Sony’s fiscal 2010 results
Sony reported its fiscal year 2010 earnings (the company’s fiscal year ends, as is customary with Japanese companies, on March 31st) in Japan overnight. Tokyo Stock Exchange requires that all listed firms both make an official estimate of anticipated results. The TSE also requires companies to publish a revision–prior to releasing the actuals–as/when it realizes the actual results will differ from the official estimate by more than 30%. In line with this requirement, Sony announced a downward revision to earnings last Monday.
The issue is deferred taxes in Japan. Sony wrote off US$4.3 billion.
The company points out that:
–the writeoff is a non-cash charge,meaning no money has been lost,
–this doesn’t preclude use of tax-loss carryforwards in the future, and
–the charge “does not reflect a change in Sony’s view of its long-term corporate strategy.”
what this means
Unlike most Japanese firms, Sony keeps its official financial reporting books according to US Generally Accepted Accounting Principles. GAAP uses deferred taxes.
Let’s say a company loses money this year–thereby establishing a tax-loss carryforward that can be used to offset taxes on future income. GAAP tells the company that it should record a credit for this possible future tax benefit in this year’s financials. In other words, if you have a loss of $100 this year, but anticipate that you will have enough profit, say, five years from now to employ this loss to offset $30 in income tax that would otherwise be payable, you should take the $30 gain in the current year. You record a loss of $100 on your income statement plus a deferred tax benefit of $30. The net loss you report to shareholders is $70, not the full $100 amount.
One proviso, though. You have to have a reasonable basis for thinking that you’ll have enough future profit to use the potential tax benefit that today’s loss represents. And your auditor has to agree with you.
Sony has been in loss in Japan for three years now. The writeoff means that Sony’s accountants no longer think the company will be able to generate enough taxable income to use $4.3 billion of future tax credits it had previously expected to enjoy.
Sony cites the March earthquake/tsunamis as a reason for this re-evaluation. But at the same time it notes that the damage to its businesses in Japan haven’t been that great, are mostly covered by insurance, and that it’s confident it will collect on its policies.
The benign reading of the big writeoff would be that Sony’s overall internal profit projections haven’t changed much and the important thing to note is the “in Japan” part of the company statement. It could be the writeoff means that Sony is going to make a major shift of production away from Japan. It will continue to make the same profits, just not in its home country.
In my experience, though, events rarely follow the benign path. I don’t know today’s Sony well enough to judge in this case, but typically a firm’s accountants notice business deterioration and propose a writeoff–and management reluctantly (sometimes, very reluctantly) falls in line. It may be that the operative word in Sony’s statement of confidence in its prospects is “long term.”
SNE as a stock
I don’t know the company well enough to have an opinion. I know what I’d look for, though.
Sony has two main businesses: consumer electronics and video games. The company has lost ground in the first to Samsung and Apple. In the current generation of game consoles, Sony has regained past form after turning first-mover advantage over to X-Box, allowing MSFT to gain a market share I don’t think it could otherwise have achieved. But rival Nintendo is already talking about a new game console. And the game business is morphing into one favoring simple games played on a cellphone or through a social network. What are Sony’s plans?
Ideally, one would like to see both main businesses in sync and operating profitably–not strength in one being offset by weakness in the other.