Sony 2003 Annual Report Download - page 107

Consolidated Financial Information 2003
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and 119.5 yen against the euro, which was 2.6 percent higher against the U.S. dollar and 8.8 percent lower against
the euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency
basis described herein show results of sales and operating revenue (“sales”) and operating income obtained by
applying the yen’s monthly average exchange rate in the previous fiscal year to monthly local currency-denominated
sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2003, as if
the value of the yen had remained constant. In the Music segment, Sony consolidates the yen-translated results of
SMEI (a U.S. based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the
results of SMEJ (a Japan based operation that aggregates the results of its operations in yen). In the Pictures
segment, Sony translates into yen the U.S. dollar consolidated results of SPE, (a U.S. based operation that has
worldwide subsidiaries). Therefore, in the results of SMEI and SPE, analysis and discussion of certain portions of
their operating results are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on
a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with
U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures.
However, Sony believes that local currency basis results provide additional useful information to investors regarding
operating performance.
Sony's consolidated results are subject to foreign currency fluctuations mainly derived from the fact that the
countries where manufacturing takes place may be different from those where such products are sold. In order to
reduce the risk caused by such 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 by
anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign
currencies.
In 2001, Sony Global Treasury Services plc (“SGTS”) was established in London for the purpose of providing
integrated treasury services for Sony Corporation and its subsidiaries. Sony's policy is that Sony Corporation and all
subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures.
Sony Corporation and most of Sony's subsidiaries utilize SGTS for this purpose. The concentration of foreign
exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony
Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party
financial institutions. Most of the transactions are entered into against projected exposures before the actual export
and import transactions take place. In particular SGTS hedges the exposures of major currency pairs such as U.S.
dollar against Japanese yen, euro against Japanese yen and euro against U.S. dollar, on average three months
before the actual transactions take place. In the case of emerging market currencies, such as Brazil, with high
inflation and high interest rates, projected exposures are hedged one month before the actual transactions take place
due to cost effectiveness considerations. Sony enters into foreign exchange transactions with financial institutions
only for hedging purposes and does not undertake speculative transactions.
To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the
Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and
manufacturing operations in areas outside of Japan.