20-F 1 d556845d20f.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, 2018

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.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, 2018      March 31, 2018  

Title of Class

   (Tokyo Time)      (New York Time)  

 

Common Stock

  

 

 

 

1,265,425,048

 

 

  

American Depositary Shares

        113,751,938  

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

 

  (ii) 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;

 

  (iii) 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;

 

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

 

  (v) changes in laws, regulations and government policies in the markets in which Sony and its third-party suppliers, service providers and business partners operate, including those related to taxation, as well as growing consumer focus on corporate social responsibility;

 

  (vi) Sony’s continued ability to identify the products, services and market trends with significant growth potential, to devote sufficient resources to research and development, to prioritize investments and capital expenditures correctly and to recoup its investments and capital expenditures, including those required for technology development and product capacity;

 

  (vii) 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, marketing and distribution of its products, and its other business operations;

 

  (viii) 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;

 

  (ix) Sony’s ability to meet operational and liquidity needs as a result of significant volatility and disruption in the global financial markets or a ratings downgrade;

 

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

 

  (xi) 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, liabilities and operating results are denominated;

 

  (xii) Sony’s ability to recruit, retain and maintain productive relations with highly skilled personnel;

 

  (xiii) Sony’s ability to prevent unauthorized use or theft of intellectual property rights, to obtain or renew licenses relating to intellectual property rights and to defend itself against claims that its products or services infringe the intellectual property rights owned by others;

 

  (xiv) 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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  (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) risks related to catastrophic disasters or similar events;

 

  (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 and the personally identifiable information of its employees and customers, potential business disruptions or financial losses; and

 

  (xviii) the outcome of pending and/or future legal and/or regulatory proceedings.

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” under “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

     17  

A. History and Development of the Company

     17  

B. Business Overview

     19  

C. Organizational Structure

     28  

D. Property, Plant and Equipment

     28  

Item 4A. Unresolved Staff Comments

     30  

Item 5. Operating and Financial Review and Prospects

     30  

A. Operating Results

     30  

B. Liquidity and Capital Resources

     53  

C. Research and Development

     54  

D. Trend Information

     55  

E. Off-balance Sheet Arrangements

     58  

F. Contractual Obligations, Commitments, and Contingent Liabilities

     58  

Critical Accounting Policies and Estimates

     59  

Recently Adopted Accounting Standards

     65  

Recent Accounting Pronouncements

     65  

Item 6. Directors, Senior Management and Employees

     65  

A. Directors and Senior Management

     65  

B. Compensation

     71  

C. Board Practices

     76  

D. Employees

     80  

E. Share Ownership

     82  

Item 7. Major Shareholders and Related Party Transactions

     82  

A. Major Shareholders

     82  

B. Related Party Transactions

     83  

C. Interests of Experts and Counsel

     83  

Item 8. Financial Information

     83  

A. Consolidated Statements and Other Financial Information

     83  

Legal Proceedings

     83  

Dividend Policy

     84  

B. Significant Changes

     84  

Item 9. The Offer and Listing

     84  

A. Offer and Listing Details

     84  

B. Plan of Distribution

     85  

C. Markets

     85  

D. Selling Shareholders

     85  

E. Dilution

     85  

F. Expenses of the Issue

     85  

Item 10. Additional Information

     85  

A. Share Capital

     85  

B. Memorandum and Articles of Association

     86  

C. Material Contracts

     94  

D. Exchange Controls

     94  

E. Taxation

     95  

F. Dividends and Paying Agent

     97  

G. Statement by Experts

     97  

H. Documents on Display

     97  

I. Subsidiary Information

     97  

Item 11.  Quantitative and Qualitative Disclosures about Market Risk

     97  

Item 12.  Description of Securities Other Than Equity Securities

     99  

A. Debt Securities

     99  

 

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B. Warrants and Rights

     99  

C. Other Securities

     99  

D. American Depositary Shares

     99  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     101  

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

     101  

Item 15. Controls and Procedures

     101  

Item 16. [Reserved]

     102  

Item 16A. Audit Committee Financial Expert

     102  

Item 16B. Code of Ethics

     102  

Item 16C. Principal Accountant Fees and Services

     102  

Audit and Non-Audit Fees

     102  

Audit Committee’s Pre-Approval Policies and Procedures

     102  

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

     103  

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

     103  

Item 16F.  Change in Registrant’s Certifying Accountant

     103  

Item 16G.  Disclosure About Differences in Corporate Governance

     104  

Item 16H. Mine Safety Disclosure

     109  

Item 17. Financial Statements

     109  

Item 18. Financial Statements

     109  

Item 19. Exhibits

     110  

Signatures

     111  

 

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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  
     2014     2015     2016     2017     2018  
     (Yen in millions, yen per share amounts)  

Income statement data:

          

Sales and operating revenue

     7,767,266       8,215,880       8,105,712       7,603,250       8,543,982  

Equity in net income (loss) of affiliated companies

     (7,374     3,921       2,238       3,563       8,569  

Operating income

     26,495       68,548       294,197       288,702       734,860  

Income before income taxes

     25,741       39,729       304,504       251,619       699,049  

Income taxes

     94,582       88,733       94,789       124,058       151,770  

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

     (128,369     (125,980     147,791       73,289       490,794  

Comprehensive income (loss)

     121,978       34,317       (44,915     143,652       553,220  

Data per share of Common Stock:

          

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

          

— Basic

     (124.99     (113.04     119.40       58.07       388.32  

— Diluted

     (124.99     (113.04     117.49       56.89       379.75  

Cash dividends declared Interim

     12.50             10.00       10.00       12.50  
     (12.12 cents           (8.09 cents     (8.79 cents     (11.11 cents

Cash dividends declared Fiscal year-end

     12.50             10.00       10.00       15.00  
     (12.19 cents           (9.01 cents     (9.13 cents     (13.75 cents

Balance sheet data:

          

Sony Corporation’s stockholders’ equity

     2,258,137       2,317,077       2,463,340       2,497,246       2,967,366  

Common stock

     646,654       707,038       858,867       860,645       865,678  

Net assets

     2,783,141       2,928,469       3,124,410       3,135,422       3,647,157  

Total assets

     15,333,720       15,834,331       16,673,390       17,660,556       19,065,538  

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

     1,044,708       1,169,773       1,262,494       1,263,764       1,266,552  

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

     2,163.63       1,982.54       1,952.79       1,977.72       2,344.96  

* 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

           

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  

2018

     110.80        114.25        104.83        106.20  

2018

           

January

            113.18        108.38        109.31  

February

            110.40        106.10        106.62  

March

            106.91        104.83        106.20  

April

            109.33        105.99        109.28  

May

            111.08        108.62        108.73  

June (through June 8)

            110.00        109.45        109.45  

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, which could lead to lower revenue or operating margins.

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 one or a few businesses and also, potentially, with outsourced manufacturing service partners that currently supply products to Sony. These competitors may have greater financial, technical, labor and marketing resources available to them than those available to Sony. Sony’s financial condition and operating results depend on its ability to efficiently anticipate and respond to these established and new competitors.

The competitive factors Sony faces vary depending on the nature of the business. For example, Sony’s electronics businesses compete on the basis of various factors including price and function, while Sony’s Music and Pictures businesses compete for talent, such as artists, songwriters, actors, directors and producers, and for entertainment content that is created, acquired, licensed and/or distributed. Competition on price in the electronics businesses can lead to lower margins when costs do not fall at a proportional rate, and competition for talent and appealing product in the entertainment businesses can also lead to lower profitability if the higher costs required for such talent and content creation cannot be recouped through greater sales. Moreover, 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 accelerate such that Sony would be unable to maintain its advantageous market position. In its consumer electronics businesses, 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 similar products, Sony must develop superior technology, anticipate consumer tastes and rapidly develop attractive and differentiated products with competitive prices and features. Sony faces increasingly intense pricing pressure from competitors, retailer consolidation, new sales/distribution channels and shorter product cycles in a variety of consumer product categories. In the Music and Pictures segments, operating results can be impacted by worldwide consumer acceptance of their products, which is difficult to predict, by other competing products released at or near the same time and by alternative forms of entertainment and leisure activities available to consumers.

 

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If Sony is unable to maintain its advantageous market position in the fields in which it has a technological or other competitive advantage, Sony is unable to effectively anticipate and counter the ongoing price erosion that frequently affects its consumer products or the cost pressures affecting its businesses, there is a change in existing business models or consumer preferences, or the average prices of Sony’s consumer products decrease faster than Sony is able to reduce manufacturing costs, Sony’s operating results and financial condition may be adversely impacted.

To remain competitive and stimulate customer demand, Sony must invest in research and development to achieve product and service innovations and successfully manage frequent introductions of such new products and services.

To strengthen the competitiveness of its products and services, Sony continues to invest in research and development (“R&D”), particularly in growth areas such as image sensors and the Game & Network Services (“G&NS”) segment. However, Sony may not be successful in investing in R&D if it fails to identify products, services and market trends with significant growth potential. In addition, Sony’s 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 new and competitive products and services.

In the consumer electronics, network services and mobile communication industries, Sony must continually introduce, enhance and stimulate customer demand for products and services. Sales of these products and services are particularly sensitive to the significant weighting of consumer demand to the year-end holiday season. In Sony’s G&NS segment, the successful introduction and penetration of gaming platforms is a significant factor driving sales and profitability, and this success is affected by the ability to provide customers with attractive software line-ups and online services. However, there is no assurance that third-party software developers and publishers, major contributors to this effort, will continue to develop and release software. In addition, Sony believes that integrating its hardware, software, entertainment content and network services, and investing in R&D to effect such integration, is essential in generating revenue growth and profitability. However, this strategy depends on its ability to further develop network services technologies, coordinate and prioritize strategic and operational issues among Sony’s various business units and sales channels, continually introduce enhanced and competitively priced hardware that is seamlessly connected to network platforms with user interfaces that are innovative and attractive to consumers and also standardize technological and interface specifications industry-wide and across Sony’s networked products and business units. In addition, the G&NS, Music and Pictures segments must invest substantial amounts, which may include significant upfront investments, in internally developed software titles, artist advances, motion picture productions, television productions and broadcast programming before knowing whether their products will receive customer acceptance. Furthermore, underperformance of Pictures’ products in the initial distribution market is correlated with weak performance in subsequent distribution markets, which would have an adverse effect on Sony’s results in the year of initial release as well as future years.

The successful introductions of, and transitions to, new products and services depend on a number of factors, such as the timely and successful completion of development efforts, market acceptance, planning and executing an effective marketing strategy, managing new product introductions, managing production ramp-up issues, the availability of application software for new products, quality control and the concentration of consumer demand in the year-end holiday season. If Sony cannot achieve the expected results from its investment in R&D, adequately manage frequent introductions of new products and services and obtain consumer acceptance of its new products and services, or if Sony is not successful in implementing its integration strategy, Sony’s reputation, operating results and financial condition may be adversely impacted.

Sony’s strategic initiatives, including acquisitions, joint ventures, investments, capital expenditures and restructurings, may not be successful in achieving their strategic objectives.

Sony actively engages in acquisitions, joint ventures, capital expenditures and other strategic investments to acquire new technologies, efficiently develop new businesses and enhance its business competitiveness. For example, on May 22, 2018, Sony signed a legally binding memorandum of understanding to acquire an approximately 60% equity interest in EMI Music Publishing. (The closing of this transaction is subject to certain conditions, including regulatory approvals.)

When making acquisitions, Sony’s financial results may be adversely affected by the significant cost of the acquisition and/or integration expenses, failure to achieve synergies, failure to generate expected revenue and cost improvements, loss of key personnel and assumption of liabilities.

 

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When establishing joint ventures and strategic partnerships, Sony’s financial and operating results may be adversely affected by strategic or cultural differences with partners, conflicts of interest, failure to achieve synergies, additional funding or debt guarantees required to maintain the joint venture or partnership, requirements to buy out a joint venture partner, sell its shares or dissolve a partnership, insufficient management control including control over cash flow, loss of proprietary technology and know-how, impairment losses and reputational harm from the actions or activities of a joint venture that uses the Sony brand.

Sony invests heavily in production facilities and equipment in its electronics businesses, including fabrication facilities used to make image sensors for smartphones and other products. Sony may not be able to recover these capital expenditures in part or full or in the planned timeframe due to the competitive environment, lower-than-expected consumer demand or changes in the financial condition or business decisions of Sony’s major customers. Sony invested 45.0 billion yen and 106.6 billion yen of capital in the fiscal years ended March 31, 2017 and 2018, respectively, mainly for the purpose of increasing image sensor production capacity.

Further, Sony is implementing restructuring and transformation initiatives to enhance profitability, business autonomy and shareholder value and to clearly position each business within the overall business portfolio. For example, Sony transferred its battery business to Murata Manufacturing Co., Ltd. Group in the fiscal year ended March 31, 2018. The expected benefits of these initiatives, including the expected level of profitability, may not be realized due to internal and external impediments or market conditions worsening beyond expectations. If Sony is not successful in achieving its restructuring and transformation initiatives, Sony’s operating results, financial condition, reputation, competitiveness or profitability may be adversely affected. Sony incurred restructuring charges in the amount of 38.3 billion yen, 60.2 billion yen and 22.4 billion yen in the fiscal years ended March 31, 2016, 2017 and 2018, respectively.

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

Sony is dependent for the distribution of its products on wholesalers, retailers, other resellers and third-party distributors, many of whom also distribute competitors’ products. For example, 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. In addition, the Pictures segment depends on third-party exhibitors to distribute its motion pictures, and cable, satellite and other distribution systems to distribute its motion pictures and television programming; a decline in the licensing fees received from these third parties may adversely affect the Pictures segment’s sales. The Pictures segment’s worldwide television networks are also distributed on third-party cable, satellite and other distribution systems and 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 these networks.

Sony invests in programs to incentivize wholesalers, retailers, and other resellers and third-party distributors 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.

The operating results and financial condition of many wholesalers, retailers, other resellers and third-party distributors have been adversely impacted by competition, especially from online retailers, and weak economic conditions. If their financial condition continues to weaken, they stop distributing Sony’s products, or uncertainty regarding demand for Sony’s products or other factors cause them to reduce their ordering, marketing, subsidizing, or distributing Sony’s products, Sony’s operating results and financial condition may be adversely impacted.

As a global company, Sony is subject to a wide range of laws and regulations and a growing consumer focus on corporate social responsibility in many countries. 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.

As a global company, Sony is subject to the laws and regulations of many countries throughout the world that affect its traditional and online operations in a number of areas, including advertising, promotions, consumer protection, import and export requirements, anti-corruption, anti-competition, environmental protection, privacy, data protection, content and broadcast regulation, labor, taxation, foreign exchange controls, as well as laws relating to the collection, use, retention, security and transfer of personally identifiable information, or PII.

 

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Compliance with these laws and regulations may be onerous and expensive. These laws and regulations continue to develop and may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such developments could 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. For example, a change in labor regulations or policies may significantly change local labor environments. Such a change in China or another country or regions in which Sony or a partner manufactures could cause interruptions in production and shipping of Sony’s products or components thereof, a sharp rise in local labor costs, or a shortage of well-trained employees, which may adversely affect Sony’s operating results. In addition, changes in laws or regulations or the judicial interpretation thereof that Sony relies on or Sony is subject to in conducting its operations, including online operations, as well as Sony’s failure to anticipate such changes, may subject Sony to greater risk of liability, increase the costs of compliance, or limit Sony’s ability to engage in certain operations or lead to discontinuance of certain operations.

Violation of applicable laws or regulations by Sony, its employees, third-party suppliers, business partners and agents may 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 increased attention on labor practices, including work environments at electronic component manufacturers and original design manufacturing/original equipment manufacturing, or ODM/OEM, product manufacturers operating in Asia. Increased regulation or public pressure in this area could cause Sony’s compliance costs to increase, particularly since Sony uses many parts, components and materials to manufacture its products and relies on suppliers to provide these parts, 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 reputation, operating results and financial condition.

Sony must manage its large and increasing volume of procurement from third-party suppliers and business partners to control inventory levels, availability, costs and quality of parts, components, software and network services within volatile markets.

Sony’s products and services increasingly rely on third-party suppliers and business partners for parts, components, software and network services, including semiconductors, chipsets for PlayStation game consoles and mobile products, liquid crystal display (“LCD”) panels and the Android OS that is used in mobile products, televisions and services. External suppliers’ and partners’ shortages, fluctuations in pricing, quality issues, discontinued support, changes in business terms or prioritization of customers outside the electronics sector or of Sony’s competitors can adversely affect Sony’s operating results, brand and reputation. Reliance on third-party software and technologies may make it increasingly difficult for Sony to differentiate its products from competitors’ products. Also, shortages or delayed shipments of critical parts or components may result in a reduction or suspension of production at Sony’s or its business partners’ manufacturing sites, particularly where Sony is substantially reliant on one supplier, where there is limited production capacity for custom parts or components, or where there are initial manufacturing capacity constraints for products, parts or components that use new technologies.

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 inventory, which can disrupt production plans and result in lost sales opportunities or inventory adjustments, respectively. 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, Sony recorded a 6.5 billion yen inventory write-down of certain image sensors for mobile products in the fiscal year ended March 31, 2017. 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, profitability and operations are sensitive to global and regional economic and political trends and conditions.

Sony’s sales and profitability are sensitive to economic trends in its major markets. In the fiscal year ended March 31, 2018, 30.7%, 21.5% and 21.6% of Sony’s sales and operating revenue were attributable to Japan, the U.S. and Europe, respectively. These markets may be subject to significant economic downturns, resulting in an adverse impact on Sony’s operating results and financial condition. An actual or expected deterioration of

 

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economic conditions in any of Sony’s major markets may result in a decline in consumers’ consumption and adverse impacts on the businesses of commercial customers, resulting in reduced demand for Sony’s products and services. For example, in the Pictures segment, a general decline in the economy may result in decreased overall spending within the advertising market and a decline in third-party television networks’ ability to generate revenues, which could result in lower license fees paid by these networks for Sony’s content, which may adversely affect the Picture segment’s revenues.

In addition, Sony’s operations are conducted in many countries and regions around the world, and these international operations, particularly in certain emerging markets, can create challenges. For example, in Sony’s electronics businesses, production and procurement of products, parts and components in China and other Asian countries and regions increase the time necessary to supply products to other markets worldwide, which can make it more difficult to meet changing customer demand in a timely manner. Further, in certain countries and regions, Sony may encounter difficulty in planning and managing operations due to unfavorable political or economic factors, such as armed conflicts, deterioration in foreign relations, non-compliance with expected business conduct and a lack of adequate infrastructure. If international or domestic political and military instability disrupts Sony’s business operations or those of its business partners Sony’s operating results and financial condition may be adversely affected.

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 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 seeks to reduce its exposure to foreign exchange risk by hedging a portion of its net short-term foreign currency exposure shortly before the transactions are projected to occur, such hedging activity may not offset any, or only a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.

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 on acceptable terms or be sufficient to meet Sony’s needs.

 

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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’s success depends on the ability to recruit, retain and maintain productive relations with highly skilled personnel.

In order to continue to develop, design, manufacture, market, and sell products and services, in increasingly competitive markets, Sony must attract, retain and maintain productive relations with key personnel, both internally and externally, including its executive team, other management professionals, creative talent and other highly skilled employees such as hardware and software engineers. However, such key personnel are in high demand. In addition, business divestitures, restructuring or other transformation initiatives may lead to an unintended loss of experienced human resources or know-how. Actual or threatened work slowdowns or stoppages related to unionized workers, particularly in the entertainment businesses, could lead to delayed releases or cost increases. If these incidents occur or if Sony is unable to attract, retain and maintain productive relations with its highly skilled employees and key management professionals, Sony’s operating results and financial condition may be adversely affected.

Sony’s intellectual property might be subject to unauthorized use or theft and it might encounter restrictions in its use of intellectual property owned by third parties.

Sony’s intellectual property relating to Sony’s products and services, including those of the electronics businesses, such as image sensors, might be subject to unauthorized use or theft. For example, digital technology, the availability of digital media, and global internet penetration impact Sony’s ability to protect its copyrighted content from unauthorized duplication, digital theft and counterfeiting, putting pressure on legitimate product sales. Sony has incurred and will continue to incur expenses to help protect its intellectual property rights; however, Sony’s various initiatives to prevent such unauthorized use or theft of intellectual property might not achieve their intended result, which could adversely affect Sony’s competitive position and the value of its investment in R&D. 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.

Many of Sony’s products and services 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 it will be able to obtain or renew licenses relating to various intellectual property rights that its business needs in the future; however, such licenses may not be available at all or on acceptable terms, and as a consequence Sony may need to redesign or discontinue its marketing, selling or distribution of such products or services.

Claims have been and may be asserted against Sony that its products or services, including third-party parts, components, software and network services used in Sony’s products or services, infringe the intellectual property rights of other parties. Such claims may be asserted by competitors or by other rights holders, particularly as products and services evolve to include new technologies and enhanced functionality. Such claims might require Sony to enter into settlement or license agreements, pay significant damage awards, face an injunction or refrain from marketing, selling or distributing certain of its products and services.

The failure to prevent unauthorized use or theft of Sony’s intellectual property rights, the failure to enter into licenses for necessary third-party intellectual property rights, the invalidation of Sony’s intellectual property rights or the settlement of an infringement claim against Sony by others may adversely impact Sony’s reputation, operating results and financial condition.

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

Technology, particularly digital technology, used in the Music and Pictures segments continues to evolve, rapidly leading to alternative methods for the delivery, consumption and storage of digital content. These technological advancements have changed consumer behavior and empowered consumers to seek more control over when, where and how they consume digital content. The prevalence of enhanced internet capabilities and other new media may continue to reduce the demand for packaged physical media and impact traditional broadcast television and in-theater motion picture viewership, which could negatively affect revenues from

 

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Sony’s entertainment businesses. Digital distribution revenues, such as those from subscription streaming services, 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. If Sony is unable to adequately respond to these changes, or fails to effectively anticipate or adapt to new market changes, Sony’s operating results and financial condition may be adversely impacted.

Changes in the regulation and performance of financial markets may adversely affect the operating results and financial condition of Sony’s Financial Services segment.

Sony’s Financial Services segment operates in industries subject to comprehensive regulation and supervision, including the Japanese insurance and banking industries. Future developments or changes in laws, regulations or policies may lead to increased compliance costs or limitations on operations in 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.

Changes in interest rates, foreign exchange rates and the value of Japanese government and corporate bonds, equities, real estate and other asset classes may have an adverse effect on the operating results and financial condition of the Financial Services segment. For example, the life insurance business has invested most of its general account assets in ultra-long-term Japanese government and corporate bonds to match the liability characteristics of the long-term maturity insurance policies it has underwritten. The life insurance business has guaranteed yields on outstanding policies while its investment portfolio could be reduced by the market changes discussed above. The banking businesses have invested most of their total loan balance, or over half of their total assets, in their mortgage loans account. An increase in non-performing loans or a decline in prices of the real estate collateral from the market changes discussed above or deterioration of credit quality may have an adverse effect on operating results and financial condition through an increase in the allowance for doubtful accounts.

The market changes discussed above, Sony’s management of these changes or the occurrence of earthquakes, pandemic disease or other catastrophic events in Japan could expose the life and non-life insurance businesses to increasing costs or adverse impact on their ability to meet policy commitments.

The insurance businesses’ policy reserves and deferred insurance acquisition costs are calculated based on many actuarial assumptions that are uncertain. Significant differences between these actuarial assumptions and actual situations may result in additional policy reserves being recorded and the accelerated amortization of deferred acquisition costs, through the changes of calculation assumptions. In particular, the insurance businesses calculate policy reserves and deferred insurance acquisition costs based on the actuarial assumptions, assuming the future schedule of insurance premium revenue, yield of investments, claims to be paid for occurrence of insured events and other factors. The review of these actuarial assumptions is required at least once in each fiscal year.

Sony’s facilities and operations are subject to damage and disruption as a result of catastrophic disasters, outages or similar events that could lead to supply chain, manufacturing and other business disruptions and have 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. A major earthquake in Japan, especially in Tokyo, the Tokai area or the Kyushu and Tohoku areas, where Sony headquarters, certain product manufacturing sites and semiconductor manufacturing sites, respectively, are located, could cause substantial damage to Sony’s business operations, including damage to buildings, machinery, equipment and inventories, and the interruption of production at manufacturing facilities. For example, the earthquake of April 14, 2016 and subsequent earthquakes in the Kumamoto region in Japan caused damage to a semiconductor manufacturing site in Kyushu, which interrupted production at the site.

In addition, offices and facilities used by Sony, its suppliers, service providers and business partners, including those used for raw materials, parts, components, network, telecommunications and information systems infrastructure, R&D, 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, 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,

 

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and/or result in large expenses to repair or replace these facilities or offices. Sony may also be exposed to price increases for raw materials, parts and components, and lower demand from commercial customers. 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.

Sony, its third-party service providers, suppliers and other business partners make extensive use of information technology to support business operations, and to provide network and online services to customers. These operations and services, as well as Sony’s business information, may be intentionally or inadvertently compromised by malicious third parties, including state-sponsored organizations, Sony employees, third-party service providers or other business partners. Such organizations or individuals may use a variety and combination of techniques, such as installing malicious software, exploiting vulnerabilities in information technology, using social engineering to mislead employees and business partners into disclosing passwords and sensitive information, and coordinating distributed denial-of-service attacks to render services unavailable. As cyber-attacks become increasingly sophisticated and automated, and as tools and resources become more readily available, 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 loss, destruction, alteration, or exfiltration of business information, or to limit the negative impact from such attacks can provide absolute security against compromise. As a result, Sony’s business information, including personal information, may be lost, destroyed, disclosed, misappropriated, altered, or accessed without consent, and Sony’s information technology systems or operations, or those of its service providers or other business partners, may be disrupted. Malicious adversaries may also use unauthorized access to Sony’s networks as a platform to compromise 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. Additionally, Sony’s network services, online game businesses and websites have been subject to cyber-attacks by groups and individuals with a range of motives and expertise, resulting in unauthorized access, denial of service, and the theft and/or disclosure of customer information.

Any of the above incidents can result in significant remediation costs. In addition, a disruption to Sony’s network and online services, information technology, or other compromise of its information security may have serious consequences to its business and operations, including lost revenues, damage to relationships with business partners and other third parties, disclosure, alteration, destruction or use of proprietary information and the failure to retain or attract customers. Moreover, such disruptions and breaches may result in a diversion of management’s attention and resources. Further, it 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. Sony’s cyber insurance may not cover all expenses and losses and, accordingly, such breaches or other compromises of Sony’s information security or that of its third-party service providers or business partners may have an adverse impact on Sony’s operating results and financial condition.

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

Sony faces the risk of litigation and regulatory actions 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 actions 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. Also, many Sony products are connected to the internet, and regularly communicate with services provided by Sony or third parties.

 

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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 damages 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. Moreover, cyber-attacks targeting internet-connected products have increased significantly. For example, customer information and Sony or third-party technical information may be misappropriated, the functionality of Sony’s products and services may be impaired, or Sony products may be used in denial-of-service attacks. There can be no guarantee that Sony’s security measures will prevent products from being compromised.

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 security vulnerability, 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 financial results and 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 have an adverse effect on Sony’s financial results and condition due to an increase in pension expenses.

Sony’s financial results and 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 financial results and condition could be adversely affected.

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

Sony is subject to income taxes in Japan and numerous other jurisdictions, and in the ordinary course of its business there are many situations where the ultimate tax determination can be uncertain, because of the transfer pricing for its intercompany transactions, and Sony is subject to continuous review by tax authorities of numerous jurisdictions. The calculation of Sony’s tax provision and the carrying value of tax assets, including net operating loss carryforwards and tax credit carryforwards, require significant judgment and the use of estimates,

 

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including estimates of future taxable income. As additional evidence becomes available, Sony reassesses these assets to determine if they remain appropriate or whether a reduction by a valuation allowance is appropriate. As of March 31, 2018, total established valuation allowances were 899.8 billion yen. An increase in a valuation allowance may have an adverse impact on Sony’s net income and financial condition.

Deferred tax assets are evaluated on a jurisdiction by jurisdiction basis. As of March 31, 2018, Sony and/or its subsidiaries had valuation allowances principally in Japan and the U.S. Additionally, deferred tax assets could expire unused or otherwise not be realizable for a variety of reasons including the lack of sufficient taxable income in the appropriate jurisdiction. Sony’s net income and financial condition could be adversely affected when the deferred tax assets expire unused.

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

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 deductions for royalties and interest.

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, reduced estimates of future cash flows, changes in global economic conditions 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, 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. In the fiscal year ended March 31, 2018, Sony recorded a 31.3 billion yen impairment charge against long-lived assets in the Mobile Communications segment. Any such charge may adversely affect 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 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.

 

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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 Insurance Co., Ltd. (“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., the 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 Sony Computer Entertainment Inc. (“SCEI”) in Japan. SCEI changed its name to Sony Interactive Entertainment Inc. (“SIEI”) in April 2016.

In October 1995, Sony/ATV Music Publishing LLC (“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.

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.

 

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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 Inc. (“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.

In September 2017, Sony transferred its battery businesses to the Murata Manufacturing Co., Ltd. Group.

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).

 

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Principal Capital Investments

In the fiscal years ended March 31, 2016, 2017 and 2018, Sony’s capital expenditures were 468.9 billion yen, 272.2 billion yen and 332.1 billion yen, respectively. Sony’s capital expenditures are expected to be approximately 360.0 billion yen during the fiscal year ending March 31, 2019. 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.

In the fiscal year ended March 31, 2018, Sony invested approximately 128.1 billion yen in the Semiconductors segment. This investment included approximately 106.6 billion yen to increase image sensor production 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 network services, game hardware and software, televisions, audio and video recorders and players, still and video cameras, mobile phones, and semiconductors. Sony is 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, including game applications based on animation titles. Sony is also engaged in the production, acquisition and distribution of motion pictures and television programming and the operation of television and digital networks. 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 separated its 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 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, 2018. As a result of this realignment, the operations of the former Components segment are now included in All Other.

Products and Services

Game & Network Services (“G&NS”)

Sony Interactive Entertainment LLC (“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 Network and Hardware and Others categories. Network includes network services relating to game, video and music content provided by SIE; and Hardware and Others includes home and portable game consoles, packaged software and peripheral devices.

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.

 

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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.

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, TriStar Pictures, Sony Pictures Animation, Stage 6 Films, AFFIRM Films and Sony Pictures Classics. 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 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.

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.

Imaging Products & Solutions (“IP&S”)

SIPS 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. Additionally, SIPS is responsible for the broadcast/professional solutions business and the FeliCa contactless IC (integrated circuit) card technology business. SOMED undertakes development support to provide 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.

Mobile Communications (“MC”)

Sony Mobile Communications Inc. (“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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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.

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 batteries, recording media and storage media businesses, 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 G&NS, HE&S, IP&S, MC and Semiconductors 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.

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 Sony Electronics JSC in Russia.

 

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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, 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.

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 of Michael Jackson (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.

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.

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

 

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arrangements with independent local distributors. Product is distributed in various home media formats including DVD, Blu-ray Disc™ and Digital Distribution. Digital Distribution includes electronic sell-through and video-on-demand distributed on cable, direct broadcast satellite (“DBS”) providers and digital platforms, as well as hotel pay-per-view.

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 DBS providers, as well as to digital platforms such as subscription and advertising supported digital platforms (including Sony’s PlayStationTM Network, Netflix, Amazon, Crackle and YouTube Red).

SPE’s television networks are distributed through cable, DBS providers, telecommunications companies and digital platforms to viewers around the world. These networks generate advertising, subscription and other ancillary revenues.

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, 2018, Sony Life employed 5,142 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 recruitment of high-caliber sales professionals from industries outside the life insurance industry, quality improvement through education and training, performance-linked compensation and high productivity. Lifeplanner® sales employees offer custom-made packages. Most of the agents in the independent agent channel are corporate and non-exclusive agents, primarily 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.

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 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.

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 Energy Devices Corporation and Sony Storage Media Solutions Corporation sell their battery and storage media products, respectively, through Sony’s Electronics sales companies, mentioned in the Electronics’ Sales and Distribution section above, as well as through their own sales forces. 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.

 

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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  
     2016      2017      2018  
     (Yen in millions)  

Japan

     2,317,312        2,392,790        2,625,619  

United States

     1,733,759        1,673,768        1,835,705  

Europe

     1,881,329        1,634,683        1,841,457  

China

     540,497        557,995        674,718  

Asia-Pacific

     959,171        866,712        1,024,179  

Other Areas

     673,644        477,302        542,304  
  

 

 

    

 

 

    

 

 

 

Total

     8,105,712        7,603,250        8,543,982  
  

 

 

    

 

 

    

 

 

 

Sources of Supply

Sony procures raw materials, parts and components 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, 2018, Sony continued to optimize the number of its suppliers 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 online support network, 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.

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. 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.

 

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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 and All Other

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 G&NS 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.

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. In addition, Sony believes that the success of the Music segment’s animation products and game applications business, Aniplex, is largely dependent on the creative talent of game producers and developers, and is also subject to the vagaries of public taste.

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. SPE competes with other companies, in particular technology companies, who are expanding into the production or distribution of film and television programing. 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 the increasing fragmentation of audiences among broadcast and cable networks, DBS providers, digital platforms and other outlets both within and outside of the U.S. Furthermore, broadcast networks in the U.S., or their affiliated production companies, 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, digital platforms 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, DBS providers, digital platforms and other distribution systems.

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

 

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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.

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 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.

 

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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, 2018, 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, 2018, 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 3.0 million U.S. dollars, and Sony has estimated that its net profit from such sales was 0.5 million U.S. dollars.

 

    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, 2018 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, 2019, 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 United States’ decision to cease its participation in the Joint Comprehensive Plan of Action of July 14, 2015, among the United States, the United Kingdom, China, France, Russia, Germany, the European Union and Iran, and will determine whether and to

 

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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, 2018)
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 Network 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 Storage Media Solutions Corporation

   Japan      100.0  

Sony Imaging Products & Solutions 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 Assurance Inc.*

   Japan      100.0  

Sony Americas Holding, Inc.

   U.S.A.      100.0  

Sony Corporation of America

   U.S.A.      100.0  

Sony Entertainment Inc.

   U.S.A.      100.0  

Sony Electronics Inc.

   U.S.A.      100.0  

Sony Interactive Entertainment LLC

   U.S.A.      100.0  

Sony Pictures Entertainment Inc.

   U.S.A.      100.0  

CPT Holdings, Inc.

   U.S.A.      100.0  

Sony Music Entertainment

   U.S.A.      100.0  

Sony/ATV Music Publishing LLC

   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 (China) Limited

   China      100.0  

Sony EMCS (Malaysia) Sdn. Bhd.

   Malaysia      100.0  

Sony Electronics (Singapore) Pte. Ltd.

   Singapore      100.0  

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

 

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.

 

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The following table sets forth information as of March 31, 2018 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)

    2,305,000      CMOS image sensors and other semiconductors

Kumamoto

(Sony Semiconductor Manufacturing Corporation

— Kumamoto TEC)

    2,204,000      CCDs, CMOS image sensors, LCDs and other semiconductors

Kagoshima

(Sony Semiconductor Manufacturing Corporation

— Kagoshima TEC)

    1,789,000      CCDs and other semiconductors

Oita

(Sony Semiconductor Manufacturing Corporation

— Oita TEC)

    975,000      CMOS image sensors and other semiconductors

Kohda, Aichi

(Sony Global Manufacturing & Operations Corporation

— Tokai TEC — Kohda Site)

    902,000      Compact digital cameras and interchangeable lens cameras

Inazawa, Aichi

(Sony Global Manufacturing & Operations Corporation

— Tokai TEC — Inazawa Site)

    842,000      Televisions

Tsuruoka, Yamagata

(Sony Semiconductor Manufacturing Corporation

— Yamagata TEC)

    703,000      CMOS image sensors and other semiconductors

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

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)

Bangi, Malaysia

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

    1,183,000      Televisions, TV components, Blu-ray Disc™ players/recorders and DVD-players/recorders

Huizhou, China

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

    1,027,000      Optical pickups and LCDs

Penang, Malaysia

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

    1,021,000      Audio equipment

Wuxi, China

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

    798,000     

Compact digital cameras, interchangeable lens cameras etc.

Beijing, China

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

    552,000      Mobile phones

Bangkadi, Thailand

(Sony Device Technology (Thailand) Co.,Ltd.)

    513,000      Image sensor assembly etc.

 

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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. SIE 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 1,939,200 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 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.

On September 1, 2017, Sony completed the transfer to Murata Manufacturing Co., Ltd. Group of the battery-related plants located in Japan, China and Singapore.

 

Item 4A. Unresolved Staff Comments

None

 

Item 5. Operating and Financial Review and Prospects

 

A. Operating Results

 

Operating Performance

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in billions)  

Sales and operating revenue

     8,105.7        7,603.3        8,544.0  

Equity in net income of affiliated companies

     2.2        3.6        8.6  

Operating income

     294.2        288.7        734.9  

Income before income taxes

     304.5        251.6        699.0  

Net income attributable to Sony Corporation’s stockholders

     147.8        73.3        490.8  

Sales

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, sales and operating revenue (“sales”) were 8,544.0 billion yen, an increase of 940.7 billion yen compared to the fiscal year ended March 31, 2017. This increase was due to increases in sales in all segments except for the Mobile Communications (“MC”) segment and All Other. In addition, sales for the fiscal year ended March 31, 2018 included 6.7 billion yen and 2.6 billion yen of insurance recoveries, mainly for opportunity losses related to the 2016 Kumamoto Earthquakes (the “Kumamoto Earthquakes”) in the Semiconductors segment and the Imaging Products & Solutions (“IP&S”) segment, respectively.

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

For the fiscal year ended March 31, 2017, sales were 7,603.3 billion yen, a decrease of 502.5 billion yen, or 6% 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 Game & Network Services (“G&NS”) and Semiconductors segment sales, substantially offset by a significant decrease in MC segment sales.

 

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Cost of Sales, Selling, General and Administrative Expenses and Other Operating (Income) 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, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, cost of sales increased 435.2 billion yen year-on-year to 5,188.3 billion yen. The ratio of cost of sales to sales improved year-on-year from 72.9% to 70.9%.

R&D costs (all R&D costs are included within cost of sales) increased 11.1 billion yen year-on-year to 458.5 billion yen. The ratio of R&D costs to sales was 6.3% compared to 6.9% in the fiscal year ended March 31, 2017. For further details, refer to Research and Development in Item 5.C.

SGA expenses increased 77.2 billion yen year-on-year to 1,583.2 billion yen. The ratio of SGA expenses to sales improved year-on-year from 23.1% to 21.6%.

Other operating expense, net, was 4.1 billion yen, a decrease of 144.9 billion yen year-on-year. This significant improvement was mainly due to the following factors that occurred in the fiscal year ended March 31, 2018 and the absence of the following factors that occurred in the fiscal year ended March 31, 2017. Refer to Note 20 of the consolidated financial statements.

Factors that occurred in the fiscal year ended March 31, 2018

 

    An impairment charge against long-lived assets: 31.3 billion yen (MC segment)

 

    A gain resulting from the sale of the entire equity interest in a manufacturing subsidiary in the camera module business: 28.3 billion yen (Semiconductors segment)

 

    A gain resulting from the sale of real estate held by a subsidiary: 10.5 billion yen (Music segment)

 

    A gain resulting from the sale of manufacturing equipment: 8.6 billion yen (Semiconductors segment)

Factors that occurred in the fiscal year ended March 31, 2017

 

    An impairment charge of goodwill: 962 million U.S. dollars (112.1 billion yen) (Pictures segment)

 

    An impairment charge related to the transfer of the battery business: 42.3 billion yen (All Other)

 

    An impairment charge against long-lived assets resulting from the termination of the development and manufacturing of certain high-functionality camera modules for external sale: 23.9 billion yen (Semiconductors segment)

 

    A gain on the sale of certain shares of M3: 37.2 billion yen (All Other)

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 Kumamoto Earthquakes. 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 above-mentioned factors that occurred in the fiscal year ended March 31, 2017, as well as the factors listed below that occurred in the fiscal year ended March 31, 2016. Refer to Note 20 of the consolidated financial statements.

 

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Factors that occurred in the fiscal year ended March 31, 2016

 

    An impairment charge against long-lived assets in the camera module business: 59.6 billion yen (Semiconductors segment)

 

    An impairment charge against long-lived assets in the battery business: 30.6 billion yen (All Other)

 

    A gain 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%: 151 million U.S. dollar (18.1 billion yen) (Music segment)

 

    A gain from the sale of a part of the logistics business, in connection with the formation of a logistics joint venture: 12.3 billion yen (Corporate and elimination)

Equity in Net Income (Loss) of Affiliated Companies

For the fiscal year ended March 31, 2018, equity in net income of affiliated companies was 8.6 billion yen, an increase of 5.0 billion yen year-on-year. This increase was primarily due to an improvement of equity in net income (loss) for SA Reinsurance Ltd. in the Financial Services segment. 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.

Operating Income

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, operating income increased 446.2 billion yen year-on-year to 734.9 billion yen. This significant increase was due to the impact of the above-mentioned increase in sales and the positive impact of foreign exchange rates as well as the above-mentioned factors that occurred in the fiscal year ended March 31, 2018. Operating income in the fiscal year ended March 31, 2017 included the above-mentioned factors that occurred in the fiscal year ended March 31, 2017.

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.

Other Income and Expenses

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2017, other income increased by 9.3 billion yen year-on-year, to 23.7 billion yen, while other expenses increased by 8.0 billion yen year-on-year, to 59.5 billion yen. The net amount of other income and other expenses was an expense of 35.8 billion yen, an improvement of 1.3 billion yen year-on-year primarily due to an increase in interest and dividend income as well as lower losses on the devaluation of securities investments, partially offset by an increase in net foreign exchange losses.

The foreign exchange loss, net, increased by 8.5 billion yen year-on-year, to 30.6 billion yen.

Interest and dividends in other income of 19.8 billion yen were recorded in the fiscal year ended March 31, 2018, an increase of 8.3 billion yen year-on-year. Interest recorded in other expenses totaled 13.6 billion yen, a decrease of 1.0 billion yen year-on-year.

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.

 

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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.

Income before Income Taxes

For the fiscal year ended March 31, 2018, income before income taxes was 699.0 billion yen, an increase of 447.4 billion yen year-on-year. 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.

Income Taxes

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

During the fiscal year ended March 31, 2018, Sony recorded 151.8 billion yen of income tax expense, resulting in an effective tax rate of 21.7%, which was lower than the effective tax rate of 49.3% in the fiscal year ended March 31, 2017. This lower effective tax rate in the fiscal year ended March 31, 2018 was mainly due to (1) profits recorded at Sony Corporation and its national tax filing group in Japan, and in the U.S. consolidated tax filing group, both of which have established valuation allowances for deferred tax assets, compared to the losses recorded for those groups in the fiscal year ended March 31, 2017 and (2) the negative impact of the nondeductible goodwill charge that was recorded in the fiscal year ended March 31, 2017. In addition, during the fiscal year ended March 31, 2018, Sony recorded a 13.8 billion yen tax benefit related to deferred tax liabilities as a result of U.S. tax reform. Refer to Note 21 of the consolidated financial statements.

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% in 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.

Net Income Attributable to Sony Corporation’s Stockholders

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, the net income attributable to Sony Corporation’s stockholders, which excludes net income attributable to noncontrolling interests, was 490.8 billion yen, an increase of 417.5 billion yen year-on-year.

Net income attributable to noncontrolling interests of 56.5 billion yen was recorded, an increase of 2.2 billion yen year-on-year.

Basic net income per share and diluted net income per share, attributable to Sony Corporation’s stockholders for the fiscal year ended March 31, 2018 were 388.32 yen and 379.75 yen, respectively, compared with 58.07 yen and 56.89 yen, respectively, in the fiscal year ended March 31, 2017. Refer to Note 22 of the consolidated financial statements.

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.

 

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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.

Game & Network Services (“G&NS”)

Key Financial Figures

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in millions)  

Sales to external customers by product category

  

Network

     529,318        714,924        1,033,192  

Hardware & Other

     950,457        866,644        815,106  
  

 

 

    

 

 

    

 

 

 

Sales to external customers

     1,479,775        1,581,568        1,848,298  

Intersegment sales

     72,118        68,231        95,514  
  

 

 

    

 

 

    

 

 

 

G&NS segment total sales

     1,551,893        1,649,799        1,943,812  
  

 

 

    

 

 

    

 

 

 

G&NS segment operating income

     88,668        135,553        177,478  
  

 

 

    

 

 

    

 

 

 
     (Units in millions)  

Major product unit sales

  

PS4 hardware

     17.7        20.0        19.0  
  

 

 

    

 

 

    

 

 

 

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, Sales increased 294.0 billion yen year-on-year to 1,943.8 billion yen. This increase was primarily due to an increase in PlayStation®4 (“PS4”) software sales, including sales through the network, the impact of foreign exchange rates, as well as an increase in the number of subscribers for PlayStation®Plus, a paid membership service.

Operating income increased 41.9 billion yen year-on-year to 177.5 billion yen. This increase was primarily due to the above-mentioned increase in sales, partially offset by an increase in selling, general and administrative expenses. During the current fiscal year, there was a 19.8 billion yen positive impact from foreign exchange rate fluctuations.

The operating performance of the G&NS segment for the fiscal year ended March 31, 2018 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, 2019, and Sony intends to expand the network services business during that fiscal year as the PS4 eco-system continues to be in its harvesting period.

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

For the fiscal year ended March 31, 2017, sales increased 97.9 billion yen 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.

 

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Music

Key Financial Figures

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in millions)  

Sales to external customers by product category

  

Recorded Music

     412,718        388,948        446,960  

Music Publishing

     71,258        66,541        74,360  

Visual Media & Platform

     118,588        175,278        263,472  
  

 

 

    

 

 

    

 

 

 

Sales to external customers

     602,564        630,767        784,792  

Intersegment sales

     16,675        16,891        15,203  
  

 

 

    

 

 

    

 

 

 

Music segment total sales

     619,239        647,658        799,995  
  

 

 

    

 

 

    

 

 

 

Music segment operating income

     86,509        75,798        127,786  
  

 

 

    

 

 

    

 

 

 

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, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, sales increased 152.3 billion yen year-on-year to 800.0 billion yen. This significant increase was mainly due to higher Visual Media and Platform sales and higher Recorded Music sales. Visual Media and Platform sales increased due to the continued strong performance of Fate/Grand Order, a game application for mobile devices. Recorded Music sales increased due to a continued increase in digital streaming revenues. Best-selling music titles included P!nk’s Beautiful Trauma, DJ Khaled’s Grateful and Camila Cabello’s Camila.

Operating income increased 52.0 billion yen year-on-year to 127.8 billion yen. This increase was primarily due to the impact of the above-mentioned increase in sales and the above-mentioned gain recorded on the sale of real estate.

The operating performance of the Music segment for the fiscal year ended March 31, 2018 reflected continued growth in the market for recorded music after many years of historical market decline, as the continued development and growth of digital streaming has continued to offset the decreases in physical and digital download revenues. Additionally, the music industry also faces increased margin pressure from higher artist royalty costs, as well as pressure on top line licensing rates with our digital partners. 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, 2019, while also undertaking various measures to maintain the current momentum of Fate/Grand Order and other game applications based on animation titles.

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

For the fiscal year ended March 31, 2017, sales increased 28.4 billion yen year-on-year to 647.7 billion yen, while sales increased significantly year-on-year on a constant currency basis (as described below under “Foreign Exchange Fluctuations and Risk Hedging”). The significant increase in sales on a constant currency basis was due to higher Visual Media and Platform sales and higher Recorded Music sales. 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 absence of the above-mentioned 151 million U.S. dollar (18.1 billion yen) gain that was recorded in the fiscal year ended March 31, 2016 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.

 

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Pictures

Key Financial Figures

 

     Fiscal year ended March 31  
     2016      2017     2018  
     (Yen in millions)  

Sales to external customers by product category

  

Motion Pictures

     447,355        409,363       448,945  

Television Productions

     270,115        271,886       289,024  

Media Networks

     218,357        219,981       272,204  
  

 

 

    

 

 

   

 

 

 

Sales to external customers

     935,827        901,230       1,010,173  

Intersegment sales

     2,315        1,899       894  
  

 

 

    

 

 

   

 

 

 

Pictures segment total sales

     938,142        903,129       1,011,067  
  

 

 

    

 

 

   

 

 

 

Pictures segment operating income (loss)

     38,507        (80,521     41,110  
  

 

 

    

 

 

   

 

 

 

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.”

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, sales increased 107.9 billion yen year-on-year (a 10% increase on a U.S. dollar basis) to 1,011.1 billion yen. The significant increase in sales on a U.S. dollar basis was due to higher sales in Media Networks, Motion Pictures, and Television Productions. Media Networks sales increased primarily due to higher advertising and subscription revenues resulting from the acquisition of TEN Sports Network and improved ratings, both in India. Motion Pictures sales increased due to the strong worldwide theatrical performance of Spider-Man: Homecoming and Jumanji: Welcome to the Jungle, partially offset by lower television licensing revenues for catalog product. Television Productions sales increased due to higher licensing revenues for various U.S. television series including The Goldbergs, The Good Doctor and Philip K. Dick’s Electric Dreams, partially offset by lower television licensing revenues for catalog product.

Operating income of 41.1 billion yen was recorded, compared to an operating loss of 80.5 billion yen in the fiscal year ended March 31, 2017. This significant improvement in operating results was primarily due to the absence of the 962 million U.S. dollars (112.1 billion yen) impairment charge of goodwill recorded in the fiscal year ended March 31, 2017. Operating results also improved due to the above-mentioned increase in sales, partially offset by an operating loss from TEN Sports Network, which was acquired in February 2017.

The operating performance of the Pictures segment in the fiscal year ended March 31, 2018 reflected the following underlying market trends. In the market in which Motion Pictures operates, a larger share of film revenue is concentrated in tent-pole films while demand for packaged physical media continues to decline. In this environment, Sony is working to expand the global appeal of its films, enhance developed and acquired intellectual property and maximize digital distribution revenues. In the market in which Television Productions operates, U.S. networks are continuing to seek 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 this 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, 2019.

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

For the fiscal year ended March 31, 2017, sales decreased 35.0 billion yen 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 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.

 

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Operating loss of 80.5 billion yen was recorded, compared to operating income of 38.5 billion yen in the fiscal year ended March 31, 2016. 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.

Home Entertainment & Sound (“HE&S”)

Key Financial Figures

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in millions)  

Sales to external customers by product category

  

Televisions

     797,764        720,557        861,763  

Audio and Video

     354,946        311,771        357,194  

Other

     2,375        1,887        2,777  
  

 

 

    

 

 

    

 

 

 

Sales to external customers

     1,155,085        1,034,215        1,221,734  

Intersegment sales

     3,957        4,789        999  
  

 

 

    

 

 

    

 

 

 

HE&S segment total sales

     1,159,042        1,039,004        1,222,733  
  

 

 

    

 

 

    

 

 

 

HE&S segment operating income

     50,558        58,504        85,841  
  

 

 

    

 

 

    

 

 

 
     (Units in millions)  

Major product unit sales

  

Televisions

     12.2        12.1        12.4  
  

 

 

    

 

 

    

 

 

 

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, sales increased 183.7 billion yen year-on-year to 1,222.7 billion yen, primarily due to an improvement in the product mix of televisions reflecting a shift to high value-added models, as well as the impact of foreign exchange rates.

Operating income increased 27.3 billion yen year-on-year to 85.8 billion yen. This increase was primarily due to the impact of the above-mentioned increase in sales and the positive impact of foreign exchange rates, partially offset by an increase in research and development, marketing and other expenses.

The operating performance of the HE&S segment for the fiscal year ended March 31, 2018 reflected the relatively stabilized television market and a continued 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 such as 4K OLED televisions, and an enhancement of its marketing initiatives.

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

For the fiscal year ended March 31, 2017, sales decreased 120.0 billion yen 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.

 

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Imaging Products & Solutions (“IP&S”)

Key Financial Figures

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in millions)  

Sales to external customers by product category

        

Still and Video Cameras

     428,777        351,834        415,318  

Other

     248,454        219,665        231,845  
  

 

 

    

 

 

    

 

 

 

Sales to external customers

     677,231        571,499        647,163  

Intersegment sales

     6,724        8,134        8,729  
  

 

 

    

 

 

    

 

 

 

IP&S segment total sales

     683,955        579,633        655,892  
  

 

 

    

 

 

    

 

 

 

IP&S segment operating income

     69,320        47,257        74,924  
  

 

 

    

 

 

    

 

 

 
     (Units in millions)  

Major product unit sales

        

Digital cameras within Still and Video Cameras*

     6.1        4.2        4.4  
  

 

 

    

 

 

    

 

 

 

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

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, sales increased 76.3 billion yen year-on-year to 655.9 billion yen. This significant increase was mainly due to the absence of the impact from the Kumamoto Earthquakes in the previous fiscal year, the impact of foreign exchange rates and an improvement in the product mix of Still and Video Cameras reflecting a shift to high value-added models.

Operating income increased 27.7 billion yen year-on-year to 74.9 billion yen. This significant increase was mainly due to the above-mentioned improvement in product mix, the positive impact of foreign exchange rates and the absence of the impact from the Kumamoto Earthquakes in the previous fiscal year.

The operating performance of the IP&S segment for the fiscal year ended March 31, 2018 reflected shrinking markets for compact digital cameras, consumer video cameras and interchangeable lens cameras. In this environment, Sony continued to strengthen its high value-added products, such as interchangeable lens cameras and lenses, and focus 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, 2019.

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

For the fiscal year ended March 31, 2017, sales decreased 104.3 billion yen 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.

 

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Mobile Communications (“MC”)

Key Financial Figures

 

     Fiscal year ended March 31  
     2016     2017      2018  
     (Yen in millions)  

Sales to external customers

     1,121,925       752,688        713,916  

Intersegment sales

     5,548       6,457        9,826  
  

 

 

   

 

 

    

 

 

 

MC segment total sales

     1,127,473       759,145        723,742  
  

 

 

   

 

 

    

 

 

 

MC segment operating income (loss)

     (61,435     10,164        (27,636
  

 

 

   

 

 

    

 

 

 
     (Units in millions)  

Major product unit sales

       

Smartphones

     24.9       14.6        13.5  

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, sales decreased 35.4 billion yen year-on-year to 723.7 billion yen. This decrease was due to a decrease in smartphone unit sales.

Operating loss of 27.6 billion yen was recorded, compared to operating income of 10.2 billion yen in the fiscal year ended March 31, 2017. This deterioration in operating results was mainly due to a 31.3 billion yen loss recorded as an impairment charge against long-lived assets, the decrease in unit sales and an increase in the price of key components, partially offset by a reduction in operating costs.

The operating performance of the MC segment for the fiscal year ended March 31, 2018 reflected the continued slowing and maturation of the smartphone market on a global scale. In addition, the Japanese carrier market, where Sony sells many premium smartphones due to its brand strength, shrank mainly due to the proliferation of mobile virtual network operators, with which Sony has traditionally not had business relationships. In this environment, Sony continued to focus on increasing smartphone sales in areas outside of Japan, but these efforts were unsuccessful mainly due to fierce competition. As a result, beginning in the fiscal year ending March 31, 2019, Sony intends to reduce the quantity of unprofitable models and stabilize the segment’s operating results by further reducing operating costs and by growing recurring revenue businesses, such as the internet service provider business.

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

For the fiscal year ended March 31, 2017, sales decreased 368.3 billion yen 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.

Semiconductors

Key Financial Figures

 

     Fiscal year ended March 31  
     2016      2017     2018  
     (Yen in millions)  

Sales to external customers

     599,430        659,779       726,892  

Intersegment sales

     139,629        113,344       123,118  
  

 

 

    

 

 

   

 

 

 

Semiconductors segment total sales

     739,059        773,123       850,010  
  

 

 

    

 

 

   

 

 

 

Semiconductors segment operating income (loss)

     14,500        (7,811     164,023  

 

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Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, sales increased 76.9 billion yen year-on-year to 850.0 billion yen. This increase was primarily due to a significant increase in unit sales of image sensors for mobile products, as well as the absence of the impact from the Kumamoto Earthquakes which resulted in a production decrease in the previous fiscal year, partially offset by a significant decrease in sales of camera modules, a business which was downsized.

Operating income of 164.0 billion yen was recorded, compared to operating loss of 7.8 billion yen in the previous fiscal year. This significant improvement in operating results was primarily due to the impact of the above-mentioned increase in sales, the 28.3 billion yen gain resulting from the sale of the entire equity interest in a manufacturing subsidiary in the camera module business, the 8.6 billion yen gain resulting from the sale of manufacturing equipment, as well as the 6.7 billion yen in insurance recoveries related to the Kumamoto Earthquakes. Additionally, in the previous fiscal year, the Semiconductors segment operating results included the above-mentioned 23.9 billion yen impairment charge against long-lived assets relating to camera modules, net charges of 15.4 billion yen in expenses resulting from the Kumamoto Earthquakes and 6.5 billion yen in inventory write-downs of certain image sensors for mobile products.

The operating performance of the Semiconductors segment for the fiscal year ended March 31, 2018 reflected continued growth in demand for image sensors for mobile products, which is currently the most important market for Sony’s image sensors. 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 continued to streamline 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, 2019.

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

For the fiscal year ended March 31, 2017, sales increased 34.1 billion yen 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.

Operating loss of 7.8 billion yen was recorded, compared to operating income of 14.5 billion yen in the fiscal year ended March 31, 2016. 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.

Electronics*

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

Inventory

 

     Fiscal year ended March 31  
     2017      2018  
     (Yen in billions)  

Game & Network Service

     81.7        74.0  

Home Entertainment & Sound

     114.1        121.3  

Imaging Products & Solutions

     62.9        75.6  

Mobile Communications

     79.5        78.7  

Semiconductors

     203.6        240.9  
  

 

 

    

 

 

 

Electronics Total

     541.8        590.5  
  

 

 

    

 

 

 

 

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Sales to External Customers by Geographic Area

 

     Fiscal year ended March 31  
     2016     2017     2018  

Japan

     18.1     20.1     18.1

United States

     20.9     22.4     22.4

Europe

     28.0     26.4     26.5

China

     8.7     10.1     11.4

Asia-Pacific (other than Japan and China)

     14.9     14.6     15.3

Other

     9.4     6.4     6.3
  

 

 

   

 

 

   

 

 

 

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  
     2017     2018  

In-house production

     63     63

Outsourced production

     37     37
  

 

 

   

 

 

 

Electronics total

     100     100
  

 

 

   

 

 

 

Breakdown of in-house production by geographic regions*

 

     Fiscal year ended March 31  
     2017     2018  

Japan

     44% (88%     43% (89%

China

     33% (74%     20% (62%

Asia-Pacific (other than Japan and China)

     22% (56%     34% (66%

Americas and Europe

     2% (less than 5%     3% (20%
  

 

 

   

 

 

 

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%.

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.

Key Financial Figures

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in millions)  

Financial services revenue

     1,073,069        1,087,504        1,228,377  
  

 

 

    

 

 

    

 

 

 

Financial Services segment operating income

     156,543        166,424        178,947  

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

For the fiscal year ended March 31, 2018, financial services revenue increased 140.9 billion yen year-on-year to 1,228.4 billion yen. This was primarily due to an increase in revenue at Sony Life. Revenue at Sony Life increased 128.0 billion yen year-on-year to 1,093.6 billion yen, primarily due to higher insurance premium revenue reflecting an increase in the policy amount in force.

 

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Operating income increased 12.5 billion yen year-on-year to 178.9 billion yen primarily due to an increase in operating income at Sony Life and a decrease of equity in net loss of affiliated companies. Operating income at Sony Life increased 4.8 billion yen year-on-year to 159.1 billion yen, mainly due to a gain recorded on the sale of real estate held for investment purposes in the general account, as well as an improvement in net gains and losses on derivative transactions to hedge market risk pertaining to minimum guarantees for variable life insurance. These increases were partially offset by a year-on-year increase in amortization of deferred insurance acquisition costs, primarily driven by a decrease in interest rates in the current fiscal year compared to an increase in interest rates in the previous fiscal year.

The operating performance of the Financial Services segment for the fiscal year ended March 31, 2018 reflected the circumstances in the Japanese economy, bond market and foreign exchange market. The Japanese economy continued to recover, as global demand for information technology products continued and a stable recovery in the Japanese employment situation fueled domestic demand. However, early 2018 was marked by a growing sense of uncertainty regarding the overseas political and economic situation, causing instability in the financial markets with the yen appreciating and stock prices falling. Between April 2017 and September 2017, such factors as political uncertainty and geopolitical risk pushed down Japanese government bond (“JGB”) yields. On the other hand, since October 2017, debates on tax reform in the United States prompted a rise in U.S. government bond yields, which rippled outward to affect JGB yields. Furthermore, with crude oil prices beginning to trend upward, Japan’s core consumer price index increased, spurring expectations among market participants that the Bank of Japan (“BOJ”) would lift the 10-year interest rate target defined in its “quantitative and qualitative monetary easing with long- and short-term interest rate controls.” However, as this situation prompted yen appreciation, the BOJ engaged in fixed-rate buying operations to curtail the rise in JGB yields, thereby indicating its stance toward continuing current levels of monetary easing. Although Sony expects the current environment to continue in the fiscal year ending March 31, 2019, 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, 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.

Information on Operations Separating Out the Financial Services Segment

The following schedules show unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services. These presentations are not in accordance with U.S. GAAP, which is used by Sony to prepare its consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and Sony without the Financial Services segment, including noncontrolling interests, are included in those respective presentations, then eliminated in the consolidated figures shown below.

 

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     Fiscal year ended March 31  
        Financial Services segment    2016     2017     2018  
     (Yen in millions)  

Financial services revenue

     1,073,069       1,087,504       1,228,377  

Financial services expenses

     914,508       917,365       1,049,305  

Other operating expenses, net

     1,373       114       64  
  

 

 

   

 

 

   

 

 

 
     915,881       917,479       1,049,369  

Equity in net loss of affiliated companies

     (645     (3,601     (61
  

 

 

   

 

 

   

 

 

 

Operating income

     156,543       166,424       178,947  

Other income (expenses), net

                  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     156,543       166,424       178,947  

Income taxes

     37,689       47,604       51,825  
  

 

 

   

 

 

   

 

 

 

Net income

     118,854       118,820       127,122  

Less — Net income attributable to noncontrolling interests

     52       107       201  
  

 

 

   

 

 

   

 

 

 

Net income of Financial Services

     118,802       118,713       126,921  
  

 

 

   

 

 

   

 

 

 
     Fiscal year ended March 31  
        Sony without Financial Services segment    2016     2017     2018  
     (Yen in millions)  

Net sales and operating revenue

      7,044,415       6,527,499       7,329,755  

Costs of sales

     5,176,143       4,761,541       5,199,748  

Selling, general and administrative

     1,687,715       1,501,957       1,578,716  

Other operating expense, net

     45,793       148,887       4,008  
  

 

 

   

 

 

   

 

 

 
     6,909,651       6,412,385       6,782,472  

Equity in net income of affiliated companies

     2,883       7,164       8,630  
  

 

 

   

 

 

   

 

 

 

Operating income

     137,647       122,278       555,913  

Other income (expenses), net

     20,755       (22,728     (20,738
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     158,402       99,550       535,175  

Income taxes

     57,101       76,454       99,945  
  

 

 

   

 

 

   

 

 

 

Net income

     101,301       23,096       435,230  

Less — Net income attributable to noncontrolling interests

     14,350       8,502       9,311  
  

 

 

   

 

 

   

 

 

 

Net income of Sony without Financial Services

     86,951       14,594       425,919  
  

 

 

   

 

 

   

 

 

 
     Fiscal year ended March 31  
        Consolidated    2016     2017     2018  
     (Yen in millions)  

Financial services revenue

     1,066,319       1,080,284       1,221,235  

Net sales and operating revenue

     7,039,393       6,522,966       7,322,747  
  

 

 

   

 

 

   

 

 

 
     8,105,712       7,603,250       8,543,982  

Costs of sales

     5,166,894       4,753,010       5,188,259  

Selling, general and administrative

     1,691,930       1,505,956       1,583,197  

Financial services expenses

     907,758       910,144       1,042,163  

Other operating expenses

     47,171       149,001       4,072  
  

 

 

   

 

 

   

 

 

 
     7,813,753       7,318,111       7,817,691  

Equity in net income of affiliated companies

     2,238       3,563       8,569  
  

 

 

   

 

 

   

 

 

 

Operating income

     294,197       288,702       734,860  

Other income (expenses), net

     10,307       (37,083     (35,811
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     304,504       251,619       699,049  

Income taxes

     94,789       124,058       151,770  
  

 

 

   

 

 

   

 

 

 

Net income

     209,715       127,561       547,279  

Less — Net income attributable to noncontrolling interests

     61,924       54,272       56,485  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Sony Corporation’s Stockholders

     147,791       73,289       490,794  
  

 

 

   

 

 

   

 

 

 

 

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All Other

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

Sales for the fiscal year ended March 31, 2018 decreased 43.3 billion yen year-on-year to 407.2 billion yen. This decrease in sales was primarily due to a decrease in sales in the battery business.

Operating loss for the fiscal year ended March 31, 2018 decreased 6.1 billion yen year-on-year to 23.5 billion yen. This decrease was primarily due to the absence of a 42.3 billion yen impairment charge related to the transfer of the battery business recorded in the previous fiscal year, partially offset by the absence of a gain of 37.2 billion yen from the sale of certain shares of M3 recorded in the previous fiscal year.

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

Sales for the fiscal year ended March 31, 2017 decreased 89.7 billion yen year-on-year to 450.5 billion yen. This significant decrease in sales was primarily due to the impact of foreign rates and a decrease in sales in the battery business, as well as the disc manufacturing business resulting from the contraction of the market.

Operating loss for the fiscal year ended March 31, 2017 decreased 11.7 billion yen year-on-year to 29.6 billion yen. This decrease was primarily due to the absence of the 30.6 billion yen impairment charge related to long-lived assets of the battery business recorded in the fiscal year ended March 31, 2016 and the above-mentioned gain from the sale of certain shares of M3, partially offset by an impairment charge related to the planned transfer of the battery business and the impact of the above-mentioned decrease in sales.

Restructuring

In a highly competitive landscape, Sony has continued to make efforts to revitalize its Electronics businesses and has undertaken a number of restructuring initiatives including exiting businesses or product categories, headcount reduction programs, and streamlining of its sales and administrative functions. For example, during the fiscal year ended March 31, 2018, Sony transferred its battery business to the Murata Manufacturing Co., Ltd. Group. In accordance with the transfer, 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) in the fiscal year ended March 31, 2017. In an effort to optimize the organization and improve the performance of its businesses, Sony implemented a number of restructuring initiatives, primarily within the Music segment, targeting effectiveness and cost reduction in the fiscal year ended March 31, 2018.

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, 2016, 2017 and 2018. For further details, refer to Note 19 of the consolidated financial statements.

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in millions)  

Restructuring charges

     38,259        60,215        22,405  

Foreign Exchange Fluctuations and Risk Hedging

Fiscal year ended March 31, 2018 compared to fiscal year ended March 31, 2017:

During the fiscal year ended March 31, 2018, the average rates of the yen were 110.9 yen against the U.S. dollar and 129.7 yen against the euro, which were 2.5 yen and 10.9 yen lower, respectively, than the fiscal year ended March 31, 2017. 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, 2018, consolidated sales increased 940.7 billion yen (12%) year-on-year to 8,544.0 billion yen. On a constant currency basis, sales increased approximately 9% year-on-year.

Consolidated operating income increased 446.2 billion yen year-on-year to 734.9 billion yen. The foreign exchange fluctuations had a positive impact on the consolidated operating results mainly in Electronics.

 

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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 11.7 yen and 13.8 yen 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 502.4 billion yen (6.2%) year-on-year to 7,603.3 billion yen. On a constant currency basis, sales were essentially flat year-on-year.

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.

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
 
          2016     2017     2018     2016 to 2017      2017 to 2018  
          (Yen in billions)  

G&NS

   Sales      1,551.9       1,649.8       1,943.8       -144.2        +82.5  
   Operating income      88.7       135.6       177.5       -2.2        +19.8  

HE&S

   Sales      1,159.0       1,039.0       1,222.7       -111.3        +56.4  
   Operating income      50.6       58.5       85.8       -13.4        +22.8  

IP&S

   Sales      684.0       579.6       655.9       -55.1        +22.9  
   Operating income      69.3       47.3       74.9       -26.5        +11.6  

MC

   Sales      1,127.5       759.1       723.7       -37.8        +16.1  
   Operating income (loss)      (61.4     10.2       (27.6     +26.1        -5.3  

Semiconductors

   Sales      739.1       773.1       850.0       -76.3        +20.8  
   Operating income (loss)      14.5       (7.8     164.0       -43.7        +11.7  

During the fiscal year ended March 31, 2018, sales for the Music segment increased 24% year-on-year to 800.0 billion yen, while sales increased approximately 22% year-on-year on a constant currency basis. In the Pictures segment, sales increased 12% year-on-year to 1,011.1 billion yen, while sales increased approximately 10% on a U.S. dollar basis. During the fiscal year ended March 31, 2017, sales for the Music segment increased 4.6% year-on-year to 647.7 billion yen, while sales increased approximately 11% year-on-year on a constant currency basis. In the Pictures segment, sales decreased 3.7% year-on-year to 903.1 billion yen, while sales increased approximately 5% on a U.S. dollar basis. For a detailed analysis of segment performance, refer to the Music and Pictures 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, 2018, Sony estimated that a one yen appreciation against the U.S. dollar would have decreased Electronics sales by approximately 21 billion yen, with an increase in operating income of approximately 3.5 billion yen. A one yen appreciation against the euro was estimated to decrease Electronics sales by approximately 9.5 billion yen, with a corresponding decrease in operating income of approximately 5.5 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 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 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 IP&S segment, there is a relatively high proportion of costs in yen, while a large proportion of sales is in emerging markets; therefore, yen appreciation against the currencies of emerging markets, particularly the Chinese yuan, has a negative impact on operating income. 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 Semiconductors segment, a

 

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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 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’s transactions and accounts receivable and payable denominated in foreign currencies.

Sony Global Treasury Services Plc (“SGTS”) in the U.K. 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, 2017 and 2018 was 2,567.7 billion yen and 2,420.6 billion yen, respectively. The net fair value of all the foreign exchange derivative contracts as of March 31, 2017 and 2018 was an asset of 9.4 billion yen and 15.2 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 previous fiscal year from the current fiscal year to the major transactional currencies in which the sales are denominated. The impact of foreign exchange rate fluctuations on operating income (loss) 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, 2016 and 2017 to local currency-denominated monthly sales in the fiscal years ended March 31, 2017 and 2018, respectively. For Sony Music Entertainment and Sony/ATV Music Publishing in the Music segment, and in the Pictures segment, the constant currency amounts are calculated by applying the monthly average U.S. dollar / yen exchange rates 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 schedules show unaudited condensed balance sheets for the Financial Services segment and all other segments excluding Financial Services. These presentations are not in accordance with U.S. GAAP, which is used by Sony to prepare its consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and Sony without the Financial Services segment, including noncontrolling interests, are included in those respective presentations, then eliminated in the consolidated figures shown below.

 

    Financial Services     Sony without
Financial Services
    Consolidated  
    March 31
2017
    March 31
2018
    March 31
2017
    March 31
2018
    March 31
2017
    March 31
2018
 
    (Yen in millions)  

Assets

           

Current assets:

           

Cash and cash equivalents (*1)

    268,382       393,133       691,760       1,193,196       960,142       1,586,329  

Marketable securities (*2)

    1,051,441       1,176,601                   1,051,441       1,176,601  

Notes and accounts receivable, trade

    10,931       15,612       947,602       1,003,558       953,811       1,012,779  

Inventories

                640,835       692,937       640,835       692,937  

Other receivables

    56,807       60,819       167,127       130,393       223,632       190,706  

Prepaid expenses and other current assets

    112,085       137,539       414,420       379,893       525,861       516,744  
 

 

 

   

 

 

   

 

 

 

Total current assets

    1,499,646       1,783,704       2,861,744       3,399,977       4,355,722       5,176,096  
 

 

 

   

 

 

   

 

 

 

Film costs

                336,928       327,645       336,928       327,645  

Investments and advances (*3)

    9,904,576       10,560,933       285,965       272,545       10,111,793       10,756,058  

Investments in Financial Services, at cost

                133,514       133,514              

Property, plant and equipment

    21,323       22,424       735,590       715,760       758,199       739,470  

Other assets:

           

Intangibles, net

    30,643       34,622       553,542       492,546       584,185       527,168  

Goodwill

    2,375       7,225       520,163       523,267       522,538       530,492  

Deferred insurance acquisition costs

    568,837       586,670                   568,837       586,670  

Deferred income taxes

    1,868       1,684       97,090       95,088       98,958       96,772  

Other

    34,607       33,267       292,529       295,650       323,396       325,167  
 

 

 

   

 

 

   

 

 

 

Total other assets

    638,330       663,468       1,463,324       1,406,551       2,097,914       2,066,269  

 

   

 

 

   

 

 

 

Total assets

    12,063,875       13,030,529       5,817,065       6,255,992       17,660,556       19,065,538  

 

   

 

 

   

 

 

 

 

Liabilities and Equity

           

Current liabilities:

           

Short-term borrowings (*4)

    411,643       433,119       106,437       288,496       518,079       721,615  

Notes and accounts payable, trade

                539,900       468,550       539,900       468,550  

Accounts payable, other and accrued expenses

    31,486       37,479       1,364,042       1,477,875       1,394,758       1,514,433  

Accrued income and other taxes

    13,512       19,401       92,525       126,504       106,037       145,905  

Deposits from customers in the banking business

    2,071,091       2,159,246                   2,071,091       2,159,246  

Other

    173,853       181,467       422,916       435,996       591,874       610,792  
 

 

 

   

 

 

   

 

 

 

Total current liabilities

    2,701,585       2,830,712       2,525,820       2,797,421       5,221,739       5,620,541  
 

 

 

   

 

 

   

 

 

 

Long-term debt (*4)

    75,511       205,373       609,692       421,817       681,462       623,451  

Accrued pension and severance costs

    31,289       33,062       365,427       361,442       396,715       394,504  

Deferred income taxes

    317,043       342,405       115,781       107,458       432,824       449,863  

Future insurance policy benefits and other (*5)

    4,834,492       5,221,772                   4,834,492       5,221,772  

Policyholders’ account in the insurance business

    2,631,073       2,820,702                   2,631,073       2,820,702  

Other

    21,825       17,778       317,980       284,270       314,771       278,338  
 

 

 

   

 

 

   

 

 

 

Total liabilities

    10,612,818       11,471,804       3,934,700       3,972,408       14,513,076       15,409,171  
 

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interest

                12,058       9,210       12,058       9,210  

Equity:

           

Stockholders’ equity of Financial Services

    1,449,605       1,557,062                          

Stockholders’ equity of Sony without Financial Services

                1,770,632       2,173,128              

Sony Corporation’s stockholders’ equity

                            2,497,246       2,967,366  

Noncontrolling interests

    1,452       1,663       99,675       101,246       638,176       679,791  
 

 

 

   

 

 

   

 

 

 

Total Equity

    1,451,057       1,558,725       1,870,307       2,274,374       3,135,422       3,647,157  

 

   

 

 

   

 

 

 

Total liabilities and equity

    12,063,875       13,030,529       5,817,065       6,255,992       17,660,556       19,065,538  

 

 

 

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*1 Refer to Cash Flow section below for details regarding the year-on-year increases in cash and cash equivalents as of March 31, 2018 in the Financial Services segment and for all segments excluding Financial Services segment.

*2 Marketable securities as of March 31, 2018 in the Financial Services segment increased year-on-year due to increases in the amount of marketable securities mainly at Sony Life.

*3 Investments and advances as of March 31, 2018 in the Financial Services segment increased year-on-year due to increases in investments and advances mainly at Sony Life.

*4 In all segments excluding the Financial Services segment, short-term borrowings as of March 31, 2018 increased year-on-year while long-term debt decreased year-on-year. These changes were mainly due to conversions from long-term debt to short-term borrowings for long-term debts whose repayment terms had become shorter than one year. In the Financial Services segment, long-term debt increased year-on-year due to an increase in long-term debt mainly at Sony Bank.

*5 Future insurance policy benefits and others as of March 31, 2018 in the Financial Services segment increased year-on-year due to an increase in future insurance policy benefits mainly at Sony Life.

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, 2018  
     Cost      Unrealized
gain
     Unrealized
loss
    Fair
market
value
 
     (Yen in millions)  

Financial Services Business:

          

Available-for-sale

          

Debt securities

          

Sony Life

     1,299,105        190,736        (4,202     1,485,639  

Sony Bank

     669,317        4,223        (1,185     672,355  

Other

     63,181        94        (28     63,247  

Equity securities

          

Sony Life

     25,459        17,196        (264     42,391  

Sony Bank

                          

Other

     413        2,611              3,024  

Held-to-maturity

          

Debt securities

          

Sony Life

     6,463,675        1,643,497        (56,528     8,050,644  

Sony Bank

     200        1              201  

Other

     79,079        17,186        (322     95,943  

Total Financial Services

     8,600,429        1,875,544        (62,529     10,413,444  

Non-Financial Services:

          

Available-for-sale securities

     29,804        51,916        (512     81,208  

Held-to-maturity securities

                          

Total Non-Financial Services

     29,804        51,916        (512     81,208  

Consolidated

     8,630,233        1,927,460        (63,041     10,494,652  

At March 31, 2018, Sony Life had debt and equity securities with gross unrealized losses of 61.0 billion yen. Of the unrealized loss, 94.7% related to securities in an unrealized loss position for periods greater than 12 months at March 31, 2018. 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, 2018, Sony Bank had debt securities with gross unrealized losses of 1.2 billion yen. Of the unrealized loss, 93.2% related to securities in an unrealized loss position for periods greater than 12 months at March 31, 2018. 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.

 

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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, 2018 (60.7 billion yen), maturity dates vary as follows:

 

• Within 1 year:

      

• 1 to 5 years:

      

• 5 to 10 years:

      

• above 10 years:

     100.0

For fixed maturity securities with unrecognized losses held by Sony Bank as of March 31, 2018 (1.2 billion yen), maturity dates vary as follows:

 

• Within 1 year:

     15.1

• 1 to 5 years:

     65.1

• 5 to 10 years:

     1.9

• above 10 years:

     17.9

For the fiscal years ended March 31, 2016, 2017 and 2018, Sony Life recorded net realized gains on available-for-sale securities of 19.3 billion yen, 1.3 billion yen and 0 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, 2018 was 52.4 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, 2016, 2017 and 2018, total realized impairment losses were 3.6 billion yen, 7.6 billion yen and 5.2 billion yen, respectively, of which 0.1 billion yen, 0.05 billion yen and 0.2 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, 2018, 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, 2018 compared to fiscal year ended March 31, 2017:

Operating Activities: During the fiscal year ended March 31, 2018, there was a net cash inflow of 1,255.0 billion yen from operating activities, an increase of 445.7 billion yen year-on-year.

 

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For all segments excluding the Financial Services segment, there was a net cash inflow of 771.7 billion yen, an increase of 325.9 billion yen 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 an increase in accrued expenses in other current liabilities.

The Financial Services segment had a net cash inflow of 498.6 billion yen, an increase of 122.4 billion yen 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, 2018, Sony used 822.2 billion yen of net cash in investing activities, a decrease of 431.8 billion yen year-on-year.

For all segments excluding the Financial Services segment, there was a net cash outflow of 163.1 billion yen, a decrease of 136.3 billion yen year-on-year. This decrease was mainly due to a decrease in payments for fixed asset purchases such as semiconductor manufacturing equipment, as well as a year-on-year increase in cash proceeds from the sales of fixed assets and businesses, such as the battery business.

The Financial Services segment used 659.3 billion yen of net cash, a decrease of 293.9 billion yen year-on-year. This decrease was mainly due to a year-on-year decrease in payments for investments and advances at Sony Life and Sony Bank.

In all segments excluding the Financial Services segment, net cash generated in operating and investing activities combined* for the fiscal year ended March 31, 2018 was 608.6 billion yen, a year-on-year increase of 462.2 billion yen.

Financing Activities: Net cash provided by financing activities during the fiscal year ended March 31, 2018, was 246.5 billion yen, a decrease of 205.8 billion yen year-on-year.

For all segments excluding the Financial Services segment, there was a 54.1 billion yen net cash outflow, a decrease of 119.3 billion yen year-on-year. This decrease was mainly due to a year-on-year decrease in the repayment of long-term debt, as well as the absence of the payment for the purchase of Sony/ATV shares from the Estate in the fiscal year ended March 31, 2017. On the other hand, during the fiscal year ended March 31, 2017, Sony raised capital from the issuance of straight bonds.

In the Financial Services segment, there was a 285.4 billion yen net cash inflow, a decrease of 326.2 billion yen year-on-year. This decrease was primarily due to a decrease in short-term borrowings at Sony Life.

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, 2018 was 1,586.3 billion yen. Cash and cash equivalents of all segments excluding the Financial Services segment was 1,193.2 billion yen at March 31, 2018, an increase of 501.4 billion yen compared with the balance as of March 31, 2017. Within the Financial Services segment, the outstanding balance of cash and cash equivalents was 393.1 billion yen at March 31, 2018, an increase of 124.8 billion yen compared with the balance as of March 31, 2017.

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 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 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 fiscal year ended March 31, 2016.

The Financial Services segment had a net cash inflow of 376.2 billion yen, a decrease of 119.1 billion yen 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 year-on-year.

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 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 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.

 

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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 fiscal year ended March 31, 2016.

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 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 fiscal year ended March 31, 2016. 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 fiscal year ended March 31, 2016, 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 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 compared with the balance as of March 31, 2016. 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 compared with the balance as of March 31, 2016.

* 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  
    2016     2017     2018  
    (Yen in billions)  

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

    749.1       809.3       1,255.0  

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

    (1,030.4     (1,254.0     (822.2
 

 

 

   

 

 

   

 

 

 

(1)

    (281.3     (444.7     432.8  

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

    495.3       376.2       498.6  

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

    (694.0     (953.2     (659.3

Eliminations**(4)

    10.5       14.1       15.1  
 

 

 

   

 

 

   

 

 

 

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

    (72.1     146.3       608.6  
 

 

 

   

 

 

   

 

 

 

** Eliminations primarily consist of intersegment dividend payments

 

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Information on Cash Flows Separating Out the Financial Services Segment

The following schedules show unaudited condensed statements of cash flows for the Financial Services segment and all other segments excluding Financial Services. These presentations are not in accordance with U.S. GAAP, which is used by Sony to prepare its consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and Sony without 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     Sony without
Financial Services
    Consolidated  
    2016     2017     2018     2016     2017     2018     2016     2017     2018  
    (Yen in millions)  

Cash flows from operating activities:

                 

Net income (loss)

    118,854       118,820       127,122       101,301       23,096       435,230       209,715       127,561       547,279  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

                 

Depreciation and amortization, including amortization of deferred insurance acquisition costs

    102,270       47,056       79,843       294,821       279,992       281,601       397,091       327,048       361,444  

Amortization of film costs

                      299,587       297,505       359,274       299,587       297,505       359,274  

Other operating (income) expense, net

    1,373       114       64       45,793       148,887       4,008       47,171       149,001       4,072  

(Gain) loss on sale or devaluation of securities investments, net

    2,653       47       220       (48,857     7,404       3,438       (46,204     7,451       3,658  

(Gain) loss on revaluation of marketable securities held for trading purposes, net

    44,821       (55,789     (47,339                       44,821       (55,789     (47,339

Changes in assets and liabilities:

                 

(Increase) decrease in notes and accounts receivable, trade

    (2,478     (1,163     (3,880     (6,080     (37,148     (77,793     (5,828     (37,529     (80,004

(Increase) decrease in inventories

                      (57,804     11,199       (51,508     (57,804     11,199       (51,508

(Increase) decrease in film costs

                      (318,391     (331,179     (362,496     (318,391     (331,179     (362,496

Increase (decrease) in notes and accounts payable, trade

                      (49,525     (1,386     (87,939     (49,525     (1,386     (87,939

Increase (decrease) in future insurance policy benefits and other

    403,392       433,803       495,419                         403,392       433,803       495,419  

(Increase) decrease in deferred insurance acquisition costs

    (83,774     (93,234     (86,779                       (83,774     (93,234     (86,779

(Increase) decrease in marketable securities held for trading purposes

    (107,433     (81,456     (89,797                       (107,433     (81,456     (89,797

Other

    15,605       8,031       23,714       1,938       47,400       267,836       16,271       56,267       289,688  

 

 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    495,283       376,229       498,587       262,783       445,770       771,651       749,089       809,262       1,254,972  

 

 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

                 

Payments for purchases of fixed assets

    (8,495     (12,296     (13,386     (366,916     (321,200     (249,770     (375,411     (333,509     (262,989

Payments for investments and advances

    (1,219,623     (1,232,059     (963,210     (20,831     (17,106     (13,801     (1,241,923     (1,250,498     (977,011

Proceeds from sales or return of investments and collections of advances

    534,072       289,901       317,159       81,535       16,078       6,596       615,607       305,979       323,755  

Other

    15       1,262       162       (28,688     22,793       93,887       (28,676     24,055       94,048  

 

 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    (694,031     (953,192     (659,275     (334,900     (299,435     (163,088     (1,030,403     (1,253,973     (822,197

 

 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

                 

Increase (decrease) in borrowings, net

    76,841       358,010       140,055       (236,289     (46,516     (24,379     (159,440     311,223       115,676  

Increase (decrease) in deposits from customers, net

    165,169       277,152       169,479                         165,169       277,152       169,479  

Dividends paid

    (17,400     (23,926     (23,921     (12,751     (25,301     (28,490     (12,751     (25,301     (28,490

Other

    312       408       (174     393,791       (101,608     (1,214     387,144       (110,772     (10,209

 

 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    224,922       611,644       285,439       144,751       (173,425     (54,083     380,122       452,302       246,456  

 

 

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                      (64,609     (31,061     (53,044     (64,609     (31,061     (53,044

 

 

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    26,174       34,681       124,751       8,025       (58,151     501,436       34,199       (23,470     626,187  

Cash and cash equivalents at beginning of the fiscal year

    207,527       233,701       268,382       741,886       749,911       691,760       949,413       983,612       960,142  

 

 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the fiscal year

    233,701       268,382       393,133       749,911       691,760       1,193,196       983,612       960,142       1,586,329  

 

 

 

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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 and So-net Media Networks Corporation, which secure liquidity on their 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.

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. Although the borrowing limits under the CP program, translated into yen, were 8,187 billion yen in total for Sony Corporation and SGTS as of March 31, 2018, there were no amounts outstanding under the CP programs as of and during the fiscal year ended March 31, 2017. On April 10, 2018, Sony Capital Corporation (“SCC”), a subsidiary in the U.S., established a 2 billion U.S. dollar CP program for the purpose of flexibly securing short-term working capital in the U.S.

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 459.4 billion yen in unused committed lines of credit, as of March 31, 2018. Details of those committed lines of credit are: a 300.0 billion yen committed line of credit contracted with a syndicate of Japanese banks and a 1.5 billion U.S. dollar multi-currency committed line of credit also with a syndicate of Japanese banks. The above-mentioned 300.0 billion yen committed line with a syndicate of Japanese banks was renewed as of April 2, 2018, will remain in effect until July 2020 and was decreased to 275.0 billion yen. The above-mentioned 1.5 billion U.S. dollar committed line with a syndicate of Japanese banks was renewed as of April 2, 2018, will remain in effect until December 2023 and was increased to 1.7 billion U.S. dollars. In addition, a 525 million U.S. dollar multi-currency committed line of credit contracted with a syndicate of foreign banks expired at the end of March 2018, was renewed as of April 2, 2018 and will remain in effect until March 2020. In all of the above-mentioned committed lines, Sony Corporation and SGTS are defined as borrowers. In the above-mentioned multi-currency committed line with a syndicate of Japanese banks, SCC was also defined as a borrower as of April 2, 2018. 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.

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.

 

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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.

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 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 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 mainly 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

Through the key themes of KANDO—to move people emotionally—and “getting closer to people,” Sony plans to continue to conduct R&D based on the spirit of innovation and challenge detailed in its Founding Prospectus. While continuing its R&D efforts to enhance product strength for Branded Hardware, comprised of the HE&S, IP&S and MC segments that bear the Sony brand, Sony will also strive to expand the G&NS ecosystem, which combines hardware and network services, and to expand the use of technology in B2B areas such as entertainment and Financial Services. In the Semiconductors segment, Sony plans to strengthen its sensing technology through continued R&D efforts.

Sony has engaged in the 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 realigned 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.

 

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R&D costs for the fiscal year ended March 31, 2018 increased by 11.0 billion yen to 458.5 billion yen. The ratio of R&D expense to total revenue excluding Financial Services was 6.3% compared to 6.9% in the previous fiscal year.

The following table includes R&D expenses in the fiscal years ended March 31, 2016, 2017, and 2018.

 

     Fiscal year ended March 31  
     2016      2017      2018  
     (Yen in billions)  

R&D expenses

        

Game & Network Services

     91.9        95.6        106.2  

Home Entertainment & Sound

     44.8        47.3        58.0  

Imaging Products & Solutions

     61.5        58.6        58.6  

Mobile Communications

     78.1        54.9        55.4  

Semiconductors

     120.4        117.6        107.2  

Corporate R&D

     31.3        44.4        44.9  

Total

     468.2        447.5        458.5  

Consolidated R&D costs for the fiscal year ending March 31, 2019 are expected to increase to 470 billion yen.

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.

 

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

The global economy has recovered, supported by the economies of emerging markets such as China. Advanced economies have benefited from consumer spending bolstered by improvements in employment and income, and are gradually recovering as a whole. On the other hand, 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 May 22, 2018, Sony unveiled a corporate direction and mid-term strategy (“third mid-range plan”) that charts the path forward for Sony over the next three years, starting with the fiscal year ending March 31, 2019 and finishing with the fiscal year ending March 31, 2021. Through the key themes of KANDO — to move people emotionally — and “getting closer to people,” Sony will aim to sustainably generate societal value and high profitability across its three primary business areas of Electronics, entertainment, and Financial Services. It will pursue this strategy based on the following basic principles.

Overall Strategy

 

    Reinforce Sony’s user-oriented Direct to Consumer services and its creator-oriented content IP, and create “Communities of Interest” that bring together people who share similar emotional values and experiences.

 

    Position Branded Hardware, which allows Sony to connect users and creators through its innovative video and audio technologies, as a sustainable and consistent cash flow generating business.

 

    In the area of CMOS image sensors that capture the real world in which we all live, and are vital to KANDO content creation, aim to maintain Sony’s global number one position in imaging applications, and become the global leader in sensing.

 

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Initiatives of each Business Segment

<Game & Network Services>

 

    The business of the G&NS segment is about being connected with both users as well as creators with PlayStation®4 as its core, and the basic strategy is to further expand PlayStationTMNetwork (“PSN”), which has now become one of the world’s leading network services with annual sales of more than one trillion yen and monthly active users of more than 80 million. Specifically, Sony aims to grow subscribers to the PlayStation®Plus service, and increase user engagement with PSN as measured by login frequency and time spent on the platform, by having more people use its products and services such as PlayStation®VR, the cloud gaming service PlayStationTMNow, the video services PlayStationTMVue and PlayStationTMVideo, and the music service PlayStationTMMusic. Sony will also aim to strengthen its content IP by creating and utilizing IP for in-house production titles and harnessing growth opportunities in areas such as add-on content.

<Music>

 

    The basic strategy for the Music segment is to strengthen Sony’s music content IP. In order to maximize the business opportunities from the continuing growth of the streaming market, Sony will seek to reinforce the quality and quantity of its content IP catalog, while also discovering and nurturing new artists to generate new IP.

 

    In addition to music IP, Sony’s animation IP is another vital part of this segment, and Sony will continue to build these assets going forward.

<Pictures>

 

    The basic strategy for the Pictures segment is to strengthen and leverage Sony’s IP while also expanding the Media Networks business, particularly in India, in order to continue to enhance profitability.

<Branded Hardware>

 

    Sony will aim to position Branded Hardware as a sustainable and consistent cash flow generating business that enables continued investment in Sony Group’s growth. In the fiscal year ended March 31, 2018, Branded Hardware was the driving force behind Sony’s record profits, and from the fiscal year ending March 31, 2019 to the fiscal year ending March 31, 2021, it is expected to be the business which generates the most stable cash flow. In this area, Sony will continue its policy of targeting profitability and the premium market rather than unnecessarily pursuing volume.

 

    In addition, Sony will leverage the technologies cultivated in Branded Hardware to support long-term initiatives in areas such as medical products and AI x Robotics.

<Semiconductors>

 

    CMOS image sensors are key component devices in growth industries such as the internet of things, artificial intelligence, autonomous vehicles, and more. Sony’s competitive strength in this area is based on its wealth of technological expertise in analog semiconductors, cultivated over many years from the charge-coupled device (CCD) era. Sony aims to maintain its global number one position in imaging and, in the longer term, become number one in sensing applications. To this end, Sony will extend its development of sensing applications beyond the area of smartphones, into new domains such as automotive use.

<Financial Services>

 

    The Financial Services segment, which continues to generate a high level of revenue and provide a stable source of profit for the Sony Group, is a business with direct and very close ties to customers. Through FinTech (financial services that utilize information technology), Sony will aim to position itself even closer to customers.

Sony’s Long-term Vision and Creating Social Value

 

    In addition to creating economic value as a company, Sony must also be managed with a view toward creating social value, including the natural environment of the Earth.

 

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    With its mission of KANDO, Sony will aim to create social value by giving people a sense of enrichment through the creation of a Community of Interest.

 

    At the same time, based on the recognition that Sony’s business only exists because of its natural environment and society, Sony will continue to promote environmental and human rights initiatives, from a long-term perspective, across all levels of its supply chain.

 

    Furthermore, based on its desire to contribute to safety in the self-driving car era, Sony will work to further develop its imaging and sensing technologies.

 

    Sony also intends to make a broader contribution to education (e.g., by nurturing creators, providing educational tools that enable children to learn about programming, and incubating businesses).

Third Mid-Range Plan — Financial Targets

 

    In order to transition management of Sony’s operations to a more long-term perspective, key performance indicators are being set as a total for the next three-year period.

 

    From the fiscal year ending March 31, 2019 to the fiscal year ending March 31, 2021, operating cash flow (“OCF”) will be the most important performance metric, and Sony will target total OCF of 2 trillion yen or more, excluding the Financial Services segment, for this three-year period.

 

    In terms of allocation of cash generated, Sony plans to spend approximately 1 trillion yen on capital expenditure. The priority for the remaining 1 trillion yen will be strategic investment, while also making an appropriate allocation to balance sheet improvement and shareholder returns, in order to further enhance Sony’s corporate value. In terms of shareholder returns, Sony intends to increase dividends in a stable and long-term manner.

 

    Sony will seek to maintain a Return on Equity (“ROE”) level of 10% or more. For the fiscal year ended March 31, 2018, Sony achieved both financial targets of ROE of 10% or more and operating income of 500 billion yen or more, which were set in the previous mid-range plan (from the fiscal year ended March 31, 2016 to the fiscal year ended March 31, 2018).

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 content 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 also plans to continue to participate in the WWF’s Climate Savers Programme, which aims to achieve reductions in greenhouse gas emissions. 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/.

 

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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.

 

F. Contractual Obligations, Commitments, and Contingent Liabilities

The following table summarizes Sony’s contractual obligations and commitments as of March 31, 2018. 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)

     496,093        496,093                       

Long-term debt (Notes 8 and 11)

              

Capital lease obligations and other

     52,929        13,483        23,559        7,751        8,136  

Other long-term debt

     796,044        212,039        190,551        213,114        180,340  

Interest on other long-term debt

     5,377        3,015        1,332        601        429  

Minimum rental payments required under operating leases (Note 8)

     287,263        57,810        102,875        45,273        81,305  

Purchase commitments (Note 27)

              

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

     118,914        62,352        41,492        13,947        1,123  

Long-term contracts with recording artists, songwriters and companies

     73,259        24,073        24,835        11,720        12,631  

Long-term sponsorship contracts related to advertising and promotional rights

     6,379        4,931        944        504         

Long-term contracts for programming contents

     26,227        14,875        11,352                

Other purchase commitments

     143,212        105,482        32,381        3,055        2,294  

Future insurance policy benefits and other and policyholders’ account in the life insurance business* (Note 10)

     22,951,646        490,578        1,084,792        1,203,235        20,173,041  

Gross unrecognized tax benefits** (Note 21)

     95,425        902                       

Total

     25,052,768        1,485,633        1,514,113        1,499,200        20,459,299  

* Future insurance policy benefits and other and policyholders’ account in the life insurance business are the estimated future cash payments to be made to policyholders and others. These cash payments are based upon assumptions including morbidity, mortality, withdrawals and other factors. The sum of the cash payments shown for all years in the table of 22,951.6 billion yen exceeds the corresponding liability amount of 7,987.1 billion yen included in the consolidated balance sheets as of March 31, 2018. Refer to Note 10 of the consolidated financial statements.

** The total amount represents the liability for gross unrecognized tax benefits in accordance with the accounting guidance for uncertain tax positions. Sony estimates that 0.9 billion yen of the liability is expected to be settled within one year. The settlement period for the remaining portion of the liability, which totaled 94.5 billion yen, cannot be reasonably estimated due to the uncertainty associated with the timing of the settlements with the various taxing authorities. Refer to Note 21 of the consolidated financial statements.

The following items are not included in either the above table or the total amount of commitments outstanding at March 31, 2018:

 

    The total amount of expected future pension payments is not included as such amount is not currently determinable. Sony expects to contribute approximately 11 billion yen to Japanese pension plans and approximately 6 billion yen to foreign pension plans during the fiscal year ending March 31, 2019. Refer to Note 15 of the consolidated financial statements.

 

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    The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in the above table as it is not foreseeable what loans will be incurred under such line of credit. The total unused portion of the line of credit extended under these contracts was approximately 31.2 billion yen as of March 31, 2018. Refer to Note 27 of the consolidated financial statements.

 

    Purchases made during the ordinary course of business from certain component manufacturers and contract manufacturers in order to establish the best pricing and continuity of supply for Sony’s production are not included as there are typically no binding purchase obligations. Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on Sony. These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be cancelled without penalty. These purchases include arrangements with certain component manufacturers whereby Sony procures goods, including product components, for these component manufacturers and is reimbursed for the related purchases. This allows Sony’s supply chain management to have flexible and mutually beneficial purchase arrangements with these manufacturers in order to minimize inventory risk. Consistent with industry practice, Sony purchases processed goods that meet technical criteria from these component manufacturers after issuing to these manufacturers information on Sony’s projected demand and manufacturing needs.

Refer to Item 8 A. “Financial Information” Consolidated Statements and Other Financial Information for legal proceedings and Note 27 of the consolidated financial statements for guarantees issued, including product warranties.

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, Sony evaluates its estimates, which are based on historical experience, future projections and various other assumptions that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of expenses that are not readily apparent from other sources. Actual results may significantly differ from these estimates. Sony considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant judgment and estimates on the part of management in its application. Sony believes that the following represents its critical accounting policies.

Investments

Sony’s investments include debt and equity securities accounted for under both the cost and equity method of accounting. If it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value with a charge to income. Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of the credit condition of the issuer, sovereign risk, and whether or not Sony is able to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.

In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to be other-than-temporary if the fair value of the security is 20% or more below its original cost for an extended period of time (generally for a period of up to six months). This criterion is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20% or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate that the decline in the fair value is other-than-temporary.

 

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When an other-than-temporary impairment of a held-to-maturity debt security has occurred, the amount of the other-than-temporary impairment recognized in income depends on whether Sony intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost. If the debt security meets either of these two criteria, the other-than-temporary impairment is recognized in income, measured as the entire difference between the security’s amortized cost and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these two criteria, the net amount recognized in income is a credit loss equal to the difference between the amortized cost of the debt security and its net present value calculated by discounting Sony’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in accumulated other comprehensive income. Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in income are presented as a separate component of accumulated other comprehensive income.

The assessment of whether a decline in the value of an investment is other-than-temporary is often subjective in nature and involves certain assumptions and estimates concerning the expected operating results, business plans and future cash flows of the issuer of the security. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that Sony currently believes to be temporary may be determined to be other-than-temporary in the future based on Sony’s evaluation of subsequent information such as continued poor operating results, future broad declines in the value of worldwide equity markets and the effect of worldwide interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized and reduce income in future periods.

Valuation of inventory

Sony values its inventory based on the lower of cost and net realizable value. Sony writes down inventory in an amount equal to the difference between the cost of the inventory and the net realizable value — i.e., estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. 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 higher value than net realizable value. As a result, if actual market conditions are less favorable than projected and further price decreases are needed, additional inventory write-downs may be required in the future.

Impairment of long-lived assets

Sony reviews the recoverability of the carrying value of its long-lived assets held and used and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying value of the assets or asset groups may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the asset or asset group with their estimated undiscounted future cash flows. This review is primarily performed using estimates of future cash flows by product category or, in certain cases, by entity. 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. Fair value is determined using the present value of estimated net cash flows or comparable market values. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates applied to determine terminal values, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.

Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in Sony’s businesses or assumptions could negatively affect the valuations of long-lived assets.

Business combinations

When Sony applies the acquisition method of accounting, the deemed purchase price is allocated to identifiable assets acquired and liabilities assumed. Any residual purchase price is recorded as goodwill. The allocation of the purchase price utilizes significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. Independent third-party appraisal firms are typically engaged in order to assist in the estimation process. The significant estimates and assumptions include, but are not limited to, the timing and amount of revenue and future cash flows, the discount rate reflecting the risk inherent in future cash flows and the perpetual growth rate used to calculate the terminal value.

 

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Due to the inherent uncertainties involved in making the estimates and assumptions, the purchase price for acquisitions could be valued and allocated to the acquired assets and liabilities differently. Actual results may differ, or unanticipated events and circumstances may affect such estimates, which could require Sony to record an impairment of an acquired asset, including goodwill, or increase in the amounts recorded for an assumed liability.

Goodwill and other intangible 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 its carrying amount. Such an event or change in circumstances would include unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by Sony’s management.

In the fiscal year ended March 31, 2018, Sony elected not to perform an optional qualitative assessment of goodwill and instead proceeded directly to a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. Reporting units are Sony’s operating segments or one level below the operating segments. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the total amount of goodwill allocated to the reporting unit. Indefinite lived intangible assets are tested for impairment by comparing the fair value of the intangible asset with its carrying value, and if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Determining the fair value of a reporting unit under the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of indefinite lived intangible assets. These estimates and assumptions could significantly impact whether or not an impairment charge is recognized as well as the magnitude of any such charge.

In its impairment review, Sony performs internal valuation analyses or utilizes third-party valuations when management believes it to be appropriate, and considers other market information that is publicly available. The fair value of a reporting unit or indefinite lived intangible asset is generally determined using a discounted cash flow analysis. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, earnings multiples, the determination of appropriate comparable entities and the determination of whether a premium or discount should be applied to comparables. Consideration is also given to Sony’s market capitalization in relation to the sum of the calculated fair values of the reporting units, including reporting units with no goodwill, and taking into account corporate level assets and liabilities not assigned to individual reporting units as well as a reasonable control premium.

The assumptions used for projected future cash flows and the timing of such cash flows are based on the forecast and mid-range plan (“MRP”) of each reporting unit and take into account such factors as historical experience, market and industry information, and current and forecasted economic conditions. Perpetual growth rates are utilized to determine a terminal cash flow value and are generally set after the three-year forecasted period for the MRP. Certain reporting units, such as those in the Pictures segment, utilize longer forecast periods and base the terminal value on an exit price using an earnings multiple applied to the final year of the forecasted earnings, which also takes into consideration a control premium. Discount rates are derived from the weighted average cost of capital of market participants in similar businesses.

For all reporting units with goodwill, fair value exceeded the carrying amount, and therefore no impairment existed in the fiscal year ended March 31, 2018. These reporting units’ fair value exceeded their respective carrying values by at least 10.0%. Also, for indefinite lived intangible assets, fair value exceeded the carrying amount, and therefore no impairment existed.

 

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The carrying amounts of goodwill by segment as of March 31, 2018 are as follows:

 

     Yen in millions  

Game & Network Services

     150,606  

Music

     165,394  

Pictures

     144,412  

Imaging Products & Solutions

     9,517  

Mobile Communications

     3,286  

Semiconductors

     45,793  

Financial Services

     7,225  

All Other

     4,259  
  

 

 

 

Total

     530,492  
  

 

 

 

A discussion of the significant assumptions, other than the MRP described above, including a sensitivity analysis with respect to their impact, of the fair value of Sony’s reporting units for the impairment analysis performed for the fiscal year ended March 31, 2018 is included below:

 

    The discount rates ranged from 5.9% to 12.4%. A hypothetical one percentage point increase in the discount rate, holding all other assumptions constant, would not have resulted in an impairment.

 

    The growth rates applied to the terminal values for reporting units within the G&NS, IP&S, MC and Semiconductors and Financial Services segments and All Other ranged from approximately 1.0% to 1.5%. The growth rates beyond the MRP period for the reporting units in the Music segment ranged from 0% to 1.0%, and in the Pictures segment ranged from 3.0% to 4.5%. A hypothetical one percentage point decrease in the growth rate, holding all other assumptions constant, would not have resulted in an impairment.

 

    The earnings multiple used to calculate the terminal value in the Pictures reporting units ranged from 8.0x to 10.0x. A hypothetical reduction in the earnings multiple by 1.0x, holding all other assumptions constant, would not have resulted in an impairment.

Management believes that the assumptions used to estimate the fair value used in the goodwill impairment tests are reasonable; however, in the future, changes in estimates resulting in lower than currently anticipated cash flows and fair value due to unforeseen changes in assumptions could negatively affect the valuations, which may result in Sony recognizing impairment charges for goodwill and indefinite lived intangible assets in the future.

Pension benefit costs

Employee pension benefit costs and obligations are dependent on certain assumptions including discount rates, retirement rates and mortality rates, which are based upon current statistical data, as well as expected long-term rates of return on pension plan assets and other factors. Specifically, the discount rate and expected long-term rate of return on pension plan assets are two critical assumptions in the determination of periodic pension costs and pension liabilities. Assumptions are evaluated at least annually, or at the time when events occur or circumstances change and these events or changes could have a significant effect on these critical assumptions.

In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods. Therefore, actual results generally affect recognized costs and the recorded obligations for pensions in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect Sony’s pension obligations and future costs.

Sony’s principal pension plans are its Japanese pension plans. No individual foreign pension plan is significant to the consolidated pension plan assets and pension obligations.

To determine the benefit obligation of the Japanese pension plans, Sony used a discount rate of 0.8% for its Japanese pension plans as of March 31, 2018. The discount rate was determined by using information about yields on high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit obligation in consideration of amounts and timing of cash outflows for expected benefit payments. Such available information about yields is collected from published market information and credit rating agencies. The 0.8% discount rate represents a 10 basis point decrease from the 0.9% discount rate used for the fiscal year ended March 31, 2017 and reflects current Japanese market interest conditions.

To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rates of return on various categories of

 

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pension plan assets. Sony’s pension investment policy recognizes the expected growth and the variability risk associated with the long-term nature of pension liabilities, the returns and risks of diversification across asset classes, and the correlation among assets. The asset allocations are designed to maximize returns consistent with levels of liquidity and investment risk that are considered prudent and reasonable. While the pension investment policy gives appropriate consideration to recent market performance and historical returns, the investment assumptions utilized by Sony are designed to achieve a long-term return consistent with the long-term nature of the corresponding pension liabilities. For Japanese pension plans, the expected long-term rate of return on pension plan assets was 2.7% and 2.4% as of March 31, 2017 and 2018, respectively. The actual return on pension plan assets for the fiscal years ended March 31, 2017 and 2018 was a 5.2% gain and a 5.6% gain, respectively. The difference between the expected and the actual rate of return on pension plan assets was primarily due to the positive performance in the domestic (Japan) and the global equity markets through the fiscal year ended March 31, 2018. Actual results that differ from the expected return on pension plan assets are accumulated and amortized as a component of pension costs over the average future service period, thereby reducing the year-to-year volatility in pension costs. As of March 31, 2017 and 2018, Sony had, with respect to Japanese pension plans, net actuarial losses of 317.4 billion yen and 299.9 billion yen, respectively, including losses related to pension plan assets. The net actual loss decreased due to the higher actual return on pension plan assets than expected, partially offset by the impact of the decline in the discount rate used to determine the defined benefit obligation, as compared to the prior fiscal year’s rate.

The following table illustrates the effect on the fiscal year ending March 31, 2019 of changes in the discount rate and the expected return on pension plan assets, while holding all other assumptions as of March 31, 2018 constant, for Japanese pension plans.

 

Change in assumption    Projected benefit
obligations
     Pension
costs
     Net income  
     (Yen in billions)  

25 basis point increase / decrease in discount rate

     -/+38.0        -/+1.9        +/-1.3  

25 basis point increase / decrease in expected long-term rate of return on pension plan assets

            -/+1.7        +/-1.2  

Deferred tax asset valuation

Carrying amounts of deferred tax assets require a reduction by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized prior to expiration. Accordingly, the need to establish a valuation allowance for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the realization of the deferred tax assets. Management’s judgments related to this assessment consider, among other matters, the nature, frequency and severity of current and cumulative losses on an individual tax jurisdiction basis, forecasts of future profitability after consideration of uncertain tax positions, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the past utilization of net operating loss carryforwards prior to expiration, as well as prudent and feasible tax planning strategies which would be employed by Sony to prevent net operating loss and tax credit carryforwards from expiring unutilized.

As a result of prior losses, as of March 31, 2018, total established valuation allowances against deferred tax assets were 899.8 billion yen, including approximately 500 billion yen relating to national and local taxes for Sony Corporation and its national tax filing group in Japan and approximately 250 billion yen relating to federal and state taxes for Sony Americas Holding Inc. (“SAHI”) and its consolidated tax filing group in the U.S.. As of March 31, 2018, some of the entities have returned to profitability, particularly SAHI and its consolidated tax filing group in the U.S. and Sony Corporation and its national tax filing group in Japan. This is a positive factor to be considered; however, in order to support a reversal of the valuation allowance, a pattern of consistent earnings still needs to be established, particularly in jurisdictions like Japan where the remaining net operating loss carryforward period is very limited.

Sony is subject to income taxes in Japan and numerous other jurisdictions, and in the ordinary course of business there are many situations where the ultimate tax determination can be uncertain, particularly with respect to transfer pricing for intercompany transactions. The amount of the deferred tax assets recorded takes into account the more likely than not final outcome of these uncertain tax positions based on Sony’s judgement, particularly for final allocations of taxable income among jurisdictions as a result of intercompany transfer pricing decisions. The estimate for the valuation of deferred tax assets, which is based on currently enacted tax laws and rates as of the balance sheet date, reflects management’s judgment and best estimate of the likely future tax consequences of events that have been recognized in Sony’s financial statements and tax returns, the ability to implement various tax planning strategies and, in certain cases, future forecasts, business plans and other

 

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expectations about future outcomes. Changes in existing tax laws or rates in tax jurisdictions in which Sony operates could affect actual tax results, and market or economic deterioration or failure of management to achieve its restructuring objectives could affect future business results, either of which could affect the valuation of deferred tax assets over time. If future results are less than projected, if the results of tax examinations or the negotiations of advance pricing agreements covering transfer pricing of intercompany transactions result in a different allocation of profits and losses than currently anticipated, if tax planning alternatives are no longer viable, or if there is no excess appreciated asset value over the tax basis of the assets contemplated for sale, further valuation allowance may be required in the future to reduce the deferred tax assets to their net realizable value. On the other hand, a forecasted improvement and consistency in future earnings or other factors, such as business reorganizations, could lead to the future reversal of valuation allowance into income as a reduction to tax expense, subject to review of the relevant qualitative factors and uncertainties. These factors and other changes that are not anticipated in current estimates could have a material impact on Sony’s earnings or financial condition in the period or periods in which the impact is recorded or reversed.

Film accounting

An aspect of film accounting that requires the exercise of judgment relates to the process of estimating the total revenues to be received throughout a film’s life cycle. Such estimate of a film’s ultimate revenue is important for two reasons. First, while a film is being produced and the related costs are being capitalized, it is necessary for management to estimate the ultimate revenue, less additional costs to be incurred, including exploitation costs which are expensed as incurred, in order to determine whether the value of a film has been impaired and thus requires an immediate write-off of unrecoverable film costs. Second, the amount of film costs recognized as cost of sales for a given film as it is exhibited in various markets throughout its life cycle is based upon the proportion that current period actual revenues bear to the estimated ultimate total revenues.

Management bases its estimates of ultimate revenue for each film on several factors including the historical performance of similar genre films, the star power of the lead actors and actresses, the expected number of theaters at which the film will be released, anticipated performance in the home entertainment, television and other ancillary markets, and agreements for future sales. Management updates such estimates on a regular basis based on the actual results to date and estimated future results for each film. For example, a film that has resulted in lower than expected theatrical revenues in its initial weeks of release would generally have its theatrical, home entertainment and television distribution ultimate revenues adjusted downward; a failure to do so would result in the understatement of amortized film costs for the period.

Future insurance policy benefits

Liabilities for future insurance policy benefits, which mainly relate to individual life insurance policies, are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities, which require significant management judgment and estimates, are computed by the net level premium method based upon the assumptions as to future investment yield, morbidity, mortality, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from 1.0% to 4.5% and are based on factors such as market conditions and expected investment returns. Morbidity, mortality and withdrawal assumptions for all policies are based on either the subsidiary’s own experience or various actuarial tables. Generally these assumptions are locked-in throughout the life of the contract upon the issuance of new insurance, although significant changes in experience or assumptions may require Sony to provide for expected future losses.

Policyholders’ account in the life insurance business

Policyholders’ account in the life insurance business represents an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges. Policyholders’ account includes universal life insurance and investment contracts. Universal life insurance includes interest sensitive whole life contracts and variable contracts. The credited rates associated with interest sensitive whole life contracts range from 1.8% to 2.0%. For variable contracts, policy values are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. Investment contracts mainly include single payment educational endowment contracts, individual variable annuities and policies after the start of annuity payments. The credited rates associated with investment contracts, except for individual variable annuities, range from 0.01% to 6.3%. For individual variable annuities, policy values are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio.

 

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Recently Adopted Accounting Standards

Refer to Note 2, summary of significant accounting policies, recently adopted accounting pronouncements, of the consolidated financial statements.

Recent Accounting Pronouncements

Refer to Note 2, summary of significant accounting policies, recent accounting pronouncements not yet adopted, of the consolidated financial statements.

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

Set forth below are the current members of the Board of Directors and Corporate Executive Officers of Sony Corporation, their responsibility as a director or officer, date of birth, the number of years they have served as a director or officer, and other principal business activities outside the Corporation as of June 19, 2018.

Board of Directors

 

Kenichiro Yoshida

Responsibility as a Director: Member of the Nominating Committee

Date of Birth: October 20, 1959

Number of Years Served as a Director: 4 years

Principal Business Activities Outside the Corporation: None

Brief Personal History:

April 1983

   Joined Sony Corporation

July 2000

   Joined Sony Communication Network Corporation (currently Sony Network Communications Inc.)

May 2001

   SVP, Sony Communication Network Corporation

April 2005

   President and Representative Director, Sony Communication Network Corporation

December 2013

   EVP, CSO and Deputy CFO, Corporate Executive Officer, Sony Corporation

April 2014

   EVP and CFO, Representative Corporate Executive Officer, Sony Corporation

June 2014

   Director, Sony Corporation (present)

April 2015

   Executive Deputy President and CFO, Representative Corporate Executive Officer, Sony Corporation

April 2018

   President and CEO, Representative Corporate Executive Officer, Sony Corporation (present)

Kazuo Hirai

Responsibility as a Director: —

Date of Birth: December 22, 1960

Number of Years Served as a Director: 6 years

Principal Business Activities Outside the Corporation: None

Brief Personal History:

April 1984

   Joined CBS/Sony Inc. (currently Sony Music Entertainment (Japan) Inc.)

July 1996

   EVP and COO, Sony Computer Entertainment America LLC (currently Sony Interactive Entertainment America LLC)

October 1997

   Corporate Executive, Sony Computer Entertainment Inc. (currently Sony Interactive Entertainment Inc.)

April 1999

   President and COO, Sony Computer Entertainment America LLC

August 2003

   President and CEO, Sony Computer Entertainment America LLC

December 2006

  

President and Group COO, Sony Computer Entertainment Inc.

Chairman, Sony Computer Entertainment America LLC

June 2007

   President and Group CEO, Sony Computer Entertainment Inc.

April 2009

   EVP, Corporate Executive Officer, Sony Corporation

April 2011

   Executive Deputy President, Representative Corporate Executive Officer, Sony Corporation

September 2011

   Chairman, Sony Computer Entertainment Inc.

April 2012

   President and CEO, Representative Corporate Executive Officer, Sony Corporation

June 2012

   Director, Sony Corporation (present)

April 2018

   Chairman, Sony Corporation (present)

 

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Osamu Nagayama

Responsibility as a Director: Chairman of the Board
Chair of the Nominating Committee

Date of Birth: April 21, 1947

Number of Years Served as a Director: 8 years

Brief Personal History and Principal Business Activities Outside the Corporation:

April 1971

   Joined The Long-Term Credit Bank of Japan, Limited

November 1978

   Joined Chugai Pharmaceutical Co., Ltd.

March 1985

   Member of the Board, Chugai Pharmaceutical Co., Ltd.

March 1987

   Director and Senior Vice President, Chugai Pharmaceutical Co., Ltd.

March 1989

   Representative Director and Deputy President, Chugai Pharmaceutical Co., Ltd.

September 1992

   Representative Director, President and Chief Executive Officer, Chugai Pharmaceutical Co., Ltd.

January 2006

   Member of Enlarged Corporate Executive Committee, F. Hoffmann-La Roche Ltd. (present)

June 2010

   Director, Sony Corporation (present)

March 2012

   Representative Director, Chairman and Chief Executive Officer, Chugai Pharmaceutical Co., Ltd.

March 2018

   Representative Director, Chairman, Chugai Pharmaceutical Co., Ltd. (present)

Eikoh Harada

Responsibility as a Director: Chair of the Compensation Committee

Date of Birth: December 3, 1948

Number of Years Served as a Director: 5 years

Brief Personal History and Principal Business Activities Outside the Corporation:

April 1972

   Joined NCR Japan, Ltd.

November 1980

   Joined Yokogawa Hewlett-Packard Company

January 1983

   Director, Schlumberger Group

October 1994

   Director, Apple Japan, Inc.

April 1997

  

President, Apple Japan, Inc.

Vice President, Apple Computer, Inc.

March 2005

  

Chairman, President and Chief Executive Officer, Representative Director, McDonald’s Holdings Company (Japan), Ltd.

Chairman, President and Chief Executive Officer, Representative Director, McDonald’s Company (Japan), Ltd.

June 2013

  

Director, Sony Corporation (present)

Director, Benesse Holdings, Inc.

March 2014

  

Chairman, Director, McDonald’s Holdings Company (Japan), Ltd.

Chairman, Director, McDonald’s Company (Japan), Ltd.

June 2014

   Representative Director, Chairman and CEO, Benesse Holdings, Inc.

October 2014

   Representative Director and CEO, Benesse Corporation

Tim Schaaff

Responsibility as a Director: Director in charge of Information Security

Date of Birth: December 5, 1959

Number of Years Served as a Director: 5 years

Brief Personal History and Principal Business Activities Outside the Corporation:

December 1982

   Joined New England Digital Corporation

July 1991

   Joined Apple Computer, Inc.

1998

   Vice President, Apple Computer, Inc.

December 2005

   Senior Vice President, Sony Corporation of America

November 2006

   Deputy President, Technology Development Group, Sony Corporation

June 2008

   President, Sony Media Software and Services Inc.

December 2009

   President, Sony Network Entertainment International LLC

June 2013

   Director, Sony Corporation (present)

January 2014

   Independent startup advisor (present)

July 2015

   Chief Product Officer, Intertrust Technologies Corporation (present)

 

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Kazuo Matsunaga

Responsibility as a Director: Chair of the Audit Committee

Date of Birth: February 28, 1952

Number of Years Served as a Director: 4 years

Brief Personal History and Principal Business Activities Outside the Corporation:

April 1974

   Joined Ministry of International Trade and Industry (currently Ministry of Economy, Trade and Industry (“METI”))

June 2004

   Director-General, Nuclear and Industrial Safety Agency, METI

September 2005

   Assistant Vice-Minister, Minister’s Secretariat, METI

July 2006

   Deputy Vice-Minister, Minister’s Secretariat, METI

July 2008

   Director-General, Economic and Industrial Policy Bureau, METI

July 2010

   Vice-Minister of Economy, Trade and Industry, METI

April 2012

   Specially-appointed Professor, Graduate School of International Corporate Strategy, Hitotsubashi University (present)

June 2013

   Outside Director, Takasago Thermal Engineering Co., Ltd. (present)

June 2014

  

Director, Sony Corporation (present)

Outside Director, Hashimoto Sogyo Co., Ltd. (currently Hashimoto Sogyo Holdings Co., Ltd.) (present)

President, Japan Cooperation Center for the Middle East (present)

April 2016

   Vice Chairman of the Board, Mitsubishi Fuso Truck and Bus Corporation

January 2017

   Chairman of the Board, Mitsubishi Fuso Truck and Bus Corporation (present)

Koichi Miyata

Responsibility as a Director: Member of the Nominating Committee

Date of Birth: November 16, 1953

Number of Years Served as a Director: 4 years

Brief Personal History and Principal Business Activities Outside the Corporation:

April 1976

   Joined The Mitsui Bank, Ltd.

June 2003

   Executive Officer, Sumitomo Mitsui Banking Corporation

October 2006

   Managing Executive Officer, Sumitomo Mitsui Banking Corporation

April 2009

   Director and Senior Managing Executive Officer, Sumitomo Mitsui Banking Corporation

April 2010

   Senior Managing Executive Officer, Sumitomo Mitsui Financial Group, Inc.

June 2010

   Director, Sumitomo Mitsui Financial Group, Inc.

April 2011

  

Director and President, Sumitomo Mitsui Financial Group, Inc.

Director, Sumitomo Mitsui Banking Corporation

June 2014

   Director, Sony Corporation (present)

June 2016

   Outside Corporate Auditor, Isetan Mitsukoshi Holdings Ltd. (present)

April 2017

  

Chairman of the Board, Sumitomo Mitsui Financial Group, Inc. (present)

Chairman of the Board, Sumitomo Mitsui Banking Corporation (present)

John V. Roos

Responsibility as a Director: Member of the Nominating Committee

Date of Birth: February 14, 1955

Number of Years Served as a Director: 4 years

Brief Personal History and Principal Business Activities Outside the Corporation:

October 1980

   Associate, O’Melveny and Myers LLP

February 1985

   Associate, Wilson Sonsini Goodrich & Rosati

February 1988

   Partner, Wilson Sonsini Goodrich & Rosati

February 2000

   Managing Director of Professional Services, Wilson Sonsini Goodrich & Rosati

February 2005

   Chief Executive Officer, Wilson Sonsini Goodrich & Rosati

August 2009

   United States Ambassador to Japan

September 2013

   Outside Director, Salesforce.com, inc. (present)

October 2013

   Chief Executive Officer, The Roos Group, LLC (present)

December 2013

   Member of Global Advisory Board, Mitsubishi UFJ Financial Group, Inc. (present)

April 2014

   Senior Advisor, Centerview Partners LLC (present)

June 2014

   Director, Sony Corporation (present)

May 2015

   Founding Partner, Geodesic Capital (present)

January 2016

   Chairman of the Advisory Board, Toyota Research Institute, Inc. (present)

 

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Eriko Sakurai

Responsibility as a Director: Member of the Compensation Committee

Date of Birth: November 16, 1960

Number of Years Served as a Director: 4 years

Brief Personal History and Principal Business Activities Outside the Corporation:

June 1987

   Joined Dow Corning Corporation

May 2008

   Director, Dow Corning Toray Co., Ltd.

March 2009

   Chairman and Chief Executive Officer, Representative Director, Dow Corning Toray Co., Ltd. (present)

June 2014

   Director, Sony Corporation (present)

June 2015

   Outside Director, Sumitomo Mitsui Financial Group, Inc. (present)

Kunihito Minakawa

Responsibility as a Director: Member of the Audit Committee

Date of Birth: August 15, 1954

Number of Years Served as a Director: 1 year

Brief Personal History and Principal Business Activities Outside the Corporation:

April 1978

   Joined Ricoh Company, Ltd.

October 1997

   Senior Vice President and Chief Financial Officer, Ricoh Americas Corporation

April 2010

   Corporate Vice President, and General Manager of Finance and Accounting Division, Ricoh Company, Ltd.

June 2010

   Outside Audit & Supervisory Board Member, Ricoh Leasing Company, Ltd.

April 2012

   Corporate Senior Vice President, and General Manager of Finance and Accounting Division, Ricoh Company, Ltd.

June 2013

   Audit & Supervisory Board Member, Ricoh Company, Ltd.

June 2017

   Director, Sony Corporation (present)

Shuzo Sumi

Responsibility as a Director: Vice Chairman of the Board

Member of the Nominating Committee

Date of Birth: July 11, 1947

Number of Years Served as a Director: 1 year

Brief Personal History and Principal Business Activities Outside the Corporation:

April 1970

   Joined Tokio Marine & Fire Insurance Co., Ltd.

June 2000

   Director and Chief Representative in London, Overseas Division, Tokio Marine & Fire Insurance Co., Ltd.

June 2002

   Managing Director, Tokio Marine & Fire Insurance Co., Ltd.

October 2004

   Managing Director, Tokio Marine & Nichido Fire Insurance Co., Ltd.

June 2005

   Senior Managing Director, Tokio Marine & Nichido Fire Insurance Co., Ltd.

June 2007

  

President & Chief Executive Officer, Tokio Marine & Nichido Fire Insurance Co., Ltd.

President & Chief Executive Officer, Tokio Marine Holdings, Inc.

June 2013

  

Chairman of the Board, Tokio Marine & Nichido Fire Insurance Co., Ltd.

Chairman of the Board, Tokio Marine Holdings, Inc. (present)

June 2014

   Outside Director, Toyota Industries Corporation (present)

June 2017

   Director, Sony Corporation (present)

 

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Nicholas Donatiello, Jr.

Responsibility as a Director: Member of the Compensation Committee

Date of Birth: June 28, 1960

Number of Years Served as a Director: —

Brief Personal History and Principal Business Activities Outside the Corporation:

July 1986

   Management Consultant, McKinsey & Company, Inc.

September 1993

   President and CEO, Odyssey Ventures, Inc. (present)

December 2008

   Outside Director, American Funds: EuroPacific Growth Fund, New Perspective Fund, and New World Fund

February 2009

   Outside Director, Dolby Laboratories, Inc. (present)

September 2012

   Lecturer, Stanford University, Graduate School of Business (present)

June 2015

   Outside Director, Big 5 Sporting Goods Corporation (present)

January 2016

   Chairman of the Board of Directors, American Funds: EuroPacific Growth Fund, New Perspective Fund, and New World Fund (present)

June 2018

   Director, Sony Corporation (present)

Toshiko Oka

Responsibility as a Director: Member of the Audit Committee

Date of Birth: March 7, 1964

Number of Years Served as a Director: —

Brief Personal History and Principal Business Activities Outside the Corporation:

April 1986

   Joined Tohmatsu Touche Ross Consulting Limited

July 2000

   Joined Asahi Arthur Anderson Limited

September 2002

   Principal, Deloitte Tohmatsu Consulting Co., Ltd. (currently ABeam Consulting Ltd.)

April 2005

   President and Representative Director, ABeam M&A Consulting Ltd. (currently PwC Advisory LLC)

June 2015

   Outside Corporate Auditor, Happinet Corporation (present)

April 2016

   Partner, PwC Advisory LLC

June 2016

  

CEO, Oka & Company Ltd. (present)

Outside Director, Mitsubishi Corporation. (present)

Outside Director, Hitachi Metals, Ltd. (present)

June 2018

   Director, Sony Corporation (present)

 

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Corporate Executive Officers

In addition to Kenichiro Yoshida, the four individuals set forth below are the current Corporate Executive Officers of Sony Corporation as of June 19, 2018. Refer to “Board Practices” below.

Hiroki Totoki

Responsibility as an Officer: Senior EVP, CFO

Date of Birth: July 17, 1964

Number of Years Served as a Corporate Executive Officer: 2 years

Principal Business Activities Outside Sony: None

Brief Personal History:

April 1987

   Joined Sony Corporation

February 2002

   Representative Director, Sony Bank Incorporated

June 2005

   Director, Corporate Executive Officer and Senior Managing Director, Sony Communication Network Corporation (currently Sony Network Communications Inc.)

April 2012

   Representative Director, Corporate Executive Officer and Senior Managing Director, So-net Corporation (currently Sony Network Communications Inc.)

April 2013

   Representative Director, Corporate Executive Officer, Deputy President and CFO, So-net Entertainment Corporation (currently Sony Network Communications Inc.)

December 2013

  

SVP, Corporate Executive, Sony Corporation

Corporate Executive in charge of Business Strategy, Corporate Development and Transformation

November 2014

  

Group Executive, Sony Corporation

President and CEO, Sony Mobile Communications Inc.

June 2015

   Director, Chairman, So-net Corporation (currently Sony Network Communications Inc.)

April 2016

  

EVP, Corporate Executive Officer, Sony Corporation

Officer in charge of Mobile Communications Business, Sony Corporation

President and Representative Director, So-net Corporation

June 2017

  

CSO, Sony Corporation

Officer in Charge of Mid-to-Long Term Business Strategy, New Business

April 2018

   Representative Corporate Executive Officer, CFO, Sony Corporation (present)

June 2018

   Senior EVP, Sony Corporation (present)

 

Shiro Kambe

Responsibility as an Officer: EVP, Officer in charge of Legal, Compliance, Corporate Communications, CSR,
External Relations and Information Security & Privacy, Quality and Environment

Date of Birth: December 18, 1961

Number of Years Served as a Corporate Executive Officer: 4 years

Principal Business Activities Outside Sony: None

Brief Personal History:

April 1984

   Joined Sony Corporation

June 2010

   SVP, Corporate Executive, Sony Corporation
   Officer in charge of Corporate Communications and CSR, Sony Corporation (present)

April 2014

   Officer in charge of External Relations, Sony Corporation (present)
   Officer in charge of Brand, Sony Corporation

June 2014

   EVP, Corporate Executive Officer, Sony Corporation (present)
   Officer in charge of Legal and Compliance, Sony Corporation (present)

August 2016

   Officer in charge of Information Security & Privacy, Sony Corporation (present)

June 2018

   Officer in charge of Quality and Environment, Sony Corporation (present)

 

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Kazushi Ambe

Responsibility as an Officer: EVP, Officer in charge of Human Resources and General Affairs

Date of Birth: April 23, 1961

Number of Years Served as a Corporate Executive Officer: 2 years

Principal Business Activities Outside Sony: None

Brief Personal History:

April 1984

   Joined Sony Corporation

October 2001

   Vice President, Sony Ericsson Mobile Communications

April 2006

   Senior Vice President, Sony Corporation of America

November 2014

   Corporate Executive, SVP, Sony Corporation

June 2016

  

EVP, Corporate Executive Officer, Sony Corporation (present)

Officer in charge of Human Resources and General Affairs (present)

Toru Katsumoto

Responsibility as an Officer: EVP, Officer in charge of R&D Platform, Medical Business

Date of Birth: October 14, 1957

Number of Years Served as a Corporate Executive Officer: -

Principal Business Activities Outside Sony: None

Brief Personal History:

April 1982

   Joined Sony Corporation

November 2012

   SVP, Corporate Executive, Sony Corporation

April 2013

   Representative Director and President, Sony Olympus Medical Solutions Inc.

January 2016

   Director, Sony Olympus Medical Solutions Inc. (present)

January 2017

   President, Medical Business Group, Sony Corporation

April 2017

   Representative Director and Deputy President, Sony Imaging Products & Solutions Inc. (present)

April 2018

  

EVP, Corporate Executive Officer, Sony Corporation (present)

Officer in charge of R&D Platform, Medical Business(present)

Kenichiro Yoshida, Hiroki Totoki, Shiro Kambe, Kazushi Ambe and Toru Katsumoto are engaged on a full-time basis by Sony Corporation. There is no family relationship between any of the persons named above. There is no arrangement or understanding with major shareholders, customers, suppliers, or others pursuant to which any person named above was selected as a Director or a Corporate Executive Officer.

 

B. Compensation

Under the Financial Instruments and Exchange Act of Japan and related regulations, Sony is required to disclose the total remuneration paid by Sony Corporation to Directors and Corporate Executive Officers, as well as remuneration of any Director or Corporate Executive Officer who receives total aggregate annual remuneration exceeding 100 million yen from Sony in a fiscal year, on an individual basis. The following table and accompanying footnotes show the information on such matters that Sony Corporation has disclosed in its annual Securities Report for the fiscal year ended March 31, 2018 filed on June 19, 2018 with the Director General of the Kanto Local Finance Bureau (the “Bureau”) of the Ministry of Finance in Japan.

(1) Total amounts of remuneration paid by Sony Corporation to Directors and Corporate Executive Officers

 

     Fixed remuneration   Remuneration linked to business results   Phantom restricted stock plan
     Number of
persons
  Amount
(Yen in millions)
  Number of
persons
  Amount
(Yen in millions)
  Number of
persons
  Amount
(Yen in millions)

Directors

  11   162   —     —     1   51
    (*1) (*2)           (*3)        

(Outside Directors)

  (10)   (142)   (—)   (—)   (1)  

(51)

Corporate Executive Officers   7   520   7   1,211   3   1,606
              (*4)        

Total (*6)

  18   682   7   1,211   4   1,657
                        (*5)

*1 The number of persons does not include two Directors who concurrently serve as Corporate Executive Officers, because Sony Corporation does not pay any additional remuneration for services as Director to Directors who concurrently serve as Corporate Executive Officers.

 

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*2 The number of persons includes a Director who resigned on the day of the Ordinary General Meeting of Shareholders held on June 15, 2017.

*3 Sony Corporation does not pay remuneration linked to business results to Directors who do not concurrently serve as Corporate Executive Officers.

*4 The amount that Sony Corporation paid in June 2018 as remuneration linked to business results for the fiscal year ended March 31, 2018.

*5 The Phantom Restricted Stock Plan includes the amount that will be paid to a Director and two Corporate Executive Officers who resigned on the day of the Ordinary General Meeting of Shareholders held on June 19, 2018, and a Corporate Executive Officer who resigned on April 1, 2018.

*6 In addition to the above, Sony Corporation issued restricted stock and stock acquisition rights for the purpose of granting stock options as remuneration linked to share price. During the fiscal year ended March 31, 2018, Sony Corporation recorded 1 million yen in expenses for the restricted stock granted to Directors who did not concurrently serve as Corporate Executive Officers and 164 million yen in expenses for the restricted stock granted to Corporate Executive Officers. Regarding the stock acquisition rights granted to Corporate Executive Officers for the purpose of granting stock options, Sony Corporation recorded 848 million yen in expenses during the fiscal year ended March 31, 2018 or in the past for stock option purposes.

 

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(2) Amounts of remuneration paid by Sony Corporation and its subsidiaries to Directors and Corporate Executive Officers on an individual basis.

 

Name   Position (*1)  

Basic
Remuneration

(*2)

(Yen in
millions)

 

Remuneration
linked to

business results (*2)

(Yen in millions)

 

Phantom restricted
stock plan

(Yen in millions)

 

Total (*2)

(Yen in millions)

 

Granted number of
stock acquisition
rights (*3)

(Thousand shares)

 

Granted number of
restricted stock

(*4)

(Thousand shares)

Kazuo Hirai

 

Sony Corporation

Director, Chairman (*6)

 

Former President & CEO, and Representative Corporate Executive Officer

(Until April 1, 2018)

 

244

(*7)

 

647

(*7)

  1,182   2,073