Sony’s Earthquake Writeoff Brings Net Loss to $3.2 Billion

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Sony seems like a family that suffered the death of  loved ones and then had its house burglarized while attending the funerals. The company announced that it would incur a $3.2 billion loss for the fiscal year that ended last March tied to natural disasters and an Internet break-in. Neither event will improve Sony’s ability to compete in a world where competition is increasing from high end gadgeteers such as Apple, from ever-sharper low-end brands in China, and from Korean firms such as Samsung that can play at all price levels.

As expected, Sony’s factories and other facilities in Japan were damaged by what the company labels the Great East Japan Earthquake, the temblor and tsunami that took place on March 11. More than 18,000 people are dead or missing and Japan’s electrical grid was severely compromised by a partial nuclear plant meltdown in Fukushima.

Sony said it suffered direct losses of about $270 million from the quake. Most of the net loss being recorded comes from a non-cash charge of $4.4 billion against future earnings that Sony has taken in fiscal 2011 for what the company calls  “a valuation allowance” triggered by the quake.

While Sony was trying to recover from the quake, it also incurred about $170 million in losses tied to the hacking of its Play Station Network. A security break netted hackers information on as many as 100 million accounts, forcing Sony to provide identity theft insurance and other “welcome back” compensation for its customers. The service was down for weeks as the company fought frantically to patch the security holes and get the operation running again.

Sony stuck by its 2011 estimates of operating income of about $2.5 billion, a huge improvement from the prior year. Sales are estimated at $88 billion. For fiscal 2012, it anticipated a $1.8 billion hit to operating earnings tied to the disaster. Despite that hit, the company says it expected earnings to be flat year on year while sales grew.

Although the monetary loss pales in comparison to the human one, for investors it signals that the company’s comeback has been derailed. Sony had expected to be able to grow earnings, something it’s had a hard time doing. It will be difficult for Sony’s management to respond to both the physical damage to its manufacturing base as well as the Internet damage while at the same time trying to find a way through an increasingly competitive landscape. It’s difficult to innovate when you have to concentrate on exogenous events.  The company will announce its earnings Thursday.

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