Sony 2004 Annual Report Download - page 65

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income was a 16.1 billion yen increase in net
foreign exchange gain, from 1.9 billion yen in
the previous fiscal year to 18.1 billion yen. The
net foreign exchange gain was recorded
because the value of the yen, especially during
the second half of the fiscal year ended March
31, 2004, was higher than the value of the yen
at the time that Sony entered into foreign ex-
change forward contracts and foreign currency
option contracts. These contracts are entered
into by Sony to mitigate the foreign exchange
rate risk to cash flows that arises from settle-
ments of foreign currency denominated
accounts receivable and accounts payable, as
well as foreign currency denominated transac-
tions between consolidated subsidiaries.
Compared to the previous fiscal year, royalty
income increased 1.9 billion yen, or 5.8
percent, from 32.4 billion yen to 34.2 billion
yen. Interest and dividends received increased
by 4.3 billion yen, or 29.9 percent, to 18.8
billion yen.
The decrease in other expenses was primarily
due to a 6.7 billion yen, or 29.0 percent, decrease
to 16.5 billion yen in loss on devaluation of
securities investments compared with the pre-
vious year. During the fiscal year ended March
31, 2004, the valuation losses Sony recorded
included 10.3 billion yen recorded in regards
to securities issued by a privately held Japanese
company engaged in cable broadcasting and
other businesses which Sony accounted for
under the cost method. Compared to the
previous fiscal year, interest paid increased 0.5
billion yen, or 2.0 percent, to 27.8 billion yen.
In January 2004, FeliCa Networks Inc.
(“FeliCa Networks”) issued 11.5 billion yen in
shares (115,000 shares at 100,000 yen per
share) in a private offering. FeliCa Networks
engages in the development and licensing of
an Integrated Circuit (“IC”) chip for cellular
phones based on the contactless IC card tech-
nology “FeliCa”, which was developed by
Sony. It also operates a platform, based on
FeliCa-ready cellular phones, for use by service
providers. Sony recorded a gain of 3.4 billion
yen and also recorded deferred taxes on this
gain. This issuance reduced Sony’s ownership
interest from 100 percent to 60 percent. In
June 2004, FeliCa Networks allocated new
shares to a third party; Sony’s ownership
interest is now approximately 57 percent.
In addition to the above transaction, for the
year ended March 31, 2004, Sony recognized
1.5 billion yen of other gains on issuances of
stock by subsidiaries and equity investees
resulting in total gains of 4.9 billion yen.
These transactions were not part of a broader
corporate reorganization and the reacquisition
of such shares was not contemplated at the
time of issuance.
INCOME BEFORE INCOME TAXES
Income before income taxes for the fiscal year
ended March 31, 2004 decreased 103.6 billion
yen, or 41.8 percent, to 144.1 billion yen com-
pared with the previous fiscal year. As men-
tioned above, operating income and the net
amount of other income and other expenses
decreased compared with the previous year.
INCOME TAXES
Income taxes for the fiscal year ended March
31, 2004 decreased by 28.1 billion yen, or
34.7 percent, to 52.8 billion yen, as a result of
the decrease in income before income taxes.
Income taxes decreased 91.6 billion yen, or
51.2 percent, to 87.2 billion yen, while deferred
income tax expense decreased by 63.6 billion
yen, or 64.9 percent, to 34.4 billion yen. The
effective tax rate for the fiscal year was 36.6
percent, lower than the statutory rate in Japan
due to a decrease in deferred tax liabilities on
undistributed earnings of foreign subsidiaries
and because U.S. income was taxed at a lower
rate due to utilization of tax loss and foreign
tax credit carryforwards. However, this rate
was higher than the effective tax rate of 32.6
percent in the prior fiscal year, which benefited
from a reversal in valuation allowances on
deferred tax assets by Aiwa Co., Ltd. and its
subsidiaries (“Aiwa”).
RESULTS OF AFFILIATED COMPANIES
ACCOUNTED FOR UNDER THE EQUITY
METHOD
Equity in net income of affiliated companies
during the fiscal year ended March 31, 2004 was
1.7 billion yen, an improvement over the 44.7
billion yen in losses recorded in the previous
fiscal year. Equity in net income of Sony Ericsson
Mobile Communications AB (“Sony Ericsson”),
a joint venture focused on mobile phone hand-
sets, was 6.4 billion yen, an improvement from
the 20.8 billion yen in losses recorded in the
previous fiscal year. This improvement was due
to strong demand for Sony Ericsson’s products,
particularly in the Global System for Mobile
Communications (“GSM”) and Japanese
markets, and due to improvements in operat-
ing efficiencies at the company. Moreover, ST
Liquid Crystal Display Corporation (“ST-LCD”),
an LCD joint venture in Japan, recorded a
profit compared with a loss in the previous fiscal
year. Partially offsetting these improvements
were equity in net losses of some other affili-
ated companies such as Crosswave, which
commenced reorganization proceedings under
the Corporate Reorganization Law of Japan.
The equity in net loss related to Crosswave for
the fiscal year ended March 31, 2004 was 1.4
billion yen.
MINORITY INTEREST IN INCOME (LOSS)
OF CONSOLIDATED SUBSIDIARIES
In the fiscal year ended March 31, 2004,
minority interest in income of consolidated
subsidiaries decreased 4.2 billion yen, or 63.9
percent, to 2.4 billion yen. This decrease is due
to the absence of the previous year’s increase
which resulted from the reversal, in that year,
of valuation allowances on deferred tax assets
held by Aiwa, as described above, and the fact
that Sony ceased to record a minority interest
in the losses of Aiwa in that year, as a result of
taking Aiwa private. For the fiscal year ended
March 31, 2004, minority interest in income
was recorded mainly at certain television and
home entertainment subsidiaries in the
Pictures segment.
NET INCOME
Net income for the fiscal year ended March
31, 2004 decreased by 27.0 billion yen, or
23.4 percent, to 88.5 billion yen compared
with the previous fiscal year. As a percentage
of sales, net income decreased 0.3 percent-
age points from 1.5 percent to 1.2 percent.
Although income before income taxes de-
creased as described above, the year on year
change from loss to income in equity in net
income (loss) of affiliated companies partially
offset the decline in net income. Return on
stockholders’ equity decreased 1.2 percent-
age points from 5.0 percent to 3.8 percent.
(This ratio is calculated by dividing net income