, 2017, were lower than the level anticipated prior to the earthquakes.

In addition, offices and facilities used by Sony, its service providers and business partners, including those used for network, telecommunications and information systems infrastructure, research and development, material procurement, manufacturing, motion picture and television production, logistics, sales, and online and other services are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of unexpected catastrophic events such as natural disasters, pandemic diseases, terrorist attacks, cyber-attacks, large-scale power outages and large-scale fires. If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it may disrupt Sony’s operations, delay design, development or production, interrupt shipments and postpone the recording of sales, and result in large expenses to repair or replace these facilities or offices. In addition, if Sony’s suppliers are damaged by such catastrophic events, Sony may be exposed to supply shortages of raw materials, parts or components, which may result in a reduction or suspension of production, interruption of shipment and delays in product launches. Sony may also be exposed to price increases for raw materials, parts and components, and lower demand from commercial customers.

 

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Moreover, as computer systems, networks and online services have become increasingly important to Sony’s operating activities, the impact that computer system, network and online service shutdowns may have on Sony’s operating activities has increased. Shutdowns may be caused by events similar to those described above or other unforeseen events, such as software or hardware defects. For example, in the fiscal year ended March 31, 2015, Sony’s Pictures segment experienced a serious disruption of its network and IT infrastructure as a result of a cyber-attack. Similar events may result in the disruption of Sony’s major business operations, delays in financial reporting, design, development, production, shipments and recognition of sales, and large expenditures necessary to enhance, repair or replace such facilities and network and information systems. Furthermore, Sony’s insurance may be insufficient to cover the resulting expenditures and losses. Sony also may be unable to obtain sufficient insurance in the future, or insurance premiums may increase. These situations may have an adverse impact on Sony’s operating results and financial condition.

Sony’s brand image, reputation and business may be harmed and Sony may be subject to legal and regulatory claims if there is a breach or other compromise of Sony’s information security or that of its third-party service providers or business partners.

As a critical element of its operations, Sony, its third-party service providers and other business partners make extensive use of information technology, including computer systems, networks and online services to receive, store, process and transmit information, including Sony’s business information, which includes but is not limited to proprietary information, intellectual property, and employee information, and data related to customers, suppliers, and other business partners. Sony’s business information may be compromised by a malicious third party, or a man-made or natural event, or impacted by intentional or inadvertent actions or inactions by Sony employees, a third-party service provider or other business partner. As cyber-attacks become increasingly sophisticated, and as tools and resources become more readily available to malicious third parties, there can be no guarantee that Sony’s actions, security measures and controls designed to prevent, detect or respond to intrusion, to limit access to data, to prevent destruction, alteration, or exfiltration of data, or to limit the negative impact from such attacks, can provide absolute security against compromise. As a result, Sony’s business information may be lost, destroyed, disclosed, misappropriated, altered, or accessed without consent, and Sony’s information technology systems, or those of its service providers or other business partners, may be disrupted. Malicious third parties may also use unauthorized access to Sony’s networks as a platform to access the networks and thereby the information of Sony’s third-party business partners without Sony’s knowledge. Sony has previously been the subject of sophisticated and targeted attacks. For example, in the fiscal year ended March 31, 2015, Sony’s Pictures segment was subject to a cyber-attack that resulted in unauthorized access to, and theft and disclosure of Sony business information, including employee information and other information, and the destruction of data. In addition, Sony’s network services, online game businesses and websites of certain subsidiaries have been subject to cyber-attacks by groups and individuals with a range of motives and expertise, resulting, in some instances, in unauthorized access to, the potential or actual theft of, and/or disclosure of customer information.

In addition, even if such data is not stored on a network, and regardless of where or in what form such data is stored, Sony’s business information and other data owned or maintained by or on behalf of Sony may be compromised by malicious third parties, or man-made or natural events, or impacted by intentional or inadvertent actions or inactions of Sony employees, or those of a third-party service provider, through loss, destruction, disclosure, misappropriation, alteration or unauthorized access to such data.

Further, the confidentiality, integrity and availability of products and services, including networked products and online services, provided by Sony or its service providers or business partners may be compromised by malicious third parties or man-made or natural events, or impacted by intentional or inadvertent actions or inactions by Sony employees, or those of a third-party service provider or business partner. For example, Sony’s online services and websites have been subjected to denial-of-service and other attacks by technically sophisticated and well-resourced third parties and others.

Any of the above compromises can result in significant remediation costs, including repairing system damage, engaging third-party experts, deploying additional personnel, training employees, and compensation or incentives offered to third parties whose data has been compromised. In addition, a disruption to Sony’s networks and online services may seriously disrupt the businesses that rely on these networks and online services for their operations, resulting in lost revenues, damage to relationships with business partners and other third parties, and the failure to retain or attract customers. Breaches or other compromises of information security, whether or not involving a cyber-attack, may lead to lost revenues resulting from a loss in competitive advantage due to the unauthorized disclosure, alteration, destruction or use of proprietary information, including intellectual property, the failure to retain or attract customers, the disruption of critical business processes or information technology

 

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systems, and the diversion of management’s attention and resources. Moreover, such disruptions and breaches may result in adverse media coverage, which may harm Sony’s brand image and reputation. Sony may also be subject to legal claims or legal proceedings, including regulatory investigations and actions, and the attendant legal fees, as well as potential settlements, judgments and fines. Sony’s cyber insurance may not cover all expenses and losses and, accordingly, cyber-attacks may have an adverse impact on Sony’s operating results and financial condition. Even without actual breaches of information security, protection against increasingly sophisticated and prevalent cyber-attacks may result in significant future prevention, detection, response and management costs, or other costs, including the deployment of additional cyber-security technologies, engaging third-party experts, deploying additional personnel, and training employees. Such expenses may also have an adverse impact on Sony’s operating results and financial condition.

Sony’s business may suffer as a result of adverse outcomes of current or future litigation and regulatory actions.

Sony faces the risk of litigation and regulatory proceedings in different countries in connection with its operations. Legal proceedings, including regulatory actions, may seek to recover very large indeterminate amounts or to limit Sony’s operations, and the possibility that they may arise and their magnitude may remain unknown for substantial periods of time. For example, legal proceedings, including regulatory actions, may result from antitrust scrutiny of market practices for anti-competitive conduct. A substantial legal liability or adverse regulatory outcome and the substantial cost to defend the litigation or regulatory proceedings may have an adverse effect on Sony’s reputation, operating results and financial condition.

Sony is subject to financial and reputational risks due to product quality and liability issues.

Sony’s products and services, such as consumer products, non-consumer products, parts and components, semiconductors, software and network services are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur and as demand increases for mobile products and online services. Sony’s efforts to adapt to rapid advancements in technologies and increased demand for mobile products and online services, while also maintaining product quality, may not be successful and may increase exposure to product liability. As a result, Sony may incur both reputational damage and expenses in connection with, for example, product recalls and after-sales services. In addition, Sony may not be successful in introducing after-sales upgrades, enhancements or new features to existing products and services, or in enabling existing products and services to continue to conveniently and effectively integrate with other technologies and online services. As a result, the quality of Sony’s existing products and services may not remain satisfactory to consumers and become less marketable, less competitive or obsolete, and Sony’s reputation, operating results and financial condition may be adversely affected. Moreover, allegations of health and safety issues related to Sony products, or lawsuits related to product quality, health issues arising from products or product safety, regardless of merit, may adversely impact Sony’s operating results and financial condition, either directly or as a result of the impact on Sony’s brand image and reputation as a producer of high-quality products and services. These issues are relevant to Sony products sold directly to customers, whether manufactured by Sony or a third party, and also to products of other companies that are equipped with Sony’s components, such as semiconductors.

Sony’s operating results and financial condition may be adversely affected by its employee benefit obligations.

Sony recognizes an unfunded pension obligation for its defined benefit pension plans based on (i) the Projected Benefit Obligation (“PBO”) under each pension plan less (ii) the fair value of the pension plan’s assets, in accordance with the accounting guidance for defined benefit plans. Actuarial gains and losses are amortized and included in pension expenses in a systematic manner over employees’ average remaining service periods. Any decrease of the pension plan asset value due to low returns from investments or increases in the PBO due to a lower discount rate, increases in rates of compensation and changes in certain other actuarial assumptions may increase the unfunded pension obligations and may result in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense.

Sony’s operating results and financial condition may be adversely affected by the status of its Japanese and foreign pension plans. Specifically, adverse equity market conditions and volatility in the credit markets may have an unfavorable impact on the value of Sony’s pension plan assets and its future estimated pension liabilities, the majority of which relate to the Japanese plans, which have approximately 30% of pension plan assets invested in equity securities. As a result, Sony’s operating results or financial condition could be adversely affected.

Further, Sony’s operating results and financial condition could be adversely affected by future pension funding requirements pursuant to the Japanese Defined Benefit Corporate Pension Plan Act (“Act”). Under the

 

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Act, Sony is required to meet certain financial criteria including periodic actuarial revaluation and the annual settlement of gains or losses of the plans. In the event that the actuarial reserve required by law exceeds the fair value of pension plan assets and that the fair value of pension assets may not be recovered within a certain moratorium period permitted by laws and/or special legislative decree, Sony may be required to make an additional contribution to the plan, which may reduce cash flows. Similarly, if Sony is required to make an additional contribution to a foreign plan to meet any funding requirements in accordance with local laws and regulations in each country, Sony’s cash flows might be adversely affected. If Sony is required to increase cash contributions to its pension plans when actuarial assumptions, such as an expected long-term rate of return of the pension plan assets, are updated for purposes of determining statutory contributions, it may have an adverse impact on Sony’s cash flows.

Further losses in jurisdictions where Sony has established valuation allowances against deferred tax assets, the inability of Sony to fully utilize its deferred tax assets, limitations on the use of its deferred tax assets under local law, exposure to additional tax liabilities or changes in Sony’s tax rates could adversely affect net income (loss) attributable to Sony Corporation’s stockholders and Sony’s financial condition.

Sony is subject to income taxes in Japan and numerous other jurisdictions, and in the ordinary course of Sony’s business there are many situations where the ultimate tax determination can be uncertain, sometimes for an extended period. The calculation of Sony’s tax provision and the carrying value of tax assets and liabilities requires significant judgment and the use of estimates, including estimates of future taxable income.

Deferred tax assets are evaluated on a jurisdiction by jurisdiction basis. In certain jurisdictions, Sony has established valuation allowances against deferred tax assets, including net operating loss carryforwards and tax credit carryforwards, where it has concluded that the deferred tax assets are not more likely than not to be realized. As of March 31, 2017, Sony had valuation allowances principally in the following jurisdictions: (1) Sony Corporation and its national filing group in Japan, as well as for local taxes in a number of Japanese subsidiaries; (2) Sony Americas Holding Inc. (“SAHI”) and its consolidated tax filing group in the U.S.; (3) Sony Mobile Communications AB in Sweden; (4) Sony Europe Limited (“SEU”) in the U.K.; and (5) various subsidiaries operating in Brazil. In jurisdictions where valuation allowances have been established, no tax benefit will be recorded against any continuing losses and as a result, net income (loss) attributable to Sony Corporation’s stockholders and Sony’s financial condition could be adversely affected. Additionally, deferred tax assets could expire unused or otherwise not be realizable if Sony is unable to implement tax planning strategies or generate sufficient taxable income in the appropriate jurisdiction in the future (from operations and/or tax planning strategies) to utilize them, if Sony enters into transactions that limit its legal ability to use them or if the use of such deferred tax assets is limited under local law. As a result, Sony may lose any associated cash tax reduction available in future periods. If it becomes more likely than not that any of Sony’s remaining deferred tax assets without valuation allowances will expire unused and are not available to offset future taxable income, or otherwise will not be realizable, Sony will have to recognize an additional valuation allowance, increasing income tax expense. Net income (loss) attributable to Sony Corporation’s stockholders and Sony’s financial condition could be adversely affected when the deferred tax assets expire unused or in periods in which an additional valuation allowance is recorded.

A key factor in the evaluation of the deferred tax assets and the valuation allowance is the determination of the uncertain tax positions related to the adjustments for Sony’s intercompany transfer pricing. Sony is subject to income taxes in Japan and numerous other jurisdictions, and in the ordinary course of Sony’s business there are many transactions, including intercompany charges, where the ultimate tax determination is uncertain. Sony is subject to the continuous examination of its income tax returns by tax authorities and, as a result, Sony regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. Significant judgment is required in making these assessments and, as additional evidence becomes available in subsequent periods, the ultimate outcomes for Sony’s uncertain tax positions and, accordingly, its valuation allowance assessments may potentially have an adverse impact on net income (loss) attributable to Sony Corporation’s stockholders and Sony’s financial condition.

In some jurisdictions, the use of net operating loss carryforwards to reduce taxable income in a subsequent period is limited to a fixed percentage of taxable income. Thus, it is possible that even with significant net operating loss carryforwards, Sony could record and pay taxes in a jurisdiction where it has taxable income but still has significant net operating loss carryforwards available. Similarly, in some jurisdictions, tax credits may only be used to offset taxes on income from certain sources. Thus, it is possible that even with significant tax credit carryforwards, Sony could record and pay taxes in a jurisdiction where it has taxable income but still has significant tax credit carryforwards available.

 

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In addition to the above, Sony’s future effective tax rates may be unfavorably affected by changes in both the statutory rates and the mix of earnings in countries with differing statutory rates or by other factors such as changes in tax laws and regulations or their interpretation, including limitations or restrictions on various tax deductions and credits, including, but not limited to, cost of goods sold, interest, net operating loss carryforwards and income tax credits.

Sony could incur asset impairment charges for goodwill, intangible assets or other long-lived assets.

Sony has a significant amount of goodwill, intangible assets and other long-lived assets, including production facilities and equipment in its electronics businesses. A decline in financial performance, market capitalization or changes in estimates and assumptions used in the impairment analysis, which in many cases requires significant judgment, could result in impairment charges against these assets. Goodwill and indefinite lived intangible assets are tested annually for impairment during the fourth quarter of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying amount. Such an event or change in circumstances would include unfavorable variances from or adjustments to established business plans, significant changes in forecasted results or volatility inherent to external markets and industries. The increased levels of global competition and the faster pace of technological change to which Sony is exposed can result in greater volatility of these estimates, assumptions and judgments, and increase the likelihood of impairment charges. In addition, the recoverability of the carrying value of long-lived assets held and used and long-lived assets to be disposed of is reviewed whenever events or changes in circumstances, including the types of events or changes described above with respect to goodwill and intangible assets, indicate that the carrying value of the assets or asset groups may not be recoverable. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. For example, in the fiscal year ended March 31, 2015, Sony recorded a 176.0 billion yen impairment charge related to goodwill in the Mobile Communications (“MC”) segment. In the fiscal year ended March 31, 2016, Sony recorded impairment charges related to long-lived assets, both in the camera module business in the Semiconductors segment, amounting to 59.6 billion yen, and in the battery business in the Components segment, amounting to 30.6 billion yen. In the fiscal year ended March 31, 2017, Sony recorded a 23.9 billion yen impairment charge against long-lived assets in the Semiconductors segment resulting from the termination of the development and manufacturing of certain high-functionality camera modules for external sale, as well as a 112.1 billion yen impairment charge related to goodwill in the Pictures segment. Any such charge may adversely affect Sony’s operating results and financial condition.

Sony may be accused of infringing others’ intellectual property rights and be liable for significant damages.

Sony’s products incorporate a wide variety of technologies. Claims have been and may be asserted against Sony that such technology infringes the intellectual property owned by others. Such claims may be asserted by competitors to protect their products and services and/or as a business strategy to seek a competitive advantage, or by other patent holders, particularly as markets become more competitive, and products evolve to include new technologies and enhanced functionality that incorporate an increasing amount of intellectual property. Such claims might require Sony to enter into settlement or license agreements, to pay significant damage awards, and/or to face a temporary or permanent injunction prohibiting Sony from marketing or selling certain of its products, which may have an adverse effect on Sony’s reputation, operating results and financial condition.

Sony may not be able to continue to obtain necessary licenses for certain intellectual property rights of others or protect and enforce the intellectual property rights on which its business depends.

Many of Sony’s products are designed under the license of patents and other intellectual property rights owned by third parties. Based upon past experience and industry practice, Sony believes that it will be able to obtain or renew licenses relating to various intellectual properties useful in its business that it needs in the future; however, such licenses may not be available at all or on acceptable terms, and Sony may need to redesign or discontinue marketing or selling such products as a result. Additionally, Sony’s intellectual property rights may be challenged or invalidated, or such intellectual property rights may not be sufficient to provide Sony with competitive advantages. Such events may adversely impact Sony’s operating results and financial condition.

Holders of American Depositary Shares have fewer rights than shareholders and may not be able to enforce judgments based on U.S. securities laws.

The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining Sony’s accounting books and records, and

 

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exercising appraisal rights, are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of the shares underlying the American Depositary Shares (“ADSs”), only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying ADSs in accordance with the instructions of ADS holders and will pay the dividends and distributions collected from Sony. However, ADS holders will not be able to bring a derivative action, examine Sony’s accounting books and records, or exercise appraisal rights through the depositary.

Sony Corporation is incorporated in Japan with limited liability. A majority of Sony’s directors and corporate executive officers are non-U.S. residents, and a substantial portion of the assets of Sony Corporation and the assets of Sony’s directors and corporate executive officers are located outside the U.S. As a result, it may be more difficult for investors to enforce against Sony Corporation or such persons, judgments obtained in U.S. courts predicated upon civil liability provisions of the federal and state securities laws of the U.S. or similar judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal and state securities laws of the U.S.

 

Item 4. Information on the Company

 

A. History and Development of the Company

Sony Corporation was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha, a joint stock company (Kabushiki Kaisha) under Japanese law. In January 1958, it changed its name to Sony Kabushiki Kaisha (“Sony Corporation” in English).

In December 1958, Sony Corporation was listed on the Tokyo Stock Exchange (the “TSE”). In June 1961, Sony Corporation issued American Depositary Receipts (“ADRs”) in the U.S.

In March 1968, Sony Corporation established CBS/Sony Records Inc. in Japan, as a 50-50 joint venture company between Sony Corporation and CBS Inc. in the U.S. In January 1988, the joint venture became a wholly-owned subsidiary of Sony Corporation, and in April 1991, changed its name to Sony Music Entertainment (Japan) Inc. (“SMEJ”). In November 1991, SMEJ was listed on the Second Section of the TSE.

In September 1970, Sony Corporation was listed on the New York Stock Exchange (the “NYSE”).

In August 1979, Sony Corporation established Sony Prudential Life Insurance Co., Ltd. in Japan, as a 50-50 joint venture company between Sony Corporation and The Prudential Insurance Company of America. In April 1991, the joint venture changed its name to Sony Life. In March 1996, Sony Life became a wholly-owned subsidiary of Sony Corporation, and in April 2004, with the establishment of SFH, a financial holding company, Sony Life became a wholly-owned subsidiary of SFH.

In July 1984, Sony Magnescale Inc., a subsidiary of Sony Corporation, was listed on the Second Section of the TSE. The subsidiary changed its name to Sony Precision Technology Inc. in October 1996 and then to Sony Manufacturing Systems Corporation in April 2004. In April 2012, Sony Manufacturing Systems was merged into Sony EMCS Corporation. Sony EMCS Corporation changed its name to Sony Global Manufacturing & Operations Corporation in April 2016.

In July 1987, Sony Chemicals Corporation, a subsidiary of Sony Corporation, was listed on the Second Section of the TSE. The subsidiary changed its name to Sony Chemical & Information Device Corporation in July 2006, and changed its name again to Dexerials Corporation in October 2012.

In January 1988, Sony Corporation acquired CBS Records Inc., a music business division of CBS Inc. in the U.S. The acquired company changed its name to Sony Music Entertainment Inc. in January 1991 and then to Sony Music Holdings Inc. in December 2008.

In November 1989, Sony Corporation acquired Columbia Pictures Entertainment, Inc. in the U.S. In August 1991, Columbia Pictures Entertainment, Inc. changed its name to Sony Pictures Entertainment Inc. (“SPE”).

In November 1993, Sony established SCEI in Japan. SCEI changed its name to Sony Interactive Entertainment Inc. (“SIEI”) in April 2016.

In October 1995, Sony/ATV was formed as a 50-50 joint venture company between Sony Corporation and Michael Jackson. In September 2016, the joint venture became a wholly-owned subsidiary of Sony Corporation.

 

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In January 2000, acquisition transactions by way of a share exchange were completed such that three subsidiaries which had been listed on the TSE — SMEJ, Sony Chemicals Corporation (currently Dexerials Corporation), and Sony Precision Technology Inc. (which was merged into Sony EMCS Corporation) — became wholly-owned subsidiaries of Sony Corporation. In September 2012, Sony Corporation completed the sale of certain of its chemical products businesses, including Sony Chemical & Information Device Corporation (currently Dexerials Corporation) to Development Bank of Japan Inc.

In October 2001, Sony Ericsson Mobile Communications AB (“Sony Ericsson”), a 50-50 joint venture company between Sony Corporation and Telefonaktiebolaget LM Ericsson (“Ericsson”) of Sweden, was established. In February 2012, Sony acquired Ericsson’s 50% equity interest in Sony Ericsson. As a result of the acquisition, Sony Ericsson became a wholly-owned subsidiary of Sony and changed its name to Sony Mobile Communications AB.

In October 2002, Aiwa Co., Ltd. (“Aiwa”), then a TSE-listed subsidiary, became a wholly-owned subsidiary of Sony Corporation. In December 2002, Aiwa was merged into Sony Corporation.

In June 2003, Sony Corporation adopted the “Company with Three Committees” corporate governance system in line with the revised Japanese Commercial Code then effective. (Refer to “Board Practices” in “Item 6. Directors, Senior Management and Employees.”)

In April 2004, Sony Corporation established SFH, a financial holding company, in Japan. Sony Life, Sony Assurance Inc. (“Sony Assurance”), and Sony Bank became subsidiaries of SFH. In October 2007, SFH was listed on the First Section of the TSE in conjunction with the global initial public offering of shares of SFH by Sony Corporation and SFH.

In April 2004, S-LCD Corporation (“S-LCD”), a joint venture between Sony Corporation and Samsung Electronics Co., Ltd. of Korea for the manufacture of amorphous thin film transistor LCD panels, was established in Korea. Sony’s stake in S-LCD was 50% minus 1 share. In January 2012, Sony sold all of its shares of S-LCD to Samsung Electronics Co., Ltd.

In August 2004, Sony combined its worldwide recorded music business, excluding its recorded music business in Japan, with the worldwide recorded music business of Bertelsmann AG (“Bertelsmann”), forming a 50-50 joint venture, SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”). In October 2008, Sony acquired Bertelsmann’s 50% equity interest in SONY BMG. As a result of the acquisition, SONY BMG became a wholly-owned subsidiary of Sony. In January 2009, SONY BMG changed its name to Sony Music Entertainment (“SME”).

In December 2005, Sony Communication Network Corporation, a subsidiary of Sony Corporation, was listed on the Mother’s market of the TSE, and was later listed on the First Section of the TSE in January 2008. Sony Communication Network Corporation was renamed So-net Corporation (“So-net”) in July 2013. In January 2013, Sony Corporation acquired all of the common shares of So-net through a tender offer and subsequent share exchange and, as a result of the acquisition, So-net became a wholly-owned subsidiary of Sony Corporation. So-net was renamed Sony Network Communications Inc. (“SNC”) in July 2016.

In April 2013, Sony Olympus Medical Solutions Inc. (“SOMED”), a medical business venture between Sony Corporation and Olympus Corporation (“Olympus”) was established in Japan. Sony’s stake in SOMED is 51%.

In July 2014, Sony Corporation sold its personal computer (“PC”) business operated under the VAIO brand to Japan Industrial Partners, Inc.

In July 2014, pursuant to a separation of Sony’s businesses into distinct subsidiaries, the television business was split out and began operations as Sony Visual Products Inc. (“SVP”).

In October 2015, the video and sound business was split out and began operations as Sony Video & Sound Products Inc. (“SVS”).

In April 2016, the semiconductors business was split out and began operations as Sony Semiconductor Solutions Corporation (“SSS”).

In April 2017, the imaging products and solution business was split out and began operations as Sony Imaging Products & Solutions Inc. (“SIPS”), which completed the sequential separation of Sony’s business units into distinct subsidiaries.

 

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Sony Corporation’s registered office is located at 7-1, Konan 1-chome, Minato-ku, Tokyo 108-0075, Japan, telephone +81-3-6748-2111.

The agent in the U.S. for purposes of this Item 4 is Sony Corporation of America (“SCA”), 25 Madison Avenue, 26th Floor, New York, NY 10010-8601 (Attn: Office of the General Counsel).

Principal Capital Investments

In the fiscal years ended March 31, 2015, 2016 and 2017, Sony’s capital expenditures were 251.0 billion yen, 468.9 billion yen and 272.2 billion yen, respectively. Sony’s capital expenditures are expected to be approximately 330.0 billion yen during the fiscal year ending March 31, 2018. For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5. Operating and Financial Review and Prospects.” The funding requirements of such various capital expenditures are expected to be financed by cash provided principally by operating and financing activities or the existing balance of cash and cash equivalents.

Sony invested approximately 260 billion yen in the Semiconductors segment, including the acquisition of semiconductor fabrication facilities, equipment and related assets owned by Toshiba, during the fiscal year ended March 31, 2016. This 260 billion yen investment included approximately 206 billion yen for image sensor fabrication capacity. In the fiscal year ended March 31, 2017, Sony invested approximately 84 billion yen in the Semiconductors segment. This investment included approximately 45 billion yen for image sensor fabrication capacity.

 

B. Business Overview

Sony is engaged in the development, design, production, manufacture, offer and sale of various kinds of electronic equipment, instruments and devices for consumer, professional and industrial markets such as mobile phones, game hardware and software, network services, still and video cameras, televisions, audio and video recorders and players, and semiconductors. Sony is engaged in the production, acquisition and distribution of motion pictures and television programming and the operation of television and digital networks. Sony is also engaged in the development, production, manufacture, and distribution of recorded music and the management and licensing of the words and music of songs as well as the production and distribution of animation titles. Further, Sony is also engaged in various financial services businesses, including life and non-life insurance operations through its Japanese insurance subsidiaries and banking operations through a Japanese Internet-based banking subsidiary.

Sony has striven to ensure the implementation of 1) clearly attributable accountability and responsibility, 2) management policies with an emphasis on sustainable profit generation and 3) the acceleration of decision-making processes and reinforcement of business competitiveness. To achieve this, Sony has implemented plans to sequentially separate business units within Sony Corporation to form distinct subsidiaries and operate them alongside existing Sony Group companies. These separations include SVP in July 2014, SVS in October 2015, SSS in April 2016, and SIPS in April 2017. As a result of this sequential separation of businesses, all segments are now being operated as subsidiaries of Sony Corporation.

Sony realigned its business segments from the first quarter of the fiscal year ended March 31, 2017 to reflect a change in the Corporate Executive Officers in charge of certain segments and modifications to the organizational structure of certain segments as of April 1, 2016. In connection with this realignment, Sony separated the Devices segment into the Semiconductors segment and the Components segment. In addition, the operations of the automotive camera business, which were included in the Imaging Products & Solutions (“IP&S”) segment, and the operations of the Imaging Device Development Division, which were included in Corporate and elimination, are now included in the Semiconductors segment. Additionally, certain operations which were included in All Other and Corporate and elimination are now included in the Music segment and All Other, respectively.

Products and Services

Mobile Communications (“MC”)

Sony Mobile undertakes product research, development, design, marketing, sales, production, distribution and customer services for mobile phones, tablets, accessories and applications. SNC provides Internet broadband network services to subscribers as well as creates and distributes content through its portal services to various electronics product platforms such as PCs and mobile phones.

 

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Game & Network Services (“G&NS”)

SIE undertakes product research, development, design, marketing, sales, production, distribution and customer service for PlayStation® hardware, software, content and network services.

The G&NS segment includes the Hardware, Network and Other categories. Hardware includes home and portable game consoles; Network includes network services relating to game, video and music content provided by SIE; and Other includes packaged software and peripheral devices.

Imaging Products & Solutions (“IP&S”)

In the IP&S segment, Sony undertakes product research, development, design, manufacturing, sales, distribution and customer service for interchangeable lens cameras, compact digital cameras, consumer and professional video cameras as well as display products such as projectors and medical equipment. SOMED undertakes development, design, manufacturing, and selling of high resolution technologies, new surgical endoscopes with 3D capabilities and related systems, and provides comprehensive medical and imaging device solutions for operating rooms and other medical areas.

The IP&S segment includes the Still and Video Cameras as well as Other categories. Still and Video Cameras includes interchangeable lens cameras, compact digital cameras, consumer video cameras and video cameras for broadcast. Other includes display products such as projectors and medical equipment.

Home Entertainment & Sound (“HE&S”)

SVP undertakes product research, development, design, marketing, sales, production, distribution and customer services for televisions. SVS undertakes product research, development, design, marketing, sales, production, distribution and customer services for video and sound products.

Semiconductors

SSS and its subsidiary Sony Semiconductor Manufacturing Corporation undertake product research, development, design, manufacturing, marketing, sales, production, distribution and customer services for complementary metal oxide semiconductor (“CMOS”) image sensors, charge-coupled devices (“CCDs”), large-scale integration systems (“LSIs”) and other semiconductors.

Components

Sony Energy Devices Corporation undertakes product research, development, design, marketing, sales, production, distribution and customer services for batteries. Sony Storage Media and Devices Corporation undertakes product research, development, design, marketing, sales, production, distribution and customer services for audio/video/data recording media and storage media.

Pictures

Motion Pictures:

“Motion Pictures” includes the worldwide production, acquisition and distribution of live-action and animated motion pictures. SPE’s motion picture production organizations include Columbia Pictures, Screen Gems, Sony Pictures Animation, Sony Pictures Classics and TriStar Pictures. SPE also operates Sony Pictures Imageworks, a visual effects and animation unit, and manages a studio facility, Sony Pictures Studios, which includes post-production facilities.

Television Productions:

“Television Productions” includes the production, acquisition and distribution of television programming including scripted series, unscripted “reality” or “light entertainment,” daytime serials, game shows, animated series, made for television movies and miniseries and other programming. Outside the U.S., SPE produces local language programming and licenses SPE owned programming and formats around the world.

Media Networks:

“Media Networks” includes the operation of television and digital networks worldwide. SPE’s television networks around the world include Sony Pictures Networks India Private Limited, which operates television

 

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networks in India, and a controlling interest in Game Show Network, which operates a U.S.-based cable network and an online game business. Digital networks include Crackle, a multi-platform video entertainment network focusing on premium video content.

Music

Recorded Music:

“Recorded Music” includes the distribution of physical and digital recorded music and revenue derived from artists’ live performance. SME, a global entertainment company, excluding Japan, is engaged primarily in the development, production, marketing and distribution of recorded music in all commercial formats and genres. SMEJ is an entertainment company focused on the Japanese market, which includes a Japanese domestic recorded music business that produces recorded music and music videos through contacts with many artists in all music genres.

Music Publishing:

“Music Publishing” includes the management and licensing of the words and music of songs. Sony/ATV is a U.S.-based music publishing business that owns and acquires rights to musical compositions, exploiting and marketing these compositions and receiving royalties or fees for their use.

Visual Media and Platform:

“Visual Media and Platform” includes the production and distribution of animation titles, game applications based on animation titles and various service offerings for music and visual products. These businesses are operated primarily by SMEJ.

Financial Services

In the Financial Services segment, on April 1, 2004, Sony established a wholly-owned subsidiary, SFH, a holding company for Sony Life, Sony Assurance and Sony Bank, with the aim of integrating various financial services including insurance and savings and loans, and offering individual customers high value-added products and high-quality services. On October 11, 2007, in conjunction with the global initial public offering of shares of SFH, the shares of SFH were listed for trading on the First Section of the TSE. Following this global offering, SFH remains a consolidated subsidiary of Sony Corporation, which is the majority shareholder of SFH.

SFH conducts insurance, banking and other operations primarily through Sony Life, a Japanese life insurance company, Sony Assurance, a Japanese non-life insurance company, and Sony Bank, a Japanese Internet-based bank, which are all wholly-owned by SFH.

All Other

All Other consists of various operating activities, including the disc manufacturing business outside of Japan and the PC business, which was sold in July 2014. Certain costs related to the PC business remain in All Other.

Sales and Distribution

Electronics*

* The term “Electronics” refers to the sum of the MC, G&NS, IP&S, HE&S, Semiconductors and Components segments.

Sony’s electronics products and services, excluding those in the game business, are marketed throughout the world under the trademark “Sony,” which has been registered in approximately 200 countries and territories.

In most cases, sales of Sony’s electronics products are made to sales subsidiaries of Sony Corporation located in or responsible for sales in the countries and territories where Sony’s products and services are marketed. These subsidiaries then sell those products to unaffiliated local distributors and dealers or through direct sales, such as through the Internet. In some regions, sales of certain products and services are made directly to local distributors by Sony Corporation.

 

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Sales of electronics products and services are particularly seasonal and also vary significantly with the timing of new product introductions and the economic conditions of each country. Sales for the third quarter ending December 31 of each fiscal year are generally higher than other quarters of the same fiscal year due to demand in the year-end holiday season.

Japan:

Sony Marketing (Japan) Inc. markets consumer electronics products mainly through retailers. Sony Business Solutions Corporation markets professional electronics products and services. For electronic components, Sony sells products directly to wholesalers and manufacturers.

United States:

Sony markets its electronics products and services through Sony Electronics Inc. and other wholly-owned subsidiaries in the U.S.

Europe:

In Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony Europe Limited, which is headquartered in the United Kingdom and has branches in European countries, and CJSC Sony Electronics in Russia.

China:

Sony markets its electronics products and services through Sony (China) Limited, Sony Corporation of Hong Kong Limited and other wholly-owned subsidiaries in China.

Asia-Pacific:

In Asia-Pacific, Sony’s electronics products and services are marketed through sales subsidiaries including Sony India Private Limited, Sony Electronics of Korea Corporation, Sony Taiwan Limited and Sony Electronics Vietnam.

Other Areas:

In overseas areas other than the U.S., Europe, China and Asia-Pacific, Sony’s electronics products and services are marketed through sales subsidiaries including Sony Brasil Ltda., Sony Middle East & Africa FZE in the United Arab Emirates and Sony de Mexico S.A.de C.V.

PlayStation® hardware, software and content and network services are marketed and distributed by SIE, SIEI, Sony Interactive Entertainment America (“SIEA”) and Sony Interactive Entertainment Europe, Ltd. (“SIEE”).

Along with certain of its global corporate functions in Japan, Sony Mobile has sales and marketing operations in many major regions of the world, as well as manufacturing sites in China and product development sites in Japan, Sweden and China. Sony Mobile brings its products to market through direct and indirect distribution channels, such as third-party cellular network carriers and retailers, as well as through its website.

Pictures

SPE generally retains all rights relating to the worldwide distribution of its internally produced motion pictures and television programming, including rights for theatrical exhibition, home entertainment distribution, pay and free television exhibition and other markets. SPE also acquires distribution rights to motion pictures and television programming produced by other companies, and jointly produces and distributes motion pictures and television programming with other studios, television networks or production companies. These rights may be limited to particular geographic regions, specific forms of media or periods of time.

Within the U.S., SPE uses its own distribution service businesses, Sony Pictures Releasing and Sony Pictures Classics, for the U.S. theatrical release of its motion pictures and for the theatrical release of motion pictures acquired from and produced by others.

 

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Outside the U.S., SPE generally distributes and markets motion pictures through one of its Sony Pictures Releasing International subsidiaries. In certain countries, however, SPE has joint distribution or sub-distribution arrangements with other studios, or arrangements with independent local distributors or other entities.

The worldwide home entertainment distribution of SPE’s motion pictures and television programming (and product acquired or licensed from others) is handled through Sony Pictures Home Entertainment, except in certain countries where SPE has joint distribution or sub-distribution arrangements with other studios, or arrangements with independent local distributors. Product is distributed in various home media formats including DVD, Blu-ray Disc™, electronic sell-through and video-on-demand.

The worldwide television distribution of SPE’s motion pictures and television programming (and product acquired or licensed from others) is handled through Sony Pictures Television. SPE’s library of motion pictures and television programming is licensed to linear distributors such as broadcast television networks, pay and basic cable networks and direct broadcast satellite providers, as well as to digital platforms such as subscription and advertising supported Internet television providers (including Sony’s PlayStationTM Network and Netflix).

SPE’s television networks are distributed to multiple distribution platforms such as cable, satellite, Internet Protocol Television (IPTV) systems, and mobile operators for delivery to viewers around the world. These networks generate advertising, subscription and other ancillary revenues.

Music

SME and SMEJ develop, produce, market, and distribute recorded music in various commercial formats. SME and its affiliates conduct business globally under “Columbia Records,” “Epic Records,” “RCA Records” and other labels. SMEJ conducts business in Japan under “Sony Music Records,” “Epic Records Japan,” “SME Records,” “Ki/oon Music,” “Sony Music Associated Records” and other labels.

Sony owns and acquires rights to musical compositions, exploits and markets these compositions, receives royalties or fees for their use and conducts its music publishing business in countries other than Japan primarily under the Sony/ATV name. Sony/ATV, previously a 50%-owned and consolidated joint venture, became a wholly-owned subsidiary of Sony on September 30, 2016 as a result of Sony’s acquisition of the 50% equity interest in Sony/ATV owned by the Estate.

SMEJ creates artwork and produces packaged home entertainment products including music/games, and organizes various events in Japan through Sony Music Communications Inc. and its affiliates. SMEJ also produces, markets, and distributes animation products and game applications based on animation titles under the Aniplex name.

Financial Services

Sony Life conducts its life insurance business primarily in Japan. Sony Life’s core business is providing death protection and other insurance products to individuals, primarily through a consulting-based sales approach utilizing its experienced team of Lifeplanner® sales employees as well as partner independent sales agents. Sony Life provides tailor-made life insurance products that are optimized for each customer. As of March 31, 2017, Sony Life employed 4,933 Lifeplanner® sales employees. Sony Life maintains an extensive service network which mainly consists of the Lifeplanner® channel and the independent agent channel in Japan. The Lifeplanner® channel is characterized by strict recruitment and training of sales professionals from industries outside the life insurance industry, performance-linked compensation and its high productivity, and offers custom-made packages. Most of the agents in the independent agent channel are corporate and non-exclusive agents, centering on shop-style agents. Shop-style agents are a sub-channel of the independent agent channel, who offer insurance in local stores and provide customers with opportunities to compare various insurers’ products. To enhance Sony Life’s relationship with independent agents, Sony Life’s agent support staff provides independent agents with various support services, including recruiting, training and sales promotion activities. As part of its plan to expand its sales of individual annuity products, Sony Life established a Japanese joint venture company with AEGON N.V. in August 2009. The 50-50 joint venture, known as AEGON Sony Life Insurance Co., Ltd., began operations in Japan in December 2009. In October 2016, Sony Life purchased 14.9% of the outstanding shares in ClearView Wealth Limited (Australia) with the aim of developing its international business base.

Sony Assurance has conducted a non-life insurance business in Japan since October 1999. Sony Assurance’s core business is providing automobile insurance products and medical and cancer insurance products to individual customers, primarily through direct marketing via the Internet and the telephone. The direct marketing business model employed by Sony Assurance enables it to improve operating efficiency and lower the costs of marketing and maintaining its insurance policies, creating savings which it passes on to policyholders in the form of competitively priced premiums.

 

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Sony Bank has conducted banking operations in Japan since June 2001. As an Internet bank focusing on the asset management and borrowing needs of individual customers, Sony Bank offers an array of products and services including yen and foreign currency deposits, investment trusts and mortgages. By using Sony Bank’s transaction channel, the “MONEYKit” service website, account holders can invest and manage assets over the Internet according to their life plans. On July 1, 2011, Sony Bank acquired Sony’s 57% equity interest in Sony Payment Services Inc. (“Sony Payment Services”), resulting in Sony Payment Services becoming a consolidated subsidiary of Sony Bank. Sony Payment Services is an industry-leading provider of credit card settlement services to members of its Internet network.

All Other

Sony DADC group (“Sony DADC”) offers Blu-ray Disc™, DVD and CD media replication services as well as digital and physical supply chain solutions to business customers in the entertainment, education and information industries.

Sales to External Customers by Geographic Area

The following table shows Sony’s consolidated sales to external customers in each of its major markets for the periods indicated.

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in millions)  

Japan

     2,233,776        2,317,312        2,392,790  

United States

     1,528,097        1,733,759        1,673,768  

Europe

     1,932,941        1,881,329        1,634,683  

China

     546,697        540,497        557,995  

Asia-Pacific

     1,052,453        959,171        866,712  

Other Areas

     921,916        673,644        477,302  
  

 

 

    

 

 

    

 

 

 

Total

     8,215,880        8,105,712        7,603,250  
  

 

 

    

 

 

    

 

 

 

Sources of Supply

Sony pursues procurement of raw materials, parts and components to be used in the production of its products on a global basis on the most favorable terms that it can achieve. These items are purchased from various suppliers around the world. Sony has a general policy of maintaining multiple suppliers for important parts and components and, in the fiscal year ended March 31, 2017, Sony continued activities to optimize the number of its suppliers by category to achieve efficiencies and to minimize procurement risk when possible.

When raw materials, parts and components become scarce, the cost of production rises. For example, LCD panels and memory devices, which are used in multiple applications, can influence Sony’s performance when the cost of such parts and components fluctuates substantially. With regard to raw materials, the market price of copper has the potential to proportionately affect the cost of the parts and components that utilize copper, such as printed circuit boards and power cables. The price of resin and sheet steel, which is widely used in mechanical parts and components, may also fluctuate and impact the cost of those parts and components.

After-Sales Service

Sony provides repair and servicing functions in the areas where its electronics products are sold. Sony provides these services through its own web support page, call centers, service centers, factories, authorized independent service centers, authorized servicing dealers and subsidiaries.

In line with industry practices of the electronics businesses, almost all of Sony’s consumer-use products that are sold in Japan carry a warranty, generally for a period of one year from the date of purchase, covering repairs, free of charge, in the case of a malfunction in the course of ordinary use of the product. Warranties outside of Japan generally provide coverage for various periods of time depending on the product and the area in which it is marketed. In the case of broadcast- and professional-use products, Sony maintains support contracts with customers in addition to warranties.

To further help ensure customer satisfaction, Sony maintains customer information centers in its principal markets and web support information for all markets.

 

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Patents and Licenses

Sony has a number of Japanese and foreign patents relating to its products. Sony is licensed to use a number of patents owned by others, covering a wide range of products. Certain of these licenses are important to Sony’s business, such as those for optical disc-related and smartphone products. Sony products that employ DVD player functionality, including PlayStation®4 (“PS4”) and PlayStation®3 (“PS3”) hardware, are substantially dependent upon patents that relate to technologies specified in the DVD specifications and are licensed from Dolby Laboratories Licensing Corporation. Sony products that employ Blu-ray Disc™ player functionality and DVD player functionality, including PS4 and PS3 hardware, are substantially dependent upon patents that relate to technologies specified in the Blu-ray Disc™ specifications and are licensed by MPEG LA LLC and One-Blue, LLC, in addition to the patents that relate to technologies specified in the DVD specifications, as described above. Sony’s smartphone products are substantially dependent upon patents that relate to technologies specified in certain codec standards and are licensed by MPEG LA LLC and Via Licensing Corporation, as well as patents that relate to CDMA technologies specified by the standard-setting bodies within the telecommunications industry and are licensed by Qualcomm Incorporated and NTT DOCOMO, INC. Sony considers its overall license position beneficial to its operations.

Competition

In each of its principal product lines and services, Sony encounters intense competition throughout the world. Sony believes, however, that in the aggregate it competes successfully and has a major position in all of the principal product lines and services in which it is engaged, although the strength of its position varies with products and markets. Refer to “Risk Factors” in “Item 3. Key Information.”

Electronics

Sony believes that its product planning and product design expertise, the high quality of its products, its record of innovative product introductions and product improvements, the user experience it provides and the ecosystem that supports such an experience, its price competitiveness derived from reductions in manufacturing and indirect costs, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position. Continuing to provide high-value added products, services and experiences is a key factor by which Sony aims to differentiate itself in the highly competitive market of consumer electronics. Sony believes that the success of the game and network services businesses is determined by the availability of attractive software titles and related content, downloadable content, network services and peripherals. In the Semiconductors segment, Sony puts significant effort into keeping Sony’s strong competitive position by investing in R&D and production capacity, while also trying to avoid overinvesting and increasing fixed costs by carefully monitoring customer demand, market trends and demand for end-user products.

Pictures

SPE faces intense competition from all forms of entertainment and other leisure activities to attract the attention of audiences worldwide. SPE competes with other motion picture studios and production companies to obtain story rights and talent, including writers, actors, directors and producers, which are essential to the success of SPE’s products. In motion picture production and distribution, SPE faces competition to obtain exhibition and distribution outlets and optimal release dates for its products. In addition, SPE faces competition to acquire motion pictures and television programming from third parties. In television production and distribution, competition arises from limitations on available broadcast time and increasing fragmentation of audiences among broadcast and cable networks, direct broadcast satellite (“DBS”) providers, the Internet and other outlets both within and outside of the U.S. Furthermore, broadcast networks in the U.S. continue to produce their own shows internally. This competitive environment may result in fewer opportunities to produce shows for U.S. networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings. SPE’s worldwide television networks compete for viewers with broadcast and cable networks, DBS providers, the Internet and other forms of entertainment. The growth in the number of networks around the world has increased the competition for advertising and subscription revenues, acquisition of programming, and distribution of SPE’s television networks by cable, satellite, the Internet and other distribution systems.

Music

Success in the music industry is dependent to a large extent upon the artistic and creative abilities of artists, producers and employees and is subject to the vagaries of public taste. The Music segment’s future competitive position depends on its continuing ability to attract and develop artists and products that can achieve a high degree of public acceptance as well as offer efficient services.

 

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Financial Services

In the Financial Services segment, Sony faces strong competition in the financial services markets in Japan. In recent years, the regulatory barriers between the life insurance and non-life insurance industries as well as among the insurance, banking and securities industries have been relaxed, resulting in new competitive pressures.

Sony Life competes not only with traditional insurance companies in Japan but also with other companies including online insurance companies, foreign-owned life insurance companies and a number of Japanese cooperative associations.

Sony Assurance competes against insurers that sell their policies through sales agents as well as insurers that, like Sony Assurance, primarily sell their policies through direct marketing via the telephone and the Internet. Competition in Japan’s non-life insurance industry has intensified in recent years, in part due to a number of new market entrants, including foreign-owned insurers.

Some of the competitors in the life insurance and non-life insurance businesses have advantages over Sony including:

 

   

greater financial resources and financial strength ratings;

 

   

greater brand awareness;

 

   

more extensive marketing and sales networks, including through tie-ups with other types of financial institutions;

 

   

more competitive pricing;

 

   

larger customer bases; and

 

   

a wider range of products and services.

Sony Bank has focused on providing retail asset management and mortgage services for individuals, and faces significant competition in Japan’s retail financial services market. Sony Bank competes with traditional banking institutions, regional banks, trust banks, non-bank companies, and newer financial groups providing online full-services of bank and brokerage in Japan.

In the Financial Services segment, it is important to maintain a strong and healthy financial foundation for the business as well as to meet diversifying customer needs. Sony Life and Sony Assurance have maintained a high solvency margin ratio, relative to the Japanese domestic minimum solvency margin ratio requirements. Sony Bank has maintained a sufficient capital adequacy ratio relative to the Japanese domestic criteria.

All Other

Sony DADC is facing intense price competition as well as contraction of worldwide physical media markets, as storage of digital content shifts from physical media to online servers. In such an environment, Sony DADC is focused on operating efficiency and service quality.

Government Regulations

Sony’s business activities are subject to various governmental regulations in different countries in which it operates, including regulations relating to: various business/investment approvals; trade affairs, including customs, import and export control; competition and antitrust; anti-bribery; advertising and promotion; intellectual property; broadcasting, consumer and business taxation; foreign exchange controls; personal information protection; product safety; labor; human rights; conflict; occupational health and safety; environmental; and recycling requirements.

In Japan, Sony’s insurance businesses are subject to the Insurance Business Act and approvals and oversight from the Financial Services Agency (“FSA”). The primary purpose of the Insurance Business Act and related regulations is to protect policyholders, not shareholders. The Insurance Business Act specifies the types of businesses insurance companies may engage in, imposes limits on the types and amounts of investments that can be made and requires insurance companies to maintain specified reserves and a minimum solvency margin ratio. In particular, life insurance companies must maintain a premium reserve (for the portion of their portfolio other than unearned premiums), an unearned premium reserve, a reserve for refunds with respect to certain insurance contracts of life insurance companies specified in the Insurance Business Act’s regulations, and a contingency

 

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reserve in amounts no lower than the amount of the “standard policy reserve” as set forth by the regulatory guidelines. The FSA maintains a solvency standard which is used by Japanese regulators to monitor the financial strength of insurance companies. Non-life insurance companies are also required to provide a policy reserve. Sony Bank is also subject to regulation by the FSA under the Banking Act of Japan, including the requirement that it maintain a minimum capital adequacy ratio in accordance with capital adequacy guidelines adopted by the FSA based on the Basel III agreement. The FSA has broad regulatory powers over insurance and banking businesses in Japan, including the authority to grant or revoke operating licenses and to request information and conduct onsite inspections of books and records. Sony’s subsidiaries in the Financial Services segment are subject to the Japanese Insurance Business Act and Banking Act that require insurance and business companies to maintain their financial credibility and to secure protection for policyholders and depositors in view of the public importance of insurance and banking services. As such, lending and borrowing between subsidiaries in the Financial Service segment and the other companies within Sony Group is strictly limited.

In addition, Sony’s telecommunication businesses in Japan are subject to approvals and oversight from the Ministry of Internal Affairs and Communications, under the Telecommunications Business Act and other regulations related to the Internet businesses and communication methods in Japan.

Social Responsibility Regulations Such as Environmental and Human Rights Regulations

Sony monitors, evaluates, and complies with new environmental requirements that may affect its operations. For example, in Europe, Sony is required to comply with a number of environmental regulations enacted by the EU such as the Restriction of Hazardous Substances (“RoHS”) Directive, the Waste Electrical and Electronic Equipment (“WEEE”) Directive and the Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”) regulation. Similar regulations are being formulated in other areas of the world, including South American and Southeast Asian countries.

Sony has taken steps to address new regulations or governmental policies related to climate change including carbon disclosure, greenhouse gas emission reduction, carbon taxes and energy efficiency for electronics products. For example, Sony has established an internal management system in response to the EU directive on energy-related products and their energy efficiency (“ErP”).

Sony also monitors and evaluates newly adopted laws and regulations that may affect its operations applicable to purchasing activities including the procurement of raw materials, with respect to environmental, occupational health and safety, human rights, labor and armed conflict issues, and complies as appropriate.

Also refer to “Risk Factors” in “Item 3. Key Information.

Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities sanctioned under programs relating to terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

Sony is aware that certain transactions during the fiscal year ended March 31, 2017, as described below, may be disclosable pursuant to Section 13(r) of the Exchange Act.

Sony does not customarily allocate net profit on a country-by-country or activity-by-activity basis, other than as set forth in Sony’s consolidated financial statements prepared in accordance with U.S. GAAP; thus, the net profit and loss described below are non-U.S. GAAP figures and are estimated solely for the purpose of preparing this disclosure pursuant to Section 13(r) of the Exchange Act. The information below is to the best of Sony’s knowledge, and in particular Sony may not be aware of all potentially reportable sales by third-party-owned dealers and distributors.

 

   

During the fiscal year ended March 31, 2017, a non-U.S. subsidiary of Sony sold medical instruments, including medical printers, print media and monitors, to a third-party-owned dealer in Dubai, which, to the best of Sony’s knowledge, planned to resell those products to hospitals and health organizations in Iran, some of which are under the control of the Iranian Ministry of Health. Sony’s gross revenue from these sales was approximately 5.7 million U.S. dollars, and Sony has estimated that its net profit from such sales was 0.4 million U.S. dollars.

 

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Sony’s representative office in Tehran, Iran, which was established in 1992, has been closed and has been under liquidation processes since before the beginning of the fiscal year ended March 31, 2014. In the course of liquidation, Sony engages in certain incidental transactions (for example, permits, taxes, and similar matters incidental to the wind-down of the office in Iran) with Iranian government-owned entities. No material revenues or profits are associated with these transactions with the Iranian government-owned entities.

Sony is not aware of any other activity, transaction or dealing by Sony Corporation or any of its affiliates during the fiscal year ended March 31, 2017 that is disclosable in this report under Section 13(r) of the Exchange Act. As of the date of this report, Sony does not anticipate that any activity, transaction or dealing that may be disclosable will be conducted during the fiscal year ending March 31, 2018, except as described above in connection with the wind-down of its representative office or for certain transactions through third-party-owned dealers that Sony believes to be intended for hospitals and health organizations in Iran. Nevertheless, Sony has continued to monitor developments in this area, especially in the light of the Joint Comprehensive Plan of Action of July 14, 2015, among the United States, the United Kingdom, China, France, Russia, Germany, the EU and Iran, and will determine whether and to what extent they affect Sony’s business with Iranian customers as currently conducted and may additionally be conducted. Such business activities may require disclosure pursuant to Section 13(r) of the Exchange Act. Sony intends to conduct any such business activities in accordance with applicable law.

Sony believes, and maintains policies and procedures designed to ensure that, its transactions with Iran and elsewhere have been conducted in accordance with applicable economic sanctions laws and regulations and do not involve transactions likely to result in the imposition of sanctions or other penalties on Sony. However, there can be no assurance that Sony’s policies and procedures will be effective, and if the relevant authorities were to impose penalties or sanctions against Sony, the impact of such sanctions could be material.

 

C. Organizational Structure

The following table sets forth the significant subsidiaries owned, directly or indirectly, by Sony Corporation.

 

Name of company

   Country of
incorporation
   (As of March 31,  2017)
Percentage owned

Sony Global Manufacturing & Operations Corporation

   Japan    100.0

Sony Semiconductor Solutions Corporation

   Japan    100.0

Sony Semiconductor Manufacturing Corporation

   Japan    100.0

Sony Marketing Inc.

   Japan    100.0

Sony Mobile Communications Inc.

   Japan    100.0

Sony Interactive Entertainment Inc.

   Japan    100.0

Sony Visual Products Inc.

   Japan    100.0

Sony Video & Sound Products Inc.

   Japan    100.0

Sony Music Entertainment (Japan) Inc.

   Japan    100.0

Sony Financial Holdings Inc.*

   Japan      63.0

Sony Life Insurance Co., Ltd.*

   Japan    100.0

Sony Bank Inc.*

   Japan    100.0

Sony Americas Holding, Inc.

   U.S.A.    100.0

Sony Corporation of America

   U.S.A.    100.0

Sony Electronics Inc.

   U.S.A.    100.0

Sony Interactive Entertainment LLC

   U.S.A.    100.0

Sony Interactive Entertainment America LLC

   U.S.A.    100.0

Sony Pictures Entertainment Inc.

   U.S.A.    100.0

Sony Music Entertainment

   U.S.A.    100.0

Sony Europe Limited

   U.K.    100.0

Sony Interactive Entertainment Europe Ltd.

   U.K.    100.0

Sony Global Treasury Services Plc

   U.K.    100.0

Sony Overseas Holding B.V.

   Netherlands    100.0

Sony Mobile Communications AB

   Sweden    100.0

Sony Electronics Asia Pacific Pte. Ltd.

   Singapore    100.0

Sony (China) Limited

   China    100.0

* Sony Corporation owns 63% of Sony Financial Holdings Inc., and Sony Financial Holdings Inc. owns 100% of Sony Life Insurance Co., Ltd. and Sony Bank Inc.

 

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D. Property, Plant and Equipment

Sony has a number of offices, plants and warehouses throughout the world. Most of the buildings and land in/on which such offices, plants and warehouses are located are owned by Sony.

The following table sets forth information as of March 31, 2017 with respect to plants used for the production of products mainly for electronics products and services with floor space of more than 500,000 square feet:

 

Location

   Approximate
floor space
    

Principal products produced

     (square feet)       
In Japan:            

Nagasaki

(Sony Semiconductor Manufacturing Corporation

— Nagasaki TEC)

     2,306,000      CMOS image sensors and other semiconductors

Kumamoto

(Sony Semiconductor Manufacturing Corporation

— Kumamoto TEC)

     2,136,000      CCDs, CMOS image sensors, LCDs and other semiconductors

Kagoshima

(Sony Semiconductor Manufacturing Corporation

— Kagoshima TEC)

     1,767,000      CCDs and other semiconductors

Oita

(Sony Semiconductor Manufacturing Corporation

— Oita TEC)

     585,000      CMOS image sensors and other semiconductors

Motomiya, Fukushima

(Sony Energy Devices Corporation

— Motomiya Plant)

     961,000      Batteries

Kohda, Aichi

(Sony Global Manufacturing & Operations Corporation
— Tokai TEC — Kohda Site)

     902,000      Home-use video cameras, compact digital cameras and interchangeable single-lens cameras

Inazawa, Aichi

(Sony Global Manufacturing & Operations Corporation
— Tokai TEC — Inazawa Site)

     842,000      LCD televisions

Tsuruoka, Yamagata

(Sony Semiconductor Manufacturing Corporation

— Yamagata TEC)

     703,000      CMOS image sensors and other semiconductors

Koriyama, Fukushima

(Sony Energy Devices Corporation
— Koriyama Plant)

     593,000      Batteries

Kosai, Shizuoka

(Sony Global Manufacturing & Operations Corporation
— Tokai TEC — Kosai Site)

     576,000      Broadcast- and professional-use video equipment

Kisarazu, Chiba

(Sony Global Manufacturing & Operations Corporation
— Kisarazu TEC)

     541,000      Blu-ray Disc™ players/recorders, audio equipment and video conference systems

 

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Location

   Approximate
floor space
    

Principal products produced

     (square feet)       

Outside of Japan:

     

Terre Haute, Indiana, U.S.A.

(Sony DADC US Inc.)

     1,541,000      Blu-ray Disc™-ROMs, CDs, DVDs and UMDs (Universal Media Disc)

Huizhou, China

(Sony Precision Devices (Huizhou) Co., Ltd.)

     1,027,000      Optical pickups and LCDs

Wuxi, China

(Sony Electronics (Wuxi) Co., Ltd., Sony Digital

Products (Wuxi) Co., Ltd. and Sony (China) Ltd.)

     1,876,000      Batteries and compact digital cameras

Penang, Malaysia

(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)

     1,021,000      Audio equipment

Tuas, Singapore

(Sony Electronics (Singapore) Pte. Ltd.)

     834,000      Batteries

Bangi, Malaysia

(Sony EMCS (Malaysia) Sdn. Bhd. — KL TEC)

     954,000      LCD televisions, TV components, Blu-ray Disc™ players/recorders and DVD-players/recorders

Guangzhou, China

(Sony Electronics Huanan Co., Ltd.)

     687,000      Optical pickups

Beijing, China

(Sony Mobile Communications (China) Co., Ltd.)

     604,000      Mobile phones

In addition to the above facilities, Sony has a number of other plants for electronic products throughout the world. Sony owns R&D facilities, and Sony Corporation’s headquarters building, with a total floor space of approximately 1,753,000 square feet, in Tokyo, Japan, where administrative functions and product development activities are carried out. SIEI has its corporate headquarters in Sony Corporation’s headquarters building and leases additional office space in Tokyo from a third party, where administrative functions, product development, and software development are carried out. SIEA and SIEE lease their offices in the U.S. and Europe, respectively.

SPE’s corporate offices and motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates a studio facility, Sony Pictures Studios, with aggregate floor space of approximately 1,935,000 square feet. SPE also leases office space and motion picture and television support facilities from third parties and affiliates of Sony Corporation in various worldwide locations. SPE’s film and videotape storage operations are located in various leased locations in the U.S. and Europe.

SME’s corporate offices are headquartered in New York, NY where it leases office space from SCA. SME also leases office space from third parties in various locations worldwide.

Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.

SCA’s corporate offices are headquartered in New York, NY where it leases office space from a third party.

On March 31, 2016, Sony Semiconductor Manufacturing Corporation Oita TEC was established in Japan. This facility uses semiconductor fabrication equipment and certain related assets acquired from Toshiba.

On April 1, 2017, Sony China completed the transfer of all of the equity interest in Sony Electronics Huanan Co., Ltd., which manufactures camera modules, to Shen Zhen O-film Tech Co., Ltd.

Pursuant to the definitive agreement between Sony and Murata Manufacturing Co., Ltd., Sony will transfer to Murata Manufacturing Co., Ltd. the battery-related plants located in Japan, China and Singapore, subject to required regulatory approvals and other conditions.

 

Item 4A. Unresolved Staff Comments

Not applicable

 

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Item 5. Operating and Financial Review and Prospects

 

A. Operating Results

Operating Performance

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in billions)  

Sales and operating revenue

     8,215.9        8,105.7        7,603.3  

Equity in net income of affiliated companies

     3.9        2.2        3.6  

Operating income

     68.5        294.2        288.7  

Income before income taxes

     39.7        304.5        251.6  

Net income (loss) attributable to Sony Corporation’s stockholders

     (126.0      147.8        73.3  

Sales

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales and operating revenue (“sales”) were 7,603.3 billion yen, a decrease of 6.2% compared to the fiscal year ended March 31, 2016. This decrease was primarily due to the impact of foreign exchange rates. On a constant currency basis, sales were essentially flat year-on-year, due to significant increases in G&NS and Semiconductors segment sales, substantially offset by a significant decrease in MC segment sales. A further breakdown of sales figures is presented under “Operating Performance by Business Segment” below.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales were 8,105.7 billion yen, a decrease of 1.3% compared to the fiscal year ended March 31, 2015. This decrease was mainly due to a significant decrease in MC segment sales, reflecting a significant decrease in smartphone unit sales, partially offset by increases in G&NS segment sales, reflecting a significant increase in PS4 software sales, and in Music segment sales mainly reflecting depreciation of the yen against the U.S. dollar. A further breakdown of sales figures is presented under “Operating Performance by Business Segment” below.

Cost of Sales, Selling, General and Administrative Expenses and Other Operating Expense, net

“Sales” in the analysis of the ratio of “cost of sales” to sales, the ratio of “R&D costs” to sales, and the ratio of “selling, general and administrative expenses (“SGA expenses”)” to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales (which excludes financial services revenue). This is because “financial services expenses” are recorded separately from cost of sales and SGA expenses in the consolidated financial statements. The calculations of all ratios below that pertain to reportable segments include intersegment transactions.

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, cost of sales decreased by 413.9 billion yen year-on-year, to 4,753.0 billion yen. The cost of sales included net charges of 15.4 billion yen in expenses in the Semiconductors segment resulting from the earthquakes in the Kumamoto region in 2016 (“the 2016 Kumamoto Earthquakes”). Refer to Note 18 of the consolidated financial statements for details. The ratio of cost of sales to sales improved year-on-year from 73.4% to 72.9%.

R&D costs (all R&D costs are included within cost of sales) decreased by 20.7 billion yen year-on-year, to 447.5 billion yen. The ratio of R&D costs to sales was 6.9% compared to 6.7% in the fiscal year ended March 31, 2016. For further details, refer to Research and Development in Item 5.C.

SGA expenses decreased by 186.0 billion yen year-on-year, to 1,506.0 billion yen, mainly due to the impact of the appreciation of the yen. The ratio of SGA expenses to sales improved year-on-year from 24.0% to 23.1%.

Other operating expense, net was 149.0 billion yen, an increase of 101.8 billion yen year-on-year. This significant deterioration was mainly due to the recording of a 962 million U.S. dollar (112.1 billion yen) charge for the impairment of goodwill recorded in the Pictures segment. Refer to Note 9 of the consolidated financial statements for details of the impairment. In addition, other operating expense, net in the fiscal year ended March 31, 2017 included a 42.3 billion yen impairment charge related to the planned transfer of the battery

 

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business in the Components segment, as well as a 23.9 billion yen impairment charge against long-lived assets resulting from the termination of the development and manufacturing of certain high-functionality camera modules for external sale in the Semiconductors segment. Offsetting all of the above charges was a 37.2 billion yen gain on the sale of certain shares of M3, Inc. (“M3”) recorded in All Other. Other operating expense, net for the fiscal year ended March 31, 2016 included a 59.6 billion yen impairment charge against long-lived assets in the camera module business recorded in the Semiconductors segment, and a 30.6 billion yen impairment charge against long-lived assets in the battery business recorded in the Components segment, as well as a 151 million U.S. dollar (18.1 billion yen) gain recorded in the Music segment on the remeasurement to fair value of SME’s 51% equity interest in Orchard Media, Inc. (“The Orchard”), which had previously been accounted for under the equity method, as a result of SME increasing its ownership interest to 100%. It also included a gain of 12.3 billion yen from the sale of a part of the logistics business, in connection with the formation of a logistics joint venture, recorded in Corporate and elimination. Refer to Note 20 of the consolidated financial statements.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, cost of sales decreased by 108.3 billion yen year-on-year, to 5,166.9 billion yen. Cost of sales in the fiscal year ended March 31, 2015 included an 11.2 billion yen write-down of PS Vita and PS TV components in the G&NS segment. The ratio of cost of sales to sales improved year-on-year from 73.9% to 73.4%.

R&D costs (all R&D costs are included within cost of sales) increased by 3.9 billion yen year-on-year, to 468.2 billion yen. The ratio of R&D costs to sales was 6.7% compared to 6.5% in the fiscal year ended March 31, 2015. For further details, refer to Research and Development in Item 5. C.

SGA expenses decreased by 119.5 billion yen year-on-year, to 1,691.9 billion yen, mainly due to decreases in advertising costs and restructuring charges. The ratio of SGA expenses to sales improved year-on-year from 25.4% to 24.0%.

Other operating expense, net was 47.2 billion yen, a decrease of 134.5 billion yen year-on-year. This significant improvement was mainly due to a decrease in the amount of impairment charges. Other operating expense, net for the fiscal year ended March 31, 2016 included a 59.6 billion yen impairment charge against long-lived assets in the camera module business recorded in the Semiconductors segment, and a 30.6 billion yen impairment charge against long-lived assets in the battery business recorded in the Components segment, as well as a 151 million U.S. dollar (18.1 billion yen) gain recorded in the Music segment on the remeasurement to fair value of SME’s 51% equity interest in The Orchard described above. It also included a gain of 12.3 billion yen from the sale of a part of the logistics business, in connection with the formation of a logistics joint venture, recorded in Corporate and elimination. Other operating expense, net for the fiscal year ended March 31, 2015 included a 176.0 billion yen impairment charge against goodwill recorded in the MC segment and a gain of 14.8 billion yen recognized on the sale of certain buildings and premises at the Gotenyama Technology Center in Japan, recorded in Corporate and elimination. Refer to Note 20 of the consolidated financial statements.

Equity in Net Income (Loss) of Affiliated Companies

For the fiscal year ended March 31, 2017, equity in net income of affiliated companies was 3.6 billion yen, an increase of 1.3 billion yen year-on-year. For the fiscal year ended March 31, 2016, equity in net income of affiliated companies was 2.2 billion yen, a decrease of 1.7 billion yen year-on-year.

Operating Income

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, operating income decreased 5.5 billion yen year-on-year, to 288.7 billion yen. This decrease was mainly due to the 962 million U.S. dollars (112.1 billion yen) impairment charge of goodwill recorded in the Pictures segment, substantially offset by an improvement in the operating results of the MC segment and an increase in the operating income of the G&NS segment. Restructuring charges, net, increased 22.0 billion yen year-on-year to 60.2 billion yen primarily due to the above-mentioned impairment charge related to the planned transfer of the battery business.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, operating income increased by 225.6 billion yen year-on-year, to 294.2 billion yen. This significant increase was primarily due to significant improvements in the results of the MC segment and All Other, as well as the G&NS, IP&S, Music and Home Entertainment & Sound (“HE&S”)

 

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segments. The increase in consolidated operating income was partially offset by a significant deterioration in the operating results of the Semiconductors, Components, Financial Services and Pictures segments. Restructuring charges, net, decreased 59.8 billion yen year-on-year to 38.3 billion yen.

Other Income and Expenses

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, other income decreased by 52.4 billion yen year-on-year, to 14.4 billion yen, while other expenses decreased by 5.0 billion yen year-on-year, to 51.5 billion yen. The net amount of other income and other expenses was an expense of 37.1 billion yen, a deterioration of 47.4 billion yen year-on-year primarily due to the absence in the fiscal year ended March 31, 2017 of a 46.8 billion yen gain on the sale of certain shares of Olympus recorded in the fiscal year ended March 31, 2016.

The foreign exchange loss, net, increased by 1.6 billion yen year-on-year, to 22.2 billion yen.

Interest and dividends in other income of 11.5 billion yen were recorded in the fiscal year ended March 31, 2017, a decrease of 1.0 billion yen year-on-year. Interest recorded in other expenses totaled 14.5 billion yen, a decrease of 10.7 billion yen year-on-year, mainly due to a decrease in interest rates.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, other income increased by 41.8 billion yen year-on-year, to 66.8 billion yen, while other expenses increased by 2.6 billion yen year-on-year, to 56.5 billion yen. The net amount of other income and other expenses was income of 10.3 billion yen, an improvement of 39.1 billion yen year-on-year. This was mainly due to an increase in the gain on securities investments. The gain on sales of securities investments in the fiscal year ended March 31, 2016 included a 46.8 billion yen gain on the sale of certain shares of Olympus and a 2.7 billion yen gain on the sale of shares in connection with the above-mentioned formation of a logistics joint venture. The gain on sales of securities investments in the fiscal year ended March 31, 2015 included a 4.8 billion yen gain on Sony’s shares in SQUARE ENIX HOLDINGS CO., LTD.

The foreign exchange loss, net, was 20.6 billion yen, essentially flat year-on-year. Interest and dividends in other income of 12.5 billion yen were recorded in the fiscal year ended March 31, 2016, a decrease of 0.4 billion yen year-on-year. Interest recorded in other expenses totaled 25.3 billion yen, an increase of 1.7 billion yen year-on-year.

Income before Income Taxes

For the fiscal year ended March 31, 2017, income before income taxes was 251.6 billion yen, a decrease of 52.9 billion yen year-on-year. For the fiscal year ended March 31, 2016, income before income taxes was 304.5 billion yen, an increase of 264.8 billion yen year-on-year.

Income Taxes

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

During the fiscal year ended March 31, 2017, Sony recorded 124.1 billion yen of income tax expense, resulting in an effective tax rate of 49.3%, which exceeded the effective tax rate of 31.1% of the fiscal year ended March 31, 2016. This higher effective tax rate was mainly due to the nondeductible impairment charge of goodwill recorded during the fiscal year ended March 31, 2017. Refer to Note 21 of the consolidated financial statements.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

During the fiscal year ended March 31, 2016, Sony recorded 94.8 billion yen of income tax expense, resulting in an effective tax rate of 31.1 %. This effective tax rate was lower than the Japanese statutory tax rate primarily as a result of profits recorded at foreign subsidiaries and in the insurance business, which are both subject to lower tax rates, the reversal of valuation allowances on deferred tax assets for local taxes by a subsidiary in Japan, and an income tax benefit due to a reduction in the corporate tax rate in Japan which resulted in a reduction of net deferred tax liabilities. These reductions were partially offset by increases in valuation allowances for deferred tax assets in the national tax filing group in Japan and certain foreign subsidiaries. Refer to Note 21 of the consolidated financial statements.

 

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Net Income Attributable to Sony Corporation’s Stockholders

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, the net income attributable to Sony Corporation’s stockholders, which excludes net income attributable to noncontrolling interests, was 73.3 billion yen, a decrease of 74.5 billion yen year-on-year.

Net income attributable to noncontrolling interests of 54.3 billion yen was recorded, a decrease of 7.7 billion yen year-on-year. This decrease was mainly due to the acquisition of the 50% equity interest in Sony/ATV held by the Estate, making Sony/ATV a wholly-owned subsidiary of Sony.

Basic net income per share and diluted net income per share, attributable to Sony Corporation’s stockholders for the fiscal year ended March 31, 2017 were 58.07 yen and 56.89 yen, respectively, compared with 119.40 yen and 117.49 yen, respectively, in the fiscal year ended March 31, 2016. Refer to Note 22 of the consolidated financial statements.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, the net income attributable to Sony Corporation’s stockholders, which excludes net income attributable to noncontrolling interests, was 147.8 billion yen, compared to a net loss of 126.0 billion yen in the fiscal year ended March 31, 2015.

Net income attributable to noncontrolling interests of 61.9 billion yen was recorded, a decrease of 15.1 billion yen year-on-year. This decrease was mainly due to the decreased income at SFH, for which there was a noncontrolling interest of 40%.

Basic net income per share and diluted net income per share, attributable to Sony Corporation’s stockholders for the fiscal year ended March 31, 2016 were 119.40 yen and 117.49 yen respectively, compared to the loss of 113.04 yen of both basic net income per share and diluted net income per share, attributable to Sony Corporation’s stockholders for the fiscal year ended March 31, 2015. Refer to Note 22 of the consolidated financial statements.

Operating Performance by Business Segment

The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 28 of the consolidated financial statements.

In addition to those significant trends, uncertainties and events listed herein, refer to Trend Information in Item 5.D for more information on significant trends, uncertainties and events that had, or may have, an effect on business segment operating performance.

 

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Business Segment Information

 

     Fiscal year ended March 31  
     2015     2016     2017  
     (Yen in billions)  

Sales and operating revenue

      

Mobile Communications

     1,410.2       1,127.5       759.1  

Game & Network Services

     1,388.0       1,551.9       1,649.8  

Imaging Products & Solutions

     700.6       684.0       579.6  

Home Entertainment & Sound

     1,238.1       1,159.0       1,039.0  

Semiconductors

     700.1       739.1       773.1  

Components

     250.7       224.6       195.4  

Pictures

     878.7       938.1       903.1  

Music

     560.4       619.2       647.7  

Financial Services

     1,083.6       1,073.1       1,087.5  

All Other

     385.6       332.2       267.0  

Corporate and elimination

     (380.1     (343.0     (298.1
  

 

 

   

 

 

   

 

 

 

Consolidated

     8,215.9       8,105.7       7,603.3  
  

 

 

   

 

 

   

 

 

 
     Fiscal year ended March 31  
     2015     2016     2017  
     (Yen in billions)  

Operating income (loss)

      

Mobile Communications

     (217.6     (61.4     10.2  

Game & Network Services

     48.1       88.7       135.6  

Imaging Products & Solutions

     38.7       69.3       47.3  

Home Entertainment & Sound

     24.1       50.6       58.5  

Semiconductors

     96.2       14.5       (7.8

Components

     (7.5     (42.9     (60.4

Pictures

     58.5       38.5       (80.5

Music

     58.2       86.5       75.8  

Financial Services

     193.3       156.5       166.4  

All Other

     (94.2     1.7       30.9  
  

 

 

   

 

 

   

 

 

 

Sub-Total

     198.0       401.9       375.8  

Corporate and elimination*

     (129.4     (107.7     (87.1
  

 

 

   

 

 

   

 

 

 

Consolidated

     68.5       294.2       288.7  
  

 

 

   

 

 

   

 

 

 

* Corporate and elimination includes headquarters restructuring costs and certain other corporate expenses, including the amortization of certain intellectual property assets such as the cross-licensing of intangible assets acquired from Ericsson at the time of the Sony Mobile Communications acquisition, which are not allocated to segments.

Mobile Communications

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales decreased 32.7% year-on-year to 759.1 billion yen. This significant decrease was primarily due to a decrease in smartphone unit sales mainly in Europe, the Middle East and Latin America, as well as a significant downsizing of unit sales in unprofitable regions.

Operating income of 10.2 billion yen was recorded, compared to an operating loss of 61.4 billion yen in the fiscal year ended March 31, 2016. Despite the impact of the above-mentioned decrease in sales, operating results improved significantly mainly due to a reduction in operating costs including the benefit of restructuring initiatives, an improvement in profitability resulting from a concentration on fewer geographic areas and a focus on high value-added models, the positive impact of foreign exchange rates, as well as a reduction in restructuring charges.

The operating performance of the MC segment for the fiscal year ended March 31, 2017 reflected the slowing and maturation of the smartphone market on a global scale, primarily due to a slowdown in sales in emerging markets, as well as the intentional downsizing of operations in unprofitable geographic regions. In this environment, Sony focused on the higher-end of the product portfolio, since the market at the low-end is

 

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increasingly more competitive, price-sensitive and volatile. Furthermore, Sony focused on product differentiation in areas where Sony believes it has a technological advantage, such as image sensors, and in geographic areas where Sony believes it has a competitive edge, such as Japan. Sony also focused on stabilizing the segment’s operating results by further reducing operating costs and by growing recurring revenue businesses, such as the Internet services provider business. Sony intends to continue these initiatives in the fiscal year ending March 31, 2018.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales decreased 20.0% year-on-year to 1,127.5 billion yen. This decrease was due to a strategic decision not to pursue scale in order to improve profitability, resulting in a significant decrease in smartphone unit sales, partially offset by an improvement in the product mix of smartphones reflecting an increased focus on high value-added models.

Operating loss decreased 156.1 billion yen year-on-year to 61.4 billion yen. This significant decrease was primarily due to the absence of 176.0 billion yen goodwill impairment charge recorded in the fiscal year ended March 31, 2015. The operating results were also primarily affected by the negative impact of the appreciation of the U.S. dollar, reflecting a high ratio of U.S. dollar-denominated costs, and an increase in restructuring charges. The negative impact of the above-mentioned decrease in smartphone unit sales was offset by the improvement in product mix, as well as cost reductions.

Major product unit sales

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Units in millions)  

Smartphones

     39.1        24.9        14.6  

Game & Network Services

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales increased 6.3% year-on-year to 1,649.8 billion yen. This increase was primarily due to an increase in PS4 software sales, including sales through the network, as well as an increase in PS4 hardware sales, partially offset by the impact of foreign exchange rates and the impact of a price reduction for PS4 hardware.

Operating income increased 46.9 billion yen year-on-year to 135.6 billion yen. This significant increase was primarily due to PS4 hardware cost reductions and the above-mentioned increase in PS4 software sales, partially offset by the impact of the price reduction for PS4 hardware and a decrease in PS3 software sales.

The operating performance of the G&NS segment for the fiscal year ended March 31, 2017 reflected the continued demand for hardware, software and network services. The expansion of the PS4 eco-system is expected to continue throughout the fiscal year ending March 31, 2018, and Sony intends to expand the network services business during that fiscal year as the PS4 eco-system enters its harvesting period.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales increased 11.8% year-on-year to 1,551.9 billion yen. This significant increase was primarily due to increases in PS4 software sales, including sales through the network, and PS4 hardware unit sales, partially offset by a decrease in PS3 software and hardware sales.

Operating income increased 40.6 billion yen year-on-year to 88.7 billion yen. This significant increase was primarily due to the increase in PS4 software sales and PS4 hardware cost reductions as well as the absence in the fiscal year ended March 31, 2016 of an 11.2 billion yen write-down of PS Vita and PS TV components recorded in the fiscal year ended March 31, 2015. Partially offsetting the increase in operating income were the negative impact of the appreciation of the U.S. dollar, reflecting a high ratio of U.S. dollar-denominated costs, and the decrease in PS3 software sales.

 

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Sales to external customers by product category

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in millions)  

Hardware

     733,757        721,829        598,373  

Network

     351,467        529,318        714,924  

Other

     206,922        228,628        268,271  
  

 

 

    

 

 

    

 

 

 

G&NS Total

     1,292,146        1,479,775        1,581,568  
  

 

 

    

 

 

    

 

 

 

 

Major product unit sales

 

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Units in millions)  

PS4

     14.8        17.7        20.0  

Imaging Products & Solutions

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales decreased 15.3% year-on-year to 579.6 billion yen. This significant decrease was mainly due to the impact of foreign exchange rates and a decrease in unit sales resulting from the 2016 Kumamoto Earthquakes.

Operating income decreased 22.1 billion yen year-on-year to 47.3 billion yen. This significant decrease was mainly due to the negative impact of foreign exchange rates and the impact of the above-mentioned decrease in unit sales, partially offset by an improvement in the product mix of Still and Video Cameras reflecting a shift to high value-added models and cost reductions.

The operating performance of the IP&S segment for the fiscal year ended March 31, 2017 reflected shrinking markets for compact digital cameras, consumer video cameras and interchangeable lens cameras, as well as decreased production as a result of the 2016 Kumamoto Earthquakes. In this environment, Sony strengthened its high value-added products, such as interchangeable lens cameras and lenses, and focused on high-end models within its product portfolio of compact digital cameras and consumer video cameras. Sony intends to continue these initiatives in the fiscal year ending March 31, 2018.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales decreased 2.4% year-on-year to 684.0 billion yen. Sales were essentially flat year-on-year primarily due to decreases in unit sales of Still and Video Cameras reflecting a contraction of the market, substantially offset by an improvement in the product mix, reflecting a shift to high value-added models.

Operating income increased 30.5 billion yen year-on-year to 69.3 billion yen. This significant increase was mainly due to the improvement in the product mix of Still and Video Cameras and cost reductions.

Below are the sales to external customers by product category and unit sales of major products:

Sales to external customers by product category

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in millions)  

Still and Video Cameras

     478,099        428,777        351,834  

Other

     218,789        248,454        219,665  
  

 

 

    

 

 

    

 

 

 

IP&S Total

        696,888           677,231           571,499  
  

 

 

    

 

 

    

 

 

 

 

Major product unit sales

 

        
     Fiscal year ended March 31  
     2015      2016      2017  
     (Units in millions)  

Digital cameras within Still and Video Cameras*

     8.5        6.1        4.2  

* Digital cameras include compact digital cameras and interchangeable single-lens cameras.

 

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Home Entertainment & Sound

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales decreased 10.4% year-on-year to 1,039.0 billion yen, primarily due to the impact of foreign exchange rates.

Operating income increased 7.9 billion yen year-on-year to 58.5 billion yen. This increase was primarily due to an improvement in the product mix reflecting a shift to high value-added models, partially offset by the negative impact of foreign exchange rates as well as an increase in expenses* resulting from the change in the method of calculating royalties and other costs for brand and patent utilization, pursuant to the separation of Sony’s businesses into distinct subsidiaries and the realignment of corporate functions.

The operating performance of the HE&S segment for the fiscal year ended March 31, 2017 reflected the relative stabilization of the television market and a market shift to high value-added models such as 4K televisions. In this environment, Sony expects to continue to pursue an improvement in product mix reflecting the shift to high value-added models and an enhancement of its marketing initiatives.

* For further details, refer to Note 28 of the consolidated financial statements.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales decreased 6.4% year-on-year to 1,159.0 billion yen. This decrease was primarily due to a decrease in unit sales of LCD televisions, and a decrease in home audio and video unit sales reflecting a contraction of the market, partially offset by an improvement in the product mix of LCD televisions reflecting a shift to high value-added models, as well as the impact of foreign exchange rates.

Operating income increased 26.5 billion yen year-on-year to 50.6 billion yen. This significant increase was primarily due to cost reductions and an improvement in product mix, partially offset by the negative impact of the appreciation of the U.S. dollar, reflecting the high ratio of U.S. dollar-denominated costs, as well as the impact of the above-mentioned decrease in sales.

Below are the sales to external customers by product category and unit sales of major products:

Sales to external customers by product category

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in millions)  

Televisions

     835,068        797,764        720,557  

Audio and Video

     396,814        354,946        311,771  

Other

     3,804        2,375        1,887  
  

 

 

    

 

 

    

 

 

 

HE&S Total

     1,235,686        1,155,085        1,034,215  
  

 

 

    

 

 

    

 

 

 

Major product unit sales

 

        
     Fiscal year ended March 31  
     2015      2016      2017  
     (Units in millions)  

LCD televisions

     14.6        12.2        12.1  

Semiconductors

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales increased 4.6% year-on-year to 773.1 billion yen. This increase in sales was primarily due to a significant increase in unit sales of image sensors mainly for mobile products, partially offset by the impact of foreign exchange rates, a significant decrease in sales of camera modules, a business which was downsized, and the decrease in production due to the 2016 Kumamoto Earthquakes. Sales to external customers increased 10.1% year-on-year.

 

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Operating loss of 7.8 billion yen was recorded, compared to operating income of 14.5 billion yen in the previous fiscal year. This significant deterioration in operating results was primarily due to the negative impact of foreign exchange rates, the above-mentioned expenses resulting from the 2016 Kumamoto Earthquakes, and a 6.5 billion yen write-down of inventories of certain image sensors mainly for mobile products. This deterioration was partially offset by the above-mentioned year-on-year increase in sales and the decrease in impairment charges against long-lived assets related to the camera module business.

The operating performance of the Semiconductors segment for the fiscal year ended March 31, 2017 reflected growing demand for image sensors for mobile products, which is currently the most important market for Sony’s image sensors, as well as Sony’s efforts to increase its customer base. This growth was largely due to increased demand for high value-added products that use these image sensors to improve their front-facing cameras, dual-lens cameras and video functionality. In this environment, Sony streamlined the portfolio of the Semiconductors segment to focus on image sensors, exiting from certain other businesses in the segment, including the camera modules business. Sony also continued to invest in production capacity for image sensors and increased its customer base while carefully monitoring demand. Sony intends to continue these initiatives in the fiscal year ending March 31, 2018.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales increased 5.6% year-on-year to 739.1 billion yen primarily due to the impact of foreign exchange rates and increases in camera module and image sensor sales. Sales to external customers increased 12.0% year-on-year.

Operating income decreased 81.7 billion yen year-on-year to 14.5 billion yen. This significant decrease was primarily due to the deterioration in the operating results of the camera module business, including the recording of a 59.6 billion yen impairment charge related to long-lived assets, increases in depreciation and amortization expenses as well as an increase in R&D expenses. This deterioration was partially offset by the positive impact of foreign exchange rates. For the camera module business, due to a decrease in projected future demand, Sony revised its Mid-Range Plan for the period beginning with the fiscal year ended March 31, 2017. Given the decrease in projected future demand, Sony performed an impairment analysis in the quarter ended March 31, 2016, and determined that future cash flows would not be sufficient to recover the entire carrying amount of the long-lived assets, resulting in the impairment charge.

Components

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales decreased 13.0% year-on-year to 195.4 billion yen primarily due to the impact of foreign exchange rates and a decrease in sales in the battery business.

Operating loss increased 17.5 billion yen year-on-year to 60.4 billion yen. This significant increase in the operating loss was primarily due to a 42.3 billion yen impairment charge related to the planned transfer of the battery business and the impact of the above-mentioned decrease in sales, partially offset by the absence of the 30.6 billion yen impairment charge related to long-lived assets of the battery business recorded in the previous fiscal year.

Sony and Murata Manufacturing Co., Ltd. signed a binding definitive agreement to transfer the Sony Group’s battery business to the Murata Group, on October 31, 2016. The closing of the transaction is subject to required regulatory approvals and other conditions.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales decreased 10.4% year-on-year to 224.6 billion yen primarily due to the impact of a decrease in battery business sales.

Operating loss increased 35.4 billion yen year-on-year to 42.9 billion yen. This significant increase in the operating loss was primarily due to the deterioration in the operating results of the battery business, including the recording of a 30.6 billion yen impairment charge related to long-lived assets. This deterioration was partially offset by the positive impact of foreign exchange rates. For the battery business, due to the increasingly competitive markets, Sony performed an impairment analysis in the quarter ended December 31, 2015, and reduced the corresponding estimated future cash flows and the estimated ability to recover the entire carrying amount of the long-lived assets, resulting in the impairment charge.

 

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Electronics*

* The term “Electronics” refers to the sum of the MC, G&NS, IP&S, HE&S, Semiconductors and Components segments.

Inventory

 

    Fiscal year ended March 31  
    2016     2017  
    (Yen in billions)  

Mobile Communications

    84.5       79.5  

Game & Network Service

    84.2       81.7  

Imaging Products & Solutions

    64.9       62.9  

Home Entertainment & Sound

    105.3       114.1  

Semiconductors

    224.7       203.6  

Components

    36.5       11.4  
 

 

 

   

 

 

 

Electronics Total

    600.1       553.2  
 

 

 

   

 

 

 

Sales to External Customers by Geographic Area

 

     Fiscal year ended March 31  
     2015     2016     2017  

Japan

     16.6     18.1     20.1

United States

     16.7     20.5     21.9

Europe

     27.5     27.5     26.1

China

     9.6     9.6     10.8

Asia-Pacific (other than Japan and China)

     16.7     14.9     14.7

Other

     12.9     9.3     6.4
  

 

 

   

 

 

   

 

 

 

Electronics Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Manufacturing by Geographic Area

The following tables set forth the Electronics segments’ total production breakdown of in-house and outsourced production, and the breakdown of in-house production by geographic regions. Figures in parentheses indicate the percentage of products that were exported from each geographic region to other regions.

Total production breakdown of in-house and outsourced production*

 

    Fiscal year ended March 31  
    2016     2017  

In-house production

    61     66

Outsourced production

    39     34
 

 

 

   

 

 

 

Electronics total

    100     100
 

 

 

   

 

 

 

Breakdown of in-house production by geographic regions*

 

     Fiscal year ended March 31  
     2016     2017  

Japan

     37% (86%     44% (87%

China

     42% (70%     33% (69%

Asia-Pacific (other than Japan and China)

     19% (55%     22% (59%

Americas and Europe

     1% (less than 5%     1% (less than 5%
  

 

 

   

 

 

 

Electronics total

     100%       100%  
  

 

 

   

 

 

 

* Because decimals have been rounded upwards, there may be cases in which the sum of individual figures does not equal 100%.

Pictures

Pictures segment results presented below are a yen-translation of the results of SPE, a U.S.-based operation that 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 is specified as being on “a U.S. dollar basis.”

 

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Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales decreased 3.7% year-on-year (a 5% increase on a U.S. dollar basis) to 903.1 billion yen, primarily due to the impact of the appreciation of the yen against the U.S. dollar. The increase in sales on a U.S. dollar basis was primarily due to higher sales for Television Productions and Media Networks. Sales for Television Productions increased primarily due to higher subscription video-on-demand (“SVOD”) licensing revenues. The increase in sales for Media Networks was due to higher advertising and subscription revenues mainly in India, Latin America and the U.S.

Operating loss of 80.5 billion yen was recorded, compared to operating income of 38.5 billion yen in the previous fiscal year. This significant deterioration in operating results was primarily due to the above-mentioned 962 million U.S. dollars (112.1 billion yen) impairment charge of goodwill. The operating results for the Pictures segment were also negatively impacted by higher programming and marketing expenses for Media Networks as well as higher theatrical marketing expenses for Motion Pictures.

As of March 31, 2017, unrecognized license fee revenue at SPE was approximately 2.6 billion U.S. dollars. SPE expects to record this amount over a ten year period, having entered into contracts with television broadcasters to provide those broadcasters with completed motion pictures and television programming. Under current revenue recognition requirements and SPE’s policies, the license fee revenue will be recognized in the fiscal year in which the product is made available for broadcast.

Within the Pictures segment in the fiscal year ended March 31, 2017, the operating performance of Motion Pictures reflected an acceleration of market decline in the home entertainment business, which resulted in a lowering of previous expectations regarding the home entertainment business, and a reduction in film performance. Underlying market trends in Motion Pictures include a larger share of film revenue being concentrated in fewer tent-pole films. In this environment, Sony is working to expand the global appeal of its films and enhance developed and acquired intellectual property. In the market in which Television Productions operates, U.S. networks are seeking to own more of the content broadcast on their networks. This impacts the number of series that these networks license from third-party producers such as SPE or the rights SPE retains in the series that are licensed. Sony, which does not own a major U.S. broadcast network, has been striving to build strong relationships with top content creators and major networks around the world to offset that impact. In the market in which Media Networks operates, there has been a gradual movement from a linear carriage environment — that is, one in which a viewer watches a program at a particular, pre-scheduled time — to a non-linear, on-demand carriage environment, which has put pressure on Media Networks’ carriage negotiations with distributors. As a result, Sony expects to continue to aim to differentiate its branded channels from the competition. Sony intends to continue these initiatives in the fiscal year ending March 31, 2018.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales increased 6.8% year-on-year (essentially flat on a U.S. dollar basis) to 938.1 billion yen. On a U.S. dollar basis, the impact of foreign exchange rates as well as lower sales in Motion Pictures were substantially offset by higher sales in Media Networks and Television Productions. The decrease in Motion Pictures sales was primarily due to a decrease in home entertainment revenues as the fiscal year ended March 31, 2015 benefited from the strong home entertainment performances of The Amazing Spider-Man 2, 22 Jump Street and Heaven Is For Real. Partially offsetting the decrease in home entertainment revenues was higher theatrical revenues in the fiscal year ended March 31, 2016, driven by the strong worldwide theatrical performances of Spectre and Hotel Transylvania 2. The increase in Media Networks sales was primarily due to higher advertising revenues in India and the United Kingdom. The increase in Television Productions sales was primarily due to higher SVOD revenues for Breaking Bad, The Blacklist and Better Call Saul.

Operating income decreased 20.0 billion yen year-on-year to 38.5 billion yen. This decrease was primarily due to the impact of the above-mentioned lower home entertainment revenues, the underperformance of The Walk and The Brothers Grimsby, and the negative impact of foreign exchange rates. This decrease was partially offset by the above-mentioned impact of higher Media Networks sales in India and the United Kingdom and the worldwide theatrical performance of Hotel Transylvania 2.

As of March 31, 2016, unrecognized license fee revenue at SPE was approximately 1.9 billion U.S. dollars. SPE expects to record this amount over a ten-year period, having entered into contracts with television broadcasters to provide those broadcasters with completed motion pictures and television programming. Under current revenue recognition requirements and SPE’s policies, the license fee revenue will be recognized in the fiscal year in which the product is made available for broadcast.

 

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Below are the sales to external customers by product category:

Sales to external customers by product category

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in millions)  

Motion Pictures

     434,253        447,355        409,363  

Television Productions

     252,456        270,115        271,886  

Media Networks

     189,605        218,357        219,981  
  

 

 

    

 

 

    

 

 

 

Pictures Total

     876,314        935,827        901,230  
  

 

 

    

 

 

    

 

 

 

Music

The Music segment results include the yen-translated results of SME and Sony/ATV, both U.S.-based operations which aggregate the results of their worldwide subsidiaries on a U.S. dollar basis and the results of SMEJ, a Japan-based music company which aggregates its results in yen. The segment also includes equity in net income for EMI Music Publishing (“EMI”), an affiliated company accounted for under the equity method for which Sony records 39.8% of EMI’s net income in the segment operating income.

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, sales increased 4.6% year-on-year (an 11% increase on a constant currency basis) to 647.7 billion yen. The significant increase in sales on a constant currency basis was due to higher Visual Media and Platform sales and higher Recorded Music sales, and was partially offset by the impact of the appreciation of the yen against the U.S. dollar. Visual Media and Platform sales increased due to the strong performance of Fate/Grand Order, a game application for mobile devices in Japan. Recorded Music sales increased due to an increase in digital streaming revenues. Best-selling music titles included Beyoncé’s Lemonade, various hit tracks from The Chainsmokers and Sia’s This is Acting.

Operating income decreased 10.7 billion yen year-on-year to 75.8 billion yen. Operating income decreased primarily due to the above-mentioned absence of the 151 million U.S. dollar (18.1 billion yen) gain that was recorded in the previous fiscal year on the remeasurement of SME’s equity interest in The Orchard. The operating results of the Music segment were also positively impacted by the above-mentioned increase in sales, partially offset by the negative impact of the appreciation of the yen against the U.S. dollar.

The operating performance of the Music segment for the fiscal year ended March 31, 2017 reflected the growth in the market for recorded music after many years of market decline, as the continued development and growth of digital streaming has begun to offset the decreases in physical and download revenues. In this environment, Sony has pursued initiatives to offset the decreases in physical and digital download revenues with increased streaming, broadcast, and other licensing revenues through continued investment in new recorded music and music publishing rights. Sony intends to continue these initiatives in the fiscal year ending March 31, 2018.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, sales increased 10.5% year-on-year (a 5% increase on a constant currency basis) to 619.2 billion yen primarily due to the impact of the depreciation of the yen against the U.S. dollar. The increase in sales on a constant currency basis was primarily due to significantly higher Visual Media and Platform sales reflecting the strong performance of Fate/Grand Order, a game application for mobile devices in Japan. In Recorded Music, digital streaming revenues significantly increased, partially offset by a worldwide decline in physical and digital download sales. The fiscal year ended March 31, 2016 included the record-breaking sales of Adele’s new album 25. Other best-selling titles included One Direction’s Made in the A.M., David Bowie’s Blackstar and Meghan Trainor’s Title.

Operating income increased 28.3 billion yen year-on-year to 86.5 billion yen. This increase was primarily due to the above-mentioned gain recorded on the remeasurement to fair value of SME’s 51% equity interest in The Orchard as well as the impact of the above-mentioned increases in digital streaming revenues in Recorded Music and in Visual Media and Platform sales. Partially offsetting the increase was the negative impact of the above-mentioned decline in physical and digital download sales in Recorded Music.

 

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Below are the sales to external customers by product category:

Sales to external customers by product category

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in millions)  

Recorded Music

     383,350        412,718        388,948  

Music Publishing

     70,959        71,258        66,541  

Visual Media & Platform

     87,383        118,588        175,278  
  

 

 

    

 

 

    

 

 

 

Music Total

     541,692        602,564        630,767  
  

 

 

    

 

 

    

 

 

 

Financial Services

In Sony’s Financial Services segment, the results include SFH and SFH’s consolidated subsidiaries such as Sony Life, Sony Assurance and Sony Bank. The results of Sony Life discussed below on the basis of U.S. GAAP differ from the results that SFH and Sony Life disclose separately on a Japanese statutory basis.

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

For the fiscal year ended March 31, 2017, financial services revenue was 1,087.5 billion yen, essentially flat year-on-year. This was primarily due to an improvement in investment performance in the separate account driven by a rise in the stock market, substantially offset by a decrease in insurance premium revenue and a deterioration in investment performance in the general account, all at Sony Life. Revenue at Sony Life was 965.6 billion yen, essentially flat year-on-year.

Operating income increased 9.9 billion yen year-on-year to 166.4 billion yen primarily due to an increase in operating income at Sony Life. Operating income at Sony Life increased 15.5 billion yen year-on-year to 154.3 billion yen mainly due to decreases in the amortization of deferred insurance acquisition costs and the provision of policy reserves, primarily driven by an increase in interest rates and the improvement in the stock market, partially offset by a decline in net gains on sales of securities in the general account.

The operating performance of the Financial Services segment for the fiscal year ended March 31, 2017 reflected the continuation of an unfavorable interest rate environment. Following the January 2016 decision by the Bank of Japan (“BOJ”) to introduce the “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” policy, long-term interest rates, which were already at a low level, fell until the BOJ’s decision in July 2016 to forgo a further reduction in interest rates. Following that decision, interest rates began to rise due to factors such as the adoption of the “Quantitative and Qualitative Monetary Easing with Yield Curve Control” policy in September 2016 with the BOJ’s purchasing of long-term government bonds to realize a target level of long-term interest rates, and moves by major countries’ central banks to curb monetary easing and shift interest rates in a positive direction. However, long-term interest rates rose only modestly in Japan due to the BOJ’s continuous monetary easing policy. Although Sony expects the current unfavorable interest rate environment to continue in the fiscal year ending March 31, 2018, Sony is continuing to pursue growth in the Financial Services segment by focusing on differentiating itself through high-quality financial products and services.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

For the fiscal year ended March 31, 2016, financial services revenue was 1,073.1 billion yen, essentially flat year-on-year. This was primarily due to a deterioration in investment performance in the separate account at Sony Life, driven by the deterioration in the stock market, substantially offset by an increase in insurance premium revenue reflecting a steady increase in policy amount in force at Sony Life. Revenue at Sony Life was 952.6 billion yen, essentially flat year-on-year.

Operating income decreased 36.8 billion year-on-year to 156.5 billion yen mainly due to a decrease in operating income at Sony Life. At Sony Life, operating income decreased 39.2 billion yen year-on-year to 138.8 billion yen, mainly due to increases in the amortization of deferred insurance acquisition costs and the provision of policy reserves, primarily driven by a significant decrease in interest rates and the deterioration in the stock market.

Information on Operations Separating Out the Financial Services Segment

The following charts show Sony’s information on operations for the Financial Services segment alone and for all segments excluding the Financial Services segment. These separate condensed presentations are not

 

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required or prepared 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 utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and Sony without the Financial Services segment, including noncontrolling interests, are included in those respective presentations, then eliminated in the consolidated figures shown below.

 

     Fiscal year ended March 31  
        Financial Services segment            2015                     2016                     2017          
     (Yen in millions)  

Financial services revenue

     1,083,629       1,073,069       1,087,504  

Financial services expenses

     889,540       915,881       917,479  

Equity in net loss of affiliated companies

     (782     (645     (3,601
  

 

 

   

 

 

   

 

 

 

Operating income

     193,307       156,543       166,424  

Other income, net

                  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     193,307       156,543       166,424  

Income taxes and other

     42,184       37,741       47,711  
  

 

 

   

 

 

   

 

 

 

Net income of Financial Services

     151,123       118,802       118,713  
  

 

 

   

 

 

   

 

 

 
     Fiscal year ended March 31  
        Sony without the Financial Services segment    2015     2016     2017  
     (Yen in millions)  

Net sales and operating revenue

     7,141,492       7,044,415       6,527,499  

Costs and expenses

     7,218,528       6,909,651       6,412,385  

Equity in net income of affiliated companies

     4,703       2,883       7,164  
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (72,333     137,647       122,278  

Other income (expenses), net

     (20,987     20,755       (22,728
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (93,320     158,402       99,550  

Income taxes and other

     63,094       71,451       84,956  
  

 

 

   

 

 

   

 

 

 

Net income (loss) of Sony without Financial Services

     (156,414     86,951       14,594  
  

 

 

   

 

 

   

 

 

 
     Fiscal year ended March 31  
        Consolidated    2015     2016     2017  
     (Yen in millions)  

Financial services revenue

     1,077,604       1,066,319       1,080,284  

Net sales and operating revenue

     7,138,276       7,039,393       6,522,966  
  

 

 

   

 

 

   

 

 

 
     8,215,880       8,105,712       7,603,250  

Costs and expenses

     8,151,253       7,813,753       7,318,111  

Equity in net income of affiliated companies

     3,921       2,238       3,563  
  

 

 

   

 

 

   

 

 

 

Operating income

     68,548       294,197       288,702  

Other income (expenses), net

     (28,819     10,307       (37,083
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     39,729       304,504       251,619  

Income taxes and other

     165,709       156,713       178,330  
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Sony Corporation’s Stockholders

     (125,980     147,791       73,289  
  

 

 

   

 

 

   

 

 

 

All Other

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

Sales for the fiscal year ended March 31, 2017 decreased 19.6% year-on-year, to 267.0 billion yen. This significant decrease in sales was primarily due to a decrease in sales of the disc manufacturing business resulting from the contraction of the market.

Operating income for the fiscal year ended March 31, 2017 increased 29.2 billion yen year-on-year to 30.9 billion yen. This significant increase was primarily due to a gain of 37.2 billion yen from the sale of certain shares of M3.

 

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Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

Sales for the fiscal year ended March 31, 2016 decreased 13.8% year-on-year to 332.2 billion yen. This significant decrease in sales was primarily due to the recording of sales in the fiscal year ended March 31, 2015 from the PC business, which was sold in July 2014.

Operating income of 1.7 billion yen was recorded, compared to an operating loss of 94.2 billion yen in the fiscal year ended March 31, 2015. This significant improvement was primarily due to a decrease in PC exit costs, including restructuring charges and after-sales service expenses, as well as the absence in the fiscal year ended March 31, 2016 of sales company fixed costs charged to the PC business in the fiscal year ended March 31, 2015, which were allocated based on the prior year results.

Restructuring

In a highly competitive landscape, Sony has made significant efforts to revitalize its Electronics businesses and has undertaken several large-scale restructuring initiatives including exiting from businesses or product categories, headcount reduction programs, and streamlining of its sales and administrative functions. For example, during the fiscal year ended March 31, 2015, Sony substantially completed the activities for optimizing the functions of its sales companies and headquarters, and experienced fixed cost reductions of more than 100 billion yen in the fiscal year ended March 31, 2016 compared with the fiscal year ended March 31, 2014. During the fiscal year ended March 31, 2015, Sony began restructuring plans in the MC segment, and has substantially completed those plans as of March 31, 2017. As a result, Sony experienced fixed cost reductions in the MC segment of more than 120 billion yen in annual operating expenses, including reductions in R&D expenses and marketing costs, in the fiscal year ended March 31, 2017 compared with the fiscal year ended March 31, 2015. Additionally, during the fiscal year ended March 31, 2017, Sony and Murata Manufacturing Co., Ltd. signed a binding definitive agreement to transfer Sony Group’s battery business to the Murata Group. Sony classified certain assets and liabilities related to the battery business as held for sale and, as a result of the fair value valuation of these assets and liabilities, recorded impairment losses of 42.3 billion yen in other operating expenses (net).

Sony believes the competitive environment will continue to be difficult, and therefore plans to be vigilant with respect to the scale of its businesses and to changes in the environment. Sony will continue to evaluate the cost and profit structure of its businesses and continue to take action to reduce cost where Sony believes appropriate.

The chart below shows the restructuring charges, which include non-cash charges related to depreciation associated with restructured assets, recorded in the fiscal years ended March 31, 2015, 2016 and 2017. For further details, refer to Note 19 of the consolidated financial statements.

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in millions)  

Restructuring charges

     98,036        38,259        60,215  

Foreign Exchange Fluctuations and Risk Hedging

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

During the fiscal year ended March 31, 2017, the average rates of the yen were 108.4 yen against the U.S. dollar and 118.8 yen against the euro, which were 10.8% and 11.6% higher, respectively, than the fiscal year ended March 31, 2016. For the latest yen exchange rates per U.S. dollar, refer to “Selected Financial Data” in “Item 3. Key Information.

For the fiscal year ended March 31, 2017, consolidated sales decreased 6.2% year-on-year (essentially flat on a constant currency basis) to 7,603.3 billion yen.

Consolidated operating income decreased 5.5 billion yen year-on-year to 288.7 billion yen. The foreign exchange fluctuations had a negative impact on the consolidated operating results mainly in Electronics.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

During the fiscal year ended March 31, 2016, the average rates of the yen were 120.1 yen against the U.S. dollar, which were 8.5% lower and 132.6 yen against the euro, which were 4.7% higher, respectively, than the fiscal year ended March 31, 2015. For the latest yen exchange rates per the U.S. dollar, refer to “Selected Financial Data” in “Item 3. Key Information.

 

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For the fiscal year ended March 31, 2016, consolidated sales decreased 1.3% year-on-year (a 4% decrease on a constant currency basis) to 8,105.7 billion yen.

Consolidated operating income increased 225.6 billion yen year-on-year to 294.2 billion yen. The foreign exchange fluctuations had a negative impact on the consolidated operating results mainly in Electronics.

The table below indicates the foreign exchange impact on sales and operating results in each of the Electronics segments. For further details, refer to “Operating Performance by Business Segment” which discusses the impact of foreign exchange rates within segments and categories where foreign exchange rate fluctuations had a significant impact.

 

          Fiscal year ended March 31     Impact of changes in
foreign exchange rates
 
          2015     2016     2017     2015 to 2016      2016 to 2017  
          (Yen in billions)  

MC

   Sales      1,410.2       1,127.5       759.1       -2.4        -37.8  
   Operating income (loss)      (217.6     (61.4     10.2       -64.3        +26.1  

G&NS

   Sales      1,388.0       1,551.9       1,649.8       +30.2        -144.2  
   Operating income      48.1       88.7       135.6       -47.7        -2.2  

IP&S

   Sales      700.6       684.0       579.6       +20.6        -55.1  
   Operating income      38.8       69.3       47.3       -1.6        -26.5  

HE&S

   Sales      1,238.1       1,159.0       1,039.0       +23.7        -111.3  
   Operating income      24.1       50.6       58.5       -36.7        -13.4  

Semiconductors

   Sales      700.1       739.1       773.1       +50.2        -76.3  
   Operating income (loss)      96.2       14.5       (7.8     +22.8        -43.7  

Components

   Sales      250.7       224.6       195.4       +14.7        -18.9  
   Operating loss      (7.5     (42.9     (60.4     +1.9        -3.9  

During the fiscal year ended March 31, 2017, sales for the Pictures segment decreased 3.7% year-on-year to 903.1 billion yen, while sales increased approximately 5% on a U.S. dollar basis. In the Music segment, sales increased 4.6% year-on-year to 647.7 billion yen, while sales increased approximately 11% year-on-year on a constant currency basis. During the fiscal year ended March 31, 2016, sales for the Pictures segment increased 6.8% year-on-year to 938.1 billion yen, while sales were essentially flat on a U.S. dollar basis. In the Music segment, sales increased 10.4% year-on-year to 617.6 billion yen, while sales increased 5% year-on-year on a constant currency basis. For a detailed analysis of segment performance, refer to the Pictures and Music segments under “Operating Performance by Business Segment.” Sony’s Financial Services segment consolidates the yen-based results of SFH. As most of the operations in this segment are based in Japan, Sony management analyzes the performance of the Financial Services segment on a yen basis only.

During the fiscal year ended March 31, 2017, Sony estimated that a one yen appreciation against the U.S. dollar would have decreased Electronics sales by approximately 22 billion yen, with an increase in operating income of approximately 3 billion yen. A one yen appreciation against the euro was estimated to decrease Electronics sales by approximately 9 billion yen, with a corresponding decrease in operating income of approximately 5 billion yen. For more details, refer to “Risk Factors” in “Item 3. Key Information.”

Sony’s consolidated results are subject to foreign currency rate fluctuations primarily due to different currency composition of revenue and costs. In the MC segment, the proportion of sales in yen is relatively high, but a significant proportion of manufacturing and procurement costs is incurred in U.S. dollars. Therefore, yen appreciation against the U.S. dollar has a positive impact on operating income. In the G&NS segment, a significant proportion of costs is incurred in U.S. dollars but sales are recorded in Japanese yen, U.S. dollars or euros. As a result, the yen appreciation against the U.S. dollar has a positive impact on operating income while the yen appreciation against the euro has a negative impact. In the IP&S segment, there is a relatively high proportion of costs in yen, while a large proportion of sales is in emerging markets, so yen appreciation against the currencies of emerging markets, particularly the Chinese yuan, has a negative impact on operating income. Similarly, in the HE&S segment, yen appreciation against emerging market currencies has a negative impact on operating income, but yen appreciation against the U.S. dollar has a positive impact on operating income due to a high proportion of manufacturing costs being incurred in U.S. dollars. In the Semiconductors segment, a significant proportion of sales contracts are denominated in U.S. dollars, but manufacturing operations are located in Japan, and, therefore, yen appreciation against the U.S. dollar has a significantly negative impact on operating income. In the Components segment, foreign exchange rate fluctuations do not have a significant impact on operating income because sales and costs are relatively balanced in all major currencies.

 

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In order to reduce the risk caused by foreign exchange rate fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated or anticipated by Sony Corporation and by its subsidiaries’ transactions and accounts receivable and payable denominated in foreign currencies.

Sony Global Treasury Services Plc (“SGTS”) in London provides integrated treasury services for Sony Corporation, its subsidiaries, and affiliated companies. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS to hedge their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. Sony’s policy of concentrating its foreign exchange exposures means that SGTS and Sony Corporation hedge most of the net foreign exchange exposure within the Sony group. Sony has a policy on the use of derivatives that, in principle, SGTS should centrally deal with and manage derivatives with financial institutions for risk management purposes. SGTS enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of these transactions are entered into against projected exposures before the actual export and import transactions take place. In general, SGTS hedges the projected exposures for a period of one to three months before the actual transactions take place. Sony enters into foreign exchange transactions with financial institutions primarily for hedging purposes. Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives in the Financial Services segment. In the Financial Services segment, Sony uses derivatives primarily for asset liability management.

To minimize the effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segments, Sony seeks, when appropriate, to localize material and parts procurement, design and manufacturing operations in areas outside of Japan.

Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses. The notional amount of all the foreign exchange derivative contracts as of March 31, 2016 and 2017 was 1,835.2 billion yen and 2,567.7 billion yen, respectively. The net fair value of all the foreign exchange derivative contracts as of March 31, 2016 and 2017 was a liability of 2.5 billion yen and an asset of 9.4 billion yen, respectively. Refer to Note 14 of the consolidated financial statements.

* Note: In this section, the impact of foreign exchange rate fluctuations on sales is calculated by applying the change in the yen’s periodic weighted average exchange rates for the fiscal year ended March 31, 2015 and 2016 from the fiscal year ended March 31, 2016 and 2017, respectively, to the major transactional currencies in which the sales are denominated. The impact of foreign exchange rate fluctuations on operating income (loss) described herein is calculated by subtracting from the impact on sales the impact on cost of sales and selling, general and administrative expenses calculated by applying the same major transactional currencies calculation process to cost of sales and selling, general and administrative expenses as for the impact on sales. Additionally, the MC segment enters into its own foreign exchange hedging transactions. The impact of those transactions is included in the impact of foreign exchange rate fluctuations on operating income (loss) for that segment. The descriptions of sales on a constant currency basis reflects sales obtained by applying the yen’s monthly average exchange rates from the fiscal year ended March 31, 2015 and 2016 to local currency-denominated monthly sales in the fiscal years ended March 31, 2016 and 2017, respectively. In the Pictures segment and SME, Sony/ATV and EMI in the Music segment, the constant currency amounts are after aggregation on a U.S. dollar basis. This information is not a substitute for Sony’s consolidated financial statements measured in accordance with U.S. GAAP. However, Sony believes that these disclosures provide additional useful analytical information to investors regarding the operating performance of Sony.

 

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Assets, Liabilities and Stockholders’ Equity

The following charts show Sony’s unaudited information on financial position for the Financial Services segment alone, and for all segments excluding the Financial Services segment. These separate condensed presentations are not required or prepared 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 utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and Sony without the Financial Services segment, including noncontrolling interests, are included in those respective presentations, and then eliminated in the consolidated figures shown below.

Financial Services segment

 

     March 31  
     2016      2017  
     (Yen in millions)  

ASSETS

     

Current assets:

     

Cash and cash equivalents

     233,701        268,382  

Marketable securities*1

     943,195        1,051,441  

Notes and accounts receivable, trade

     9,743        10,931  

Other

     141,505        168,892  
  

 

 

    

 

 

 
     1,328,144        1,499,646  

Investments and advances*2

     9,004,981        9,904,576  

Property, plant and equipment

     18,047        21,323  

Other assets:

     

Deferred insurance acquisition costs

     511,834        568,837  

Other

     52,523        69,493  
  

 

 

    

 

 

 
     564,357        638,330  
  

 

 

    

 

 

 
     10,915,529        12,063,875  
  

 

 

    

 

 

 
     March 31  
     2016      2017  
     (Yen in millions)  

LIABILITIES AND EQUITY

     

Current liabilities:

     

Short-term borrowings*3

     93,398        411,643  

Notes and accounts payable, trade

             

Deposits from customers in the banking business

     1,912,673        2,071,091  

Other

     203,161        218,851  
  

 

 

    

 

 

 
     2,209,232        2,701,585  

Long-term liabilities:

     

Long-term debt

     34,567        75,511  

Accrued pension and severance costs

     29,082        31,289  

Future insurance policy benefits and other*4

     6,910,535        7,465,565  

Other

     345,277        338,868  
  

 

 

    

 

 

 
     7,319,461        7,911,233  

Stockholders’ equity of Financial Services

     1,385,515        1,449,605  

Noncontrolling interests

     1,321        1,452  
  

 

 

    

 

 

 
     10,915,529        12,063,875  
  

 

 

    

 

 

 

 

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Sony without the Financial Services segment

 

     March 31  
     2016      2017  
     (Yen in millions)  

ASSETS

     

Current assets:

     

Cash and cash equivalents

     749,911        691,760  

Marketable securities

     3,202         

Notes and accounts receivable, trade*5

     847,788        947,602  

Other

     1,272,710        1,222,382  
  

 

 

    

 

 

 
     2,873,611        2,861,744  

Film costs

     301,228        336,928  

Investments and advances

     309,184        285,965  

Investments in Financial Services, at cost

     111,476        133,514  

Property, plant and equipment

     801,485        735,590  

Other assets*6

     1,559,646        1,463,324  
  

 

 

    

 

 

 
       5,956,630          5,817,065  
  

 

 

    

 

 

 

 

     March 31  
     2016      2017  
     (Yen in millions)  

LIABILITIES AND EQUITY

     

Current liabilities:

     

Short-term borrowings*7

     243,543        106,437  

Notes and accounts payable, trade

     550,964        539,900  

Other

     1,832,039        1,879,483  
  

 

 

    

 

 

 
     2,626,546        2,525,820  

Long-term liabilities:

     

Long-term debt

     525,507        609,692  

Accrued pension and severance costs

     433,302        365,427  

Other

     462,319        433,761  
  

 

 

    

 

 

 
     1,421,128        1,408,880  

Redeemable noncontrolling interest

     7,478        12,058  

Stockholders’ equity of Sony without Financial Services

     1,796,891        1,770,632  

Noncontrolling interests

     104,587        99,675  
  

 

 

    

 

 

 
       5,956,630          5,817,065  
  

 

 

    

 

 

 

 

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Consolidated

 

     March 31  
     2016      2017  
     (Yen in millions)  

ASSETS

     

Current assets:

     

Cash and cash equivalents

     983,612        960,142  

Marketable securities

     946,397        1,051,441  

Notes and accounts receivable, trade

     853,592        953,811  

Other

     1,413,126        1,390,328  
  

 

 

    

 

 

 
     4,196,727        4,355,722  

Film costs

     301,228        336,928  

Investments and advances

     9,234,083        10,111,793  

Property, plant and equipment

     820,818        758,199  

Other assets:

     

Deferred insurance acquisition costs

     511,834        568,837  

Other

     1,608,700        1,529,077  
  

 

 

    

 

 

 
     2,120,534        2,097,914  
  

 

 

    

 

 

 
     16,673,390        17,660,556  
  

 

 

    

 

 

 

 

     March 31  
     2016      2017  
     (Yen in millions)  

LIABILITIES AND EQUITY

     

Current liabilities:

     

Short-term borrowings

     336,940        518,079  

Notes and accounts payable, trade

     550,964        539,900  

Deposits from customers in the banking business

     1,912,673        2,071,091  

Other

     2,030,173        2,092,669  
  

 

 

    

 

 

 
     4,830,750        5,221,739  

Long-term liabilities:

     

Long-term debt

     556,605        681,462  

Accrued pension and severance costs

     462,384        396,715  

Future insurance policy benefits and other

     6,910,535        7,465,565  

Other

     781,228        747,595  
  

 

 

    

 

 

 
     8,710,752        9,291,337  

Redeemable noncontrolling interest

     7,478        12,058  

Sony Corporation’s stockholders’ equity

     2,463,340        2,497,246  

Noncontrolling interests

     661,070        638,176  
  

 

 

    

 

 

 
     16,673,390        17,660,556  
  

 

 

    

 

 

 

*1 Marketable securities as of March 31, 2017 in the Financial Services segment increased year-on-year due to increases in the amount of marketable securities mainly at Sony Life.

*2 Investments and advances as of March 31, 2017 in the Financial Services segment increased year-on-year due to an increase in investments and advances mainly at Sony Life.

*3 Short-term borrowings as of March 31, 2017 in the Financial Services segment increased year-on-year due to an increase in short-term borrowings mainly at Sony Life.

*4 Future insurance policy benefits and other as of March 31, 2017 in the Financial Services segment increased year-on-year due to an increase in future insurance policy benefits resulting from the increase in the policy amount in force at Sony Life.

*5 Notes and accounts receivable, trade as of March 31, 2017 in all segments, excluding the Financial Services segment, increased year-on-year due to increases in notes and accounts receivable, trade in the G&NS, Pictures and Music segments.

 

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*6 Other assets as of March 31, 2017 in all segments, excluding the Financial Services segment, decreased year-on-year due to a decrease in goodwill (Refer to Note 9 of the consolidated financial statements).

*7 Short-term borrowings as of March 31, 2017 in all segments, excluding the Financial Services segment, decreased year-on-year mainly due to the repayment of the current portion of long-term debt.

Investments

The following table contains available-for-sale and held-to-maturity securities, including the breakdown of unrealized gains and losses by investment category.

 

     March 31, 2017  
     Cost      Unrealized
gain
     Unrealized
loss
    Fair
market
value
 
     (Yen in millions)  

Financial Services Business:

          

Available-for-sale

          

Debt securities

          

Sony Life

     1,149,125        188,332        (2,772     1,334,685  

Sony Bank

     613,954        6,857        (1,686     619,125  

Other

     59,504        182        (16     59,670  

Equity securities

          

Sony Life

     25,302        13,660        (370     38,592  

Sony Bank

                          

Other

     530        1,517              2,047  

Held-to-maturity

          

Debt securities

          

Sony Life

     6,066,464        1,522,835        (75,043     7,514,256  

Sony Bank

     6,219        87              6,306  

Other

     75,837        16,064        (449     91,452  

Total Financial Services

     7,996,935        1,749,534        (80,336     9,666,133  

Non-Financial Services:

          

Available-for-sale securities

     32,131        54,760        (7     86,884  

Held-to-maturity securities

                          

Total Non-Financial Services

     32,131        54,760        (7     86,884  

Consolidated

     8,029,066        1,804,294        (80,343     9,753,017  

At March 31, 2017, Sony Life had debt and equity securities with gross unrealized losses of 78.2 billion yen. Sony Life principally invests in Japanese and foreign government and corporate bonds. Almost all of the debt securities in which Sony Life invested were rated higher than or equal to “BBB” or its equivalent by Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service (“Moody’s”) or other rating agencies.

At March 31, 2017, Sony Bank had debt securities with gross unrealized losses of 1.7 billion yen. Of the unrealized loss, 46.8% related to securities in an unrealized loss position for periods greater than 12 months at March 31, 2017. Sony Bank principally invests in Japanese government bonds, Japanese corporate bonds and foreign bonds. Almost all of these securities were rated higher than or equal to “BBB” or its equivalent by S&P, Moody’s or other rating agencies.

These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position for greater than 12 months. In addition, there was no individual security with unrealized losses that met the test for impairment as the decline in values were small both in amount and percentage, and the decline in values for those investments were still determined to be temporary in nature.

For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2017 (77.8 billion yen), maturity dates vary as follows:

 

• Within 1 year:

      

• 1 to 5 years:

      

• 5 to 10 years:

      

• above 10 years:

     100.0

 

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For fixed maturity securities with unrecognized losses held by Sony Bank as of March 31, 2017 (1.7 billion yen), maturity dates vary as follows:

 

• Within 1 year:

     10.5

• 1 to 5 years:

     57.5

• 5 to 10 years:

     2.0

• above 10 years:

     30.0

For the fiscal years ended March 31, 2015, 2016 and 2017, Sony Life recorded net realized gains on available-for-sale securities of 9.3 billion yen, 19.3 billion yen and 1.3 billion yen, respectively.

In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other issued by a number of non-public companies. The aggregate carrying amount of the investments in non-public companies at March 31, 2017 was 61.3 billion yen. A non-public equity investment is primarily valued at cost if fair value is not readily determinable. If the value is estimated to have declined and such decline is judged to be other-than-temporary, the impairment of the investment is recognized immediately and the carrying value is reduced to its fair value.

For the fiscal years ended March 31, 2015, 2016 and 2017, total realized impairment losses were 0.9 billion yen, 3.6 billion yen and 7.6 billion yen, respectively, of which 0.1 billion yen, 0.1 billion yen and 0.0 billion yen, respectively, were recorded in financial services revenue by the subsidiaries in the Financial Services segment. Realized impairment losses recorded other than by subsidiaries in the Financial Services segment in each of the three fiscal years were reflected in non-operating expenses and primarily relate to certain strategic investments in non-Financial Services businesses. These investments primarily relate to certain strategic investments in Japan and the U.S. with which Sony has strategic relationships for the purposes of developing and marketing new technologies. Impairment losses were recorded for each of the three fiscal years as certain companies failed to successfully develop and market such technology, resulting in the operating performance of these companies being more unfavorable than previously expected. As a result the decline in the fair value of these companies was judged as other-than-temporary. None of these impairment losses were individually material to Sony.

Upon determination that the value of an investment is impaired, the value of the investment is written down to its fair value. For an investment where the quoted price is available in an active market, fair value is determined based on unadjusted quoted prices as of the date on which the impairment determination is made. For investments where the quoted price is not available in an active market, fair value is usually determined based on quoted prices of securities with similar characteristics or measured through the use of various methodologies such as pricing models, discounted cash flow techniques, or similar techniques that require significant management judgment or estimation of assumptions that market participants would use in pricing the investments. The impairment losses that were recorded in each of the three fiscal years related to the unique facts and circumstances of each individual investment and did not significantly impact other investments.

Sony Life and Sony Bank’s investments constitute the majority of the investments in the Financial Services segment. As of March 31, 2017, Sony Life and Sony Bank account for approximately 92% and 7% of the investments in the Financial Services segment, respectively.

Cash Flows

Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016:

Operating Activities: During the fiscal year ended March 31, 2017, there was a net cash inflow of 809.3 billion yen from operating activities, an increase of 60.2 billion yen, or 8.0% year-on-year.

For all segments excluding the Financial Services segment, there was a net cash inflow of 445.8 billion yen, an increase of 183.0 billion yen, or 69.6% year-on-year. This increase was primarily due to an increase in net income after taking into account non-cash adjustments (including depreciation and amortization, gain on sales of securities investments and other operating income (expense)) and a decrease of inventories, compared to an increase in the previous fiscal year.

The Financial Services segment had a net cash inflow of 376.2 billion yen, a decrease of 119.1 billion yen, or 24.0% year-on-year. This decrease was primarily due to a decrease in net income after taking into account a net gain or loss on revaluation of marketable securities held for trading purposes.

Investing Activities: During the fiscal year ended March 31, 2017, Sony used 1,254.0 billion yen of net cash in investing activities, an increase of 223.6 billion yen, or 21.7% year-on-year.

 

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For all segments excluding the Financial Services segment, there was a net cash outflow of 299.4 billion yen, a decrease of 35.5 billion yen, or 10.6% year-on-year. This decrease was mainly due to a decrease in payments for fixed asset purchases such as semiconductor manufacturing equipment.

The Financial Services segment used 953.2 billion yen of net cash, an increase of 259.2 billion yen, or 37.3% year-on-year. This increase was mainly due to a year-on-year decrease in proceeds from sales or return of investments and collections of advances at Sony Life.

In all segments excluding the Financial Services segment, net cash generated in operating and investing activities combined* for the fiscal year ended March 31, 2017 was 146.3 billion yen, a 218.5 billion yen improvement from net cash used in the previous fiscal year.

Financing Activities: Net cash provided by financing activities during the fiscal year ended March 31, 2017, was 452.3 billion yen, an increase of 72.2 billion yen, or 19.0% year-on-year.

For all segments excluding the Financial Services segment, there was a 173.4 billion yen net cash outflow, compared to a 144.8 billion yen net cash inflow in the previous fiscal year. During the fiscal year ended March 31, 2017, there was a net cash outflow as Sony redeemed long-term debt and made a payment for the acquisition of the 50% equity interest in Sony/ATV previously owned by the Estate, making Sony/ATV a wholly-owned subsidiary of Sony, partially offset by the issuance of straight bonds by Sony. During the previous fiscal year, Sony issued new stock and convertible bonds.

In the Financial Services segment, there was a 611.6 billion yen net cash inflow, an increase of 386.7 billion yen, or 171.9% year-on-year. This increase was primarily due to an increase in short-term borrowings at Sony Life and a larger year-on-year increase in deposits from customers at Sony Bank.

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 March 31, 2017 was 960.1 billion yen. Cash and cash equivalents of all segments excluding the Financial Services segment was 691.8 billion yen at March 31, 2017, a decrease of 58.2 billion yen, or 7.8% compared with the balance as of March 31, 2016. Sony believes that it continues to maintain sufficient liquidity through access to a total, translated into yen, of 524.4 billion yen of unused committed lines of credit with financial institutions in addition to the cash and cash equivalents balance at March 31, 2017. Within the Financial Services segment, the outstanding balance of cash and cash equivalents was 268.4 billion yen at March 31, 2017, an increase of 34.7 billion yen, or 14.8% compared with the balance as of March 31, 2016.

Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015:

Operating Activities: During the fiscal year ended March 31, 2016, there was a net cash inflow of 749.1 billion yen from operating activities, a decrease of 5.6 billion yen, or 0.7% year-on-year.

For all segments excluding the Financial Services segment, there was a net cash inflow of 262.8 billion yen, a decrease of 40.9 billion yen, or 13.5% year-on-year. This decrease was primarily due to the negative impact of an increase in inventories, resulting from a larger increase in inventories in the Semiconductors segment, compared to a decrease in the fiscal year ended March 31, 2015, partially offset by positive factors such as a year-on-year improvement in net income after taking into account non-cash adjustments (including depreciation and amortization, other operating expense, net, deferred income taxes and equity in net income of affiliated companies) and a year-on-year smaller decrease in notes and accounts payable, trade.

The Financial Services segment had a net cash inflow of 495.3 billion yen, an increase of 35.6 billion yen, or 7.7% year-on-year. This increase was primarily due to an increase in insurance premium revenue at Sony Life.

Investing Activities: During the fiscal year ended March 31, 2016, Sony used 1,030.4 billion yen of net cash in investing activities, an increase of 390.8 billion yen, or 61.1% year-on-year.

For all segments excluding the Financial Services segment, there was a net cash outflow of 334.9 billion yen, an increase of 231.3 billion yen, or 223.2% year-on-year. This increase was primarily due to an increase in the amount of fixed asset purchases, such as semiconductor manufacturing equipment, partially offset by factors such as cash inflow from the sale of certain shares of Olympus.

The Financial Services segment used 694.0 billion yen of net cash, an increase of 157.1 billion yen, or 29.3% year-on-year. This increase was mainly due to a year-on-year increase in payments for investments and advances at Sony Life.

In all segments excluding the Financial Services segment, net cash used in operating and investing activities combined* for the fiscal year ended March 31, 2016, was 72.1 billion yen, a 272.1 billion yen deterioration from cash generated in the fiscal year ended March 31, 2015.

 

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Financing Activities: Net cash provided by financing activities during the fiscal year ended March 31, 2016, was 380.1 billion yen, compared to a net cash outflow of 263.2 billion yen in the fiscal year ended March 31, 2015.

For all segments excluding the Financial Services segment, there was a 144.8 billion yen net cash inflow, compared to a net cash outflow of 315.4 billion yen in the fiscal year ended March 31, 2015. This change was primarily due to the issuance of new shares and convertible bonds in the fiscal year ended March 31, 2016, partially offset by factors such as repayments of long-term debt.

In the Financial Services segment, financing activities provided 224.9 billion yen of net cash, an increase of 180.5 billion yen, or 406.6% year-on-year. This increase was primarily due to a larger increase in short-term borrowings and policyholders’ account at Sony Life and an increase in customer deposits at Sony Bank, compared to a decrease in the fiscal year ended March 31, 2015.

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 March 31, 2016 was 983.6 billion yen. Cash and cash equivalents of all segments excluding the Financial Services segment was 749.9 billion yen at March 31, 2016, an increase of 8.0 billion yen, or 1.1% compared with the balance as of March 31, 2015. In order to manage cash balance globally, Sony utilizes a system in which cash surpluses among subsidiaries are deposited with SGTS and cash shortfalls are covered by loans through SGTS. Sony’s ability to repatriate cash held in foreign subsidiaries may be restricted or delayed by local laws; however, any such amounts are considered insignificant. Refer to Cash Management in Item 5 B. Liquidity and Capital Resources. Sony believes that it continues to maintain sufficient liquidity through access to a total, translated into yen, of 522.5 billion yen of unused committed lines of credit with financial institutions in addition to the cash and cash equivalents balance at March 31, 2016. Within the Financial Services segment, the outstanding balance of cash and cash equivalents was 233.7 billion yen at March 31, 2016, an increase of 26.2 billion yen, or 12.6% compared with the balance as of March 31, 2015.

* Sony has included the information for cash flow from operating and investing activities combined, excluding the Financial Services segment’s activities, as Sony’s management frequently monitors this financial measure and believes this non-U.S. GAAP measurement is important for use in evaluating Sony’s ability to generate cash to maintain liquidity and fund debt principal and dividend payments from business activities other than its Financial Services segment. This information is derived from the reconciliations prepared in the section “Information on Cash Flows Separating Out the Financial Services Segment”. This information and the separate condensed presentations shown below are not required or prepared in accordance with U.S. GAAP. The Financial Services segment’s cash flow is excluded from the measure because SFH, which constitutes a majority of the Financial Services segment, is a separate publicly traded entity in Japan with a significant minority interest and it, as well as its subsidiaries, secures liquidity on its own. This measure may not be comparable to those of other companies. This measure has limitations because it does not represent residual cash flows available for discretionary expenditures, principally due to the fact that the measure does not deduct the principal payments required for debt service. Therefore, Sony believes it is important to view this measure as supplemental to its entire statement of cash flows and together with Sony’s disclosures regarding investments, available credit facilities and overall liquidity.

A reconciliation of the differences between the Consolidated Statement of Cash Flows reported and cash flows from operating and investing activities combined excluding the Financial Services segment’s activities is as follows:

 

    Fiscal year ended March 31  
    2015     2016     2017  
    (Yen in billions)  

Net cash provided by operating activities reported in the consolidated statements of cash flows

    754.6       749.1       809.3  

Net cash used in investing activities reported in the consolidated statements of cash flows

    (639.6     (1,030.4     (1,254.0
 

 

 

   

 

 

   

 

 

 

(1)

    115.0       (281.3     (444.7

Less: Net cash provided by operating activities within the Financial Services segment (2)

    459.7       495.3       376.2  

Less: Net cash used in investing activities within the Financial Services segment (3)

    (536.9     (694.0     (953.2

Eliminations**(4)

    7.8       10.5       14.1  
 

 

 

   

 

 

   

 

 

 

Cash flow generated by operating and investing activities combined excluding the Financial Services segment’s activities (1) - (2) - (3) + (4)

    200.0       (72.1     146.3  
 

 

 

   

 

 

   

 

 

 

** Eliminations primarily consist of intersegment dividend payments

 

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Information on Cash Flows Separating Out the Financial Services Segment

The following charts show Sony’s cash flow information for the Financial Services segment alone, and for all segments, excluding the Financial Services segment. These separate condensed presentations are not required or prepared 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 utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and Sony without the Financial Services segment, including noncontrolling interests, are included in those respective presentations, and then eliminated in the consolidated figures shown below.

 

     Fiscal year ended March 31  
  Financial Services segment            2015                     2016                     2017          
     (Yen in millions)  

Net cash provided by operating activities

     459,719       495,283       376,229  

Net cash used in investing activities

     (536,920     (694,031     (953,192

Net cash provided by financing activities

     44,396       224,922       611,644  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (32,805     26,174       34,681  

Cash and cash equivalents at beginning of the fiscal year

     240,332       207,527       233,701  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the fiscal year

     207,527       233,701       268,382  
  

 

 

   

 

 

   

 

 

 
     Fiscal year ended March 31  
  Sony without the Financial Services segment    2015     2016     2017  
     (Yen in millions)  

Net cash provided by operating activities

     303,659       262,783       445,770  

Net cash used in investing activities

     (103,630     (334,900     (299,435

Net cash provided (used) in financing activities

     (315,415     144,751       (173,425

Effect of exchange rate changes on cash and cash equivalents

     51,138       (64,609     (31,061
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (64,248     8,025       (58,151

Cash and cash equivalents at beginning of the fiscal year

     806,134       741,886       749,911  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the fiscal year

     741,886       749,911       691,760  
  

 

 

   

 

 

   

 

 

 
     Fiscal year ended March 31  
  Consolidated    2015     2016     2017  
     (Yen in millions)  

Net cash provided by operating activities

     754,640       749,089       809,262  

Net cash used in investing activities

     (639,636     (1,030,403     (1,253,973

Net cash provided (used) by financing activities

     (263,195     380,122       452,302  

Effect of exchange rate changes on cash and cash equivalents

     51,138       (64,609     (31,061
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (97,053     34,199       (23,470

Cash and cash equivalents at beginning of the fiscal year

     1,046,466       949,413       983,612  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the fiscal year

     949,413       983,612       960,142  
  

 

 

   

 

 

   

 

 

 

 

B. Liquidity and Capital Resources

The description below covers basic financial policy and figures for Sony’s consolidated operations except for the Financial Services segment, which secures liquidity on its own. Furthermore, the Financial Services segment is described separately at the end of this section.

Liquidity Management and Market Access

An important financial objective of Sony is to maintain the strength of its balance sheet, while securing adequate liquidity for business activities. Sony defines its liquidity sources as the amount of cash and cash equivalents (“cash balance”) (excluding restrictions on capital transfers mainly due to national regulations) and the unused amount of committed lines of credit. Sony’s basic liquidity management policy is to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as 50% of monthly consolidated sales and repayments on debt that comes due within six months.

 

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Funding requirements that arise from maintaining liquidity are principally covered by cash flow from operating activities and investing activities (including asset sales) combined and by the cash balance; however, as needed, Sony has demonstrated the ability to procure funds from financial and capital markets. In the event financial and capital markets become illiquid, based on its current forecasts, Sony could sustain sufficient liquidity through access to committed lines of credit with financial institutions, together with its cash balance.

Sony procures funds mainly from the financial and capital markets through Sony Corporation and SGTS, a finance subsidiary in the U.K.

In order to meet working capital requirements, Sony Corporation and SGTS maintain Commercial Paper (“CP”) programs that have the ability to access the Japanese, U.S. and European CP markets, subject to prevailing market conditions. The borrowing limits under the CP program, translated into yen, were 836.6 billion yen in total for Sony Corporation and SGTS. There were no amounts outstanding under the CP programs as of March 31, 2017, although the largest month-end outstanding balance of CP during the fiscal year ended March 31, 2017 was 130.0 billion yen in August 2016.

Sony typically raises funds through straight bonds, CP programs and bank loans (including syndicated loans). If market disruption and volatility occur and Sony could not raise sufficient funds from these sources, Sony may also draw down funds from contractually committed lines of credit from various financial institutions. Sony has a total, translated into yen, of 524.4 billion yen in unused committed lines of credit, as of March 31, 2017. Details of those committed lines of credit are: a 300.0 billion yen committed line of credit contracted with a syndicate of Japanese banks, effective until July 2019, a 1.5 billion U.S. dollar multi-currency committed line of credit also with a syndicate of Japanese banks, effective until December 2018, and a 500 million U.S. dollar multi-currency committed line of credit contracted with a syndicate of foreign banks, effective until March 2017, in all of which Sony Corporation and SGTS are defined as borrowers. The above 500 million U.S. dollar committed line with a syndicate of foreign banks was renewed as of April 3, 2017, will remain in effect until March 2018 and was increased to 525 million U.S. dollars. These contracts are aimed at securing sufficient liquidity in a quick and stable manner even in the event of turmoil within the financial and capital markets.

In the event of a downgrade in Sony’s credit ratings, there are no financial covenants in any of Sony’s material financial agreements with financial institutions that would cause an acceleration of the obligation. Even though the cost of borrowing for some committed lines of credit could change according to Sony’s credit ratings, there are no financial covenants that would cause any impairment on the ability to draw down on unused facilities. Furthermore, there are no restrictions on the uses of most proceeds except that certain borrowings may not be used to acquire securities listed on a U.S. stock exchange or traded over-the-counter in the U.S. in accordance with the rules and regulations issued by authorities such as the Board of Governors of the Federal Reserve Board.

In September 2016, Sony Corporation issued unsecured straight bonds in the aggregate principal amount of 200,000 million yen. Most of the proceeds from the issuance of the bonds have already been applied to the repayment of borrowings and debt. Sony intends to apply the remaining proceeds to the repayment of borrowings and debt by the end of July 2017.

Ratings

Sony considers one of management’s top priorities to be the maintenance of stable and appropriate credit ratings in order to ensure financial flexibility for liquidity and capital management and continued adequate access to sufficient funding resources in the financial and capital markets.

In order to facilitate access to global capital markets, Sony obtains credit ratings from two rating agencies, Moody’s and S&P. In order to facilitate access to Japanese financial and capital markets, Sony obtains credit ratings from two agencies in Japan, including Rating and Investment Information, Inc. and Japan Credit Rating Agency, Ltd. 9

Sony currently believes that it has access to sufficient funding resources in the financial and capital markets. For information regarding a possible further rating downgrade, refer to “Risk Factors” in “Item 3. Key Information.”

Cash Management

Sony manages its global cash management activities mainly through SGTS. The excess or shortage of cash at most of Sony’s subsidiaries is invested or funded by SGTS on a net basis, although Sony recognizes that fund

 

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transfers are limited in certain countries and geographic areas due to restrictions on capital transactions. In order to pursue more efficient cash management, cash surpluses among Sony’s subsidiaries are deposited with SGTS and cash shortfalls among subsidiaries are covered by loans through SGTS, so that Sony can make use of excess cash balances and reduce third-party borrowings. Where local restrictions prevent an efficient intercompany transfer of funds, Sony’s intent is that cash balances remain outside of SGTS and that Sony meet its liquidity needs through ongoing cash flows, external borrowings, or both. Sony does not expect restrictions of capital transactions on amounts held outside of Japan to have a material effect on Sony’s overall liquidity, financial condition or results of operations.

Financial Services segment

The management of SFH, Sony Life, Sony Assurance and Sony Bank recognizes the importance of securing sufficient liquidity to cover the payment of obligations that these companies incur in the ordinary course of business. Sony Life, Sony Assurance and Sony Bank maintain a sufficient cash balance and secure sufficient means to meet their obligations while abiding by laws and regulations such as the Insurance Business Act or the Banking Act of Japan, and restrictions imposed by the Financial Services Agency (“FSA”) and other regulatory authorities as well as establishing and operating under company guidelines that comply with these regulations. Sony Life and Sony Assurance establish a sufficient level of liquidity for the smooth payment of insurance claims when they invest primarily in various securities cash inflows which are mainly from policyholders’ insurance premiums. Sony Bank maintains a necessary level of liquidity for the smooth settlement of transactions when it uses its cash inflows, which come mainly from customers’ deposits in local currency, in order to offer mortgage loans to individuals, and the remaining cash inflows are invested mainly in marketable securities. Cash inflows from customers’ deposits in foreign currencies are invested in investment instruments of the same currency.

In addition, Sony’s subsidiaries in the Financial Services segment are subject to the Japanese Insurance Business Act and Banking Act, which require insurance and business companies to maintain their financial credibility and to secure protection for policyholders and depositors in view of the public nature of insurance and banking services. As such, lending and borrowing between subsidiaries in the Financial Service segment and the other companies within Sony Group is strictly limited. Sony’s subsidiaries in the Financial Services segment are managed separately from Sony’s cash management activities through SGTS as mentioned above.

 

C. Research and Development

Sony’s mission is to be a company that provides customers with Kando, which means to move people emotionally, and to inspire and fulfill their curiosity. To realize this mission, Sony plans to continue to conduct R&D based on the spirit of innovation and challenge detailed in its Founding Prospectus, and create new customer value at the “last one inch,” or the very closest point of contact with its customers. Even as the requirements of hardware change over time, the importance of hardware as the first and last customer touchpoint remains, and Sony believes that this is somewhere it can demonstrate its uniqueness and find new sources of growth. Core technological components that Sony believes are the foundation of its competitive advantage and are necessary for the continuous development of products and services unique to Sony, include the following:

 

   

Mastering image and sound, with audiovisual technologies such as Sony’s original super-resolution image processing engine, X-Reality™ PRO, and high-resolution audio technology including S-Master HX™ and DSEE HX™.

 

   

Connecting people’s minds, with user interface and communication technologies that facilitate communication and connect people to one another.

 

   

Going beyond human intelligence, with machine learning technology such as Deep Learning and reinforcement learning, recognition technology such as voice and image recognition, and computer vision technology combining Sony’s image sensors with image signal processing.

Sony has been engaged in the sequential separation of business units into distinct subsidiaries across the Sony Group, in order to reinforce the competitiveness of each business, and ensure clearly attributable accountability and responsibility. Concurrently, Sony has also been realigning the Group headquarters functions and platform functions that support each of its business units in order to enhance the effectiveness and efficiency of these operations. At its Group headquarters, Sony promotes corporate R&D, which leads its differentiation and creativity through technological innovation, and promotes the incubation of new businesses in areas beyond Sony’s current business domains.

 

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R&D costs for the fiscal year ended March 31, 2017 decreased by 20.7 billion yen to 447.5 billion yen. This decrease was primarily a result of the strategic decision in the MC segment not to pursue scale in order to improve profitability, which accelerated cost control initiatives.

The following table includes R&D expenses in the fiscal years ended March 31, 2015, 2016, and 2017.

 

     Fiscal year ended March 31  
     2015      2016      2017  
     (Yen in billions)  

R&D expenses

        

Mobile Communications

     91.0        78.1        54.9  

Game & Network Services

     89.1        91.9        95.6  

Imaging Products & Solutions

     66.0        61.5        58.6  

Home Entertainment & Sound

     49.3        44.8        47.3  

Semiconductors

     96.0        120.4        117.6  

Components

     13.6        15.7        14.4  

Corporate R&D

     34.7        31.3        44.4  

Total

     464.3        468.2        447.5  

Consolidated R&D costs for the fiscal year ending March 31, 2018 are expected to be essentially flat year-on-year at 450 billion yen.

R&D costs for the fiscal year ended March 31, 2016 were essentially flat year-on-year at 468.2 billion yen. This was primarily due to an increase in R&D costs in the Semiconductors segment, reflecting an increase in image sensor-related R&D costs, substantially offset by a decrease in R&D costs in the MC, IP&S and HE&S segments, each categorized as either a “stable profit generator” or an “area focusing on volatility management.” (refer to Trend Information in Item 5 D). This decrease was a result of the strategic decision not to pursue scale in order to improve profitability, which accelerated cost control initiatives to address the decrease in scale of Sony’s AV/IT electronics businesses.

 

D. Trend Information

This section contains forward-looking statements about the possible future performance of Sony and should be read in light of the cautionary statement on that subject, which appears on the inside front cover page and applies to this entire document.

Issues Facing Sony and Management’s Response to those Issues

Amid worldwide movements towards preservationist and protectionist policies, there has been a moderate recovery in the global economy. In advanced economies, the United States has benefited from favorable consumer spending trends and a recovery in capital expenditures and exports, while the European economy has seen a modest recovery amid the impact of Brexit. In emerging markets, Russia and Brazil are coming out of recession, backed by a moderate recovery in international commodity markets, while growth in China is slowing due to a reduction of surplus production facilities. Furthermore, noneconomic shocks related to geopolitical conflicts, political discord, or terrorism loom over many regions, and could have a significant impact on the global economy.

The uncertain economic environment surrounding Sony is compounded by continued, intense pricing pressure from competitors, shrinking markets for certain key products and shorter product cycles, primarily in Sony’s Electronics businesses.

On February 18, 2015, Sony unveiled its mid-range plan announcing that it would position Return on Equity (“ROE”) (i.e., net income attributable to Sony Corporation’s stockholders divided by stockholders’ equity) as its most important performance indicator. With the goal of transforming into a highly profitable enterprise, Sony set targets of ROE of 10% or more and operating income above 500 billion yen for the fiscal year ending March 31, 2018, the last year of the mid-range plan.

Sony’s key strategies for business operations are as follows:

 

   

Business management that emphasizes profitability, without necessarily pursuing volume

 

   

Business management that grants each business unit greater autonomy and mandates a focus on shareholder value

 

   

Clearly defined positioning of each business within a broader business portfolio perspective

 

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Based on its specific characteristics and the competitive landscape, each of the Sony Group’s businesses is classified as a “growth driver,” “stable profit generator,” or “area focusing on volatility management” in terms of its position within Sony’s overall business portfolio. Each business has been assigned a target figure for Return on Invested Capital (“ROIC”) linked with the ROE target for Sony Group as a whole, and managed with a clear emphasis on profitability.

On May 23, 2017, Sony held its Corporate Strategy Meeting for the fiscal year ended March 31, 2017 and provided an update on the progress of its mid-range corporate plan covering the fiscal year ended March 31, 2016 through the fiscal year ending March 31, 2018. Sony also presented details of initiatives it is undertaking to establish the Company’s foundations for the fiscal year ending March 31, 2019 and beyond. Highlights from this presentation are outlined below.

 

1. Progress of Mid-range Corporate Plan (fiscal year ended March 31, 2016 to fiscal year ending March 31, 2018)

For the five years since the fiscal year ended March 31, 2013, Sony has been managed with an emphasis on “transforming Sony” as well as “profit generation and investment for growth.” During the mid-range plan from the fiscal year ended March 31, 2016 through fiscal year ending March 31, 2018, Sony has been working to transition to a highly profitable enterprise and has established financial targets for the consolidated Sony Group of 10% or more ROE and 500 billion yen or more operating income in the fiscal year ending March 31, 2018, the final year of the mid-range plan. Sony currently expects to achieve 500 billion yen in consolidated operating income in the fiscal year ending March 31, 2018, the final year of the mid-range plan, a level of profit that it has not achieved for twenty years. After achieving that mid-range target, Sony aims to generate sustainably high profit and be a company that continuously generates new value.

Sony believes that the primary reason for the improvement in financial results for the fiscal year ended March 31, 2017 was the revitalization of the consumer electronics business. The strategy employed to manage that business was “emphasize differentiation, not volume,” a strategy which has been in Sony’s DNA since its founding, and Sony was able to revitalize the business to the point where it is expected to contribute stable profit.

In order to achieve the financial targets for the fiscal year ending March 31, 2018 and to generate sustainably high profit for the fiscal year ending March 31, 2019 and beyond, Sony believes that it not only needs consumer electronics to generate stable profit, but it also needs profits in the G&NS segment to increase, the image sensor for mobile use business to recover, the Music and Financial Services segments to continue to contribute significant profits and the Pictures segment to improve in profitability.

Revitalization of Consumer Electronics

The consumer electronics business had been struggling for a long time, but by employing the strategy “emphasize differentiation, not volume,” Sony was able to revitalize the business to the point where it is expected to contribute stable profit.

The television business, which had generated sizable operating losses since the fiscal year ended March 31, 2005, abandoned the strategy of attempting to improve profitability by expanding its business scale, and, since November 2011, has transformed its business structure to one that could break-even even with a business scale less than half the size it had previously targeted. At the same time, it shifted to a strategy of generating profit by increasing the added value of its products. As a result of these changes, the business improved to the point of generating an approximately 5% operating income margin (i.e., operating income divided by sales) for the fiscal year ended March 31, 2017.

The digital imaging business was able to transform its business by responding quickly to rapid changes in the operating environment. At a time when the digital camera market was changing dramatically mainly due to the emergence of smartphones, it was able to maintain a high level of profit by continuously reducing fixed costs and increasing the added value of its products, especially in the interchangeable lens camera space.

On the other hand, the profitability of the smartphone business remains an issue despite the fact that it was able to turn a profit in the fiscal year ended March 31, 2017 due to thorough structural reforms and a reduction in products and sales regions. Smartphones are the “last one inch” products which have the most touch-points with customers, and they showcase Sony’s differentiation by utilizing the latest Sony technology, such as Sony’s camera technology. However, the business is an extremely volatile and competitive one. Sony will carefully manage the business in the fiscal year ending March 31, 2018 so as to quickly respond to rapid changes in the environment while developing new business areas in the MC segment such as IoT (Internet of Things).

 

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Increase Profit in the Game & Network Services Segment

The PlayStation® and PlayStationTMNetwork businesses continue to deliver strong results, and Sony successfully launched the PlayStation®4 Pro (“PS4TMPro”), as well as the PlayStation®VR (“PS VR”), in the fiscal year ended March 31, 2017.

Sony expects to sell 18 million units of PS4 in the fiscal year ending March 31, 2018 and reach a total cumulative units sold of 78 million units by the end of the fiscal year ending March 31, 2018. Sony will introduce several appealing software titles and a variety of network services to accompany the PS4TMPro and PS VR, which add to the enjoyment of the PS4 world, at a time when the platform is entering its harvest period.

The network business aims to contribute profit by further enhancing the PS4 eco-system, which will in turn be achieved by further increasing the connection customers have to the PlayStationTMNetwork and by expanding Sony’s loyal customer base.

Since it went on sale in October 2016, PS VR has provided a totally new, high-quality VR experience and is receiving acclaim from customers around the world. Over 100 game titles are already being sold for PS VR, and Sony expects to aggressively promote the development of not only game titles but non-game content as well.

Reviving the Image Sensor Business for Mobile Use

In the devices business, Sony has recognized the necessity of rapidly responding to changes in the operating environment and focusing on its strong businesses. Consequently, in the camera module business, which had produced significant losses, the development and production of high-functionality camera modules for external sale at Kumamoto Technology Center was terminated and the factory in Guangzhou, China was sold.

In the image sensors for mobile use business, Sony was not able to supply enough product to meet external customer demand in the first half of the fiscal year ended March 31, 2016 and financial results rapidly deteriorated from the second half of that fiscal year as sales stagnated due to a slow-down in growth of the smartphone market, particularly high-end models. In response to these circumstances, Sony worked to increase sales to Chinese smartphone makers and those efforts contributed to an improvement in results from the second half of the fiscal year ended March 31, 2017.

Recent trends in the market for image sensors for mobile use include an acceleration of dual-lens adoption, migration to higher resolution for front-facing cameras and more emphasis on video functionality. This means that the market for products that Sony excels at making is growing, and, as a result, Sony expects significant improvement in the profitability of this segment to be a positive contributor to profit in the fiscal year ending March 31, 2018.

Sony’s image sensors are receiving high acclaim for their functionality, yields and quality. However, there is still room to improve in areas like production lead-time and manufacturing cost. Sony plans to make the investments necessary to fuel future growth, including in the automotive space. Sony also aims to transform this business into an even more highly profitable one that generates a return which justifies the large investments made.

Deliver a Consistently High Level of Profit in the Music and Financial Services Segments

In the Music segment, songs from artists like Adele and Beyoncé became huge hits and contributed significantly to profit. In addition to the actual results of the underlying business, which is the discovery, development and promotion of artists, Sony has made strategic investments to augment recurring revenue businesses at a time when the market for paid streaming services is expanding. Examples of these investments include the acquisition of the remaining equity interests in Sony/ATV, which operates a music publishing business, and The Orchard, which operates a digital distribution platform for independent labels, making them wholly-owned subsidiaries of Sony. At a time when the operating environment for the music industry is changing dramatically, the strength of this business segment lies in creating new businesses which will become new sources of profit, while, at the same time, establishing a stable foundation of profit. Examples of these new businesses include SMEJ’s efforts in the animation and concert hall businesses.

The Financial Services segment is a recurring revenue business which has a “last one inch” connection to customers and leverages the Sony brand. It also continues to generate consistently high profit. Moreover, it demonstrates Sony’s DNA of innovating new business models as a new entrant, and creating change in existing markets. In that way, it has several of the elements Sony is emphasizing in its mid- to long-term strategy and is a very important business.

 

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Activities in the Pictures Segment

In the fiscal year ended March 31, 2017, Sony recorded a 112.1 billion yen impairment of goodwill in the Pictures segment as a result of a revision of the future profitability plan in the Motion Pictures business. The profit forecast for the fiscal year ending March 31, 2018 is also significantly below the level of the original target set in the mid-range plan.

However, the Pictures segment remains an important business for Sony and the level of urgency with which measures are being implemented to improve the profitability of the Motion Pictures business has increased.

As more of the world moves online and the manner in which video content is consumed diversifies, demand for appealing content is increasing more than ever before. In this environment, Sony is working to establish even stronger relations with content creators to create high-quality content.

Due to the nature of the business model for the Motion Pictures business, it takes time for results to improve, but Sony is enacting reforms to transform this business into one that generates a high level of profit.

 

2. Looking Forward to the fiscal year ending March 31, 2019 and Beyond

Sony operates a diverse range of businesses in the Electronics, Entertainment and Financial Services arenas with a mission to “be a company that inspires and fulfills your curiosity” and a vision to “use our unlimited passion for technology, content and services to deliver groundbreaking new excitement and entertainment, as only Sony can.” Having diverse business domains and operating them with a common set of values under the SONY brand is the fundamental strength of Sony.

In order to achieve sustainable growth over the mid- to long term, Sony believes it must 1) remain the “last one inch” that delivers a sense of “wow” to customers through its direct relationships with consumers, 2) enhance recurring revenue business models which grow stable profit by maintaining a relationship with each customer and 3) be a diverse company that pursues new businesses.

“Kando @ The Last One Inch”

 

   

Sony is a brand that makes and delivers to customers, around the world, products that enable them to enjoy a variety of content, like videos and music, in the space closest to those customers: the “last one inch.” Sony will continue to make products that create emotion, appeal to all five senses and embody “Kando @ The Last One Inch,” such as the 4K BRAVIA OLED TVs, the XperiaTM XZ Premium smartphone with the world’s first super slow motion functionality and 4K HDR display and the Alpha 9 full-sized mirrorless interchangeable lens camera, all of which were announced in spring of 2017. Another example of how the entire Sony Group is working together to create a new market is VR. VR is a field that can fully leverage the camera and film technology, content creation capability and rich entertainment assets owned across the Sony Group. Sony is working to nurture it into a new business domain.

Enhance Recurring Revenue Business Models

 

   

As a part of Sony’s current mid-range plan, Sony is focusing on recurring revenue businesses which maintain a continuous relationship with customers to create a high level of stable profit.

 

   

Recurring revenue businesses include: 1) subscription businesses like financial services, network services and channel businesses, 2) add-on revenue businesses like lenses for digital interchangeable lens cameras and game software and 3) content businesses like music and television show production. Going forward, Sony thinks that the highest potential lies with subscription and other service businesses which connect directly to customers.

 

   

Through the enhancement of recurring revenue businesses, Sony plans to stabilize the business model of each of its businesses to generate sustainably high profit, enabling it to create new value and open a path to the future.

Be a Diverse Company that Undertakes New Business

 

   

Since its founding, Sony has grown by entering into new businesses through the integration of its strengths and the strengths of other companies and by providing new value to existing industries. Examples of this are the Music and Financial Services businesses, which were started with other

 

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companies as joint ventures, and the Game business, which created a new business by combining knowledge from the diverse businesses already within the Sony Group. More recently, the medical business, which began operations as a joint venture between Sony and Olympus Corporation, LifeSpace UX and Sony Seed Acceleration Program (“SAP”), the new business development program, are producing good results. Sony plans to continue to proactively create new businesses going forward by utilizing the expertise held in its diverse range of businesses.

 

   

The Sony Innovation Fund, a corporate venture capital fund established in July 2016 with the goal of promoting collaboration with highly-skilled researchers outside of Sony and with venture businesses, is laying a foundation for the future through several investments.

 

   

As for Sony’s efforts to create new businesses using artificial intelligence and robotics, several projects are steadily progressing which combine Sony’s strength in the “moving things” of robotics and its strength in sensor technology.

After achieving the financial targets for the fiscal year ending March 31, 2018, the Sony Group as a whole, and each business unit within it, must not maintain the status quo, but must instead try new things so as to continue to generate a high level of profit over the mid- to long term. The company will work together as One Sony to create sustainable profit and continue to be a company that provides new value to society.

Group Environmental Mid-Term Targets “Green Management 2020”

Sony announced in June 2015 the establishment of its “Green Management 2020” group environmental mid-term targets, effective from fiscal 2016 (the fiscal year ended March 31, 2017) through fiscal 2020 (the fiscal year ending March 31, 2021). Based on the following three pillars, Sony has been implementing various initiatives to reduce the Sony Group’s environmental footprint:

 

   

Formulate targets and implement initiatives that leverage the distinctive characteristics of Sony’s businesses, from Electronics to entertainment. Among these, reduce annual energy consumption by an average of 30% (compared to levels at the fiscal year ended March 31, 2014) in Electronics products, and in entertainment, continue to look to use its contents to raise awareness of sustainability issues and inspire environmentally conscious actions;

 

   

Enhance efforts to reduce Sony’s environmental footprint across its entire value chain, including manufacturing partners and suppliers, by calling on them to reduce greenhouse gas (GHG) emissions and water consumption; and

 

   

Accelerate the use of renewable energy.

Sony’s long-term vision is to achieve a “zero environmental footprint” throughout all stages of its product lifecycles and business activities by 2050. The “Green Management 2020” mid-term plan has been backcasted (calculated backwards) in order to determine the necessary intermediate steps that need to be taken by fiscal 2020 on the way to this long-term goal. With “Green Management 2020,” Sony plans to further accelerate its various initiatives directed towards its ultimate goal of a “zero environmental footprint.”

Sony plans to also continue to participate in the WWF’s Climate Savers Programme, which aims to achieve reductions in greenhouse gas emissions, from the fiscal year ended March 31, 2017 onwards. Climate change targets are verified by WWF and a third-party verification body for their degrees of difficulty and progress.

Further details of the group environmental mid-term targets “Green Management 2020” and actual measures undertaken by Sony are reported in Sony’s CSR report available on the following website: http://www.sony.net/SonyInfo/csr_report/.

 

E. Off-balance Sheet Arrangements

Sony has certain off-balance sheet arrangements that provide liquidity, capital resources and/or credit risk support.

Refer to Note 6 of the consolidated financial statements for transfers of financial asset transactions in which Sony has relinquished control of receivables and accounted for these transfers as sales, and Note 23 of the consolidated financial statements for various arrangements with variable interest entities, including those where Sony is not the primary beneficiary and therefore does not consolidate the entity.

 

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F. Contractual Obligations, Commitments, and Contingent Liabilities

The following table summarizes Sony’s contractual obligations and commitments as of March 31, 2017. The references to the notes below refer to the corresponding notes within the consolidated financial statements.

 

      Total     

Less than

1 year

    

1 to 3

years

    

3 to 5

years

    

More than

5 years

 
     (Yen in millions)  

Contractual obligations and commitments:

              

Short-term debt (Note 11)

     464,655        464,655        —          —          —    

Long-term debt (Notes 8 and 11)

              

Capital lease obligations and other

     34,224        10,152        12,338        7,794        3,940  

Other long-term debt

     700,662        43,272        336,968        149,723        170,699  

Interest on other long-term debt

     8,530        4,165        2,942        887        536  

Minimum rental payments required under operating leases (Note 8)

     268,520        54,727        83,842        42,691        87,260  

Purchase commitments (Note 27)

              

Expected cost for the production or purchase of motion pictures and television programming or certain rights

     139,006        76,104        55,933        4,446        2,523  

Long-term contracts with recording artists, songwriters and companies

     61,660        26,286        18,147        8,872        8,355  

Long-term sponsorship contracts related to advertising and promotional rights

     13,305        4,826        8,479        —          —    

Long-term contracts for programming contents

     16,317