Annual Reports

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  • 20-F (Jun 30, 2015)
  • 20-F (Jun 30, 2014)
  • 20-F (Jun 28, 2013)
  • 20-F (Jun 29, 2012)

 
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Kyocera 20-F 2007
Annual Report
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 20-F

 


 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the transition period from              to             

Commission file number: 1-7952

 


Kyocera Kabushiki Kaisha

(Exact name of Registrant as specified in its charter)

 


Kyocera Corporation

(Translation of Registrant’s name into English)

 


 

Japan  

6, Takeda, Tobadono-cho, Fushimi-ku,

Kyoto 612-8501, Japan

(Jurisdiction of incorporation or organization)   (Address of principal executive offices)

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

Common Stock (“Shares”)*

  New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 


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.

As of March 31, 2007, 188,649,089 shares of common stock were outstanding, comprised of 184,820,723 Shares and 3,828,366 American Depositary Shares (equivalent to 3,828,366 Shares).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  x    No  ¨

If this report is an annual 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   x

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  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer   x     Accelerated filer   ¨     Non-accelerated filer   ¨

Indicate by check mark which financial statement item the Registrant has elected to follow.     Item 17  ¨      Item 18   x

If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

 

* Not for trading, but only in connection with the registration of the American Depositary Shares, each representing one share of Common Stock.

 



Table of Contents

TABLE OF CONTENTS

 

            Page
  

Cautionary Statement Regarding Forward-Looking Statements

   4

PART I

      6

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

   8

Item 4.

  

Information on Kyocera Corporation and its Consolidated Subsidiaries

   12
  

A. History and Development of Kyocera Corporation and its Consolidated Subsidiaries

   12
  

B. Business Overview

   14
  

C. Organizational Structure

   23
  

D. Property, Plants and Equipment

   27

Item 4A.

  

Unresolved Staff Comments

   29

Item 5.

  

Operating and Financial Review and Prospects

   29
  

A. Operating Results

   29
  

B. Liquidity and Capital Resources

   53
  

C. Research and development activities

   58
  

D. Trend Information

   60
  

E. Off-Balance Sheet Arrangements

   61
  

F. Tabular Disclosure of Contractual Obligations

   62

Item 6.

  

Directors, Senior Management and Employees

   63
  

A. Directors and Senior Management

   63
  

B. Compensation

   68
  

C. Board Practices

   68
  

D. Employees

   69
  

E. Share Ownership

   70

Item 7.

  

Major Shareholders and Related Party Transactions

   75
  

A. Major Shareholders

   75
  

B. Related Party Transactions

   76
  

C. Interests of Experts and Counsel

   76

Item 8.

  

Financial Information

   76
  

A. Consolidated Statements and Other Financial Information

   76
  

B. Significant Changes

   77

Item 9.

  

The Offer and Listing

   77
  

A. Offering and Listing Details

   77
  

B. Plan of Distribution

   79
  

C. Markets

   79
  

D. Selling Shareholders

   79
  

E. Dilution

   79
  

F. Expenses of the Issue

   79

Item 10.

  

Additional Information

   79
  

A. Share Capital

   79
  

B. Memorandum and Articles of Association

   79
  

C. Material Contracts

   88
  

D. Exchange Controls

   88
  

E. Taxation

   88

 

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Table of Contents
  

F. Dividends and Paying Agents

   93
  

G. Statement by Experts

   93
  

H. Documents on Display

   93
  

I. Subsidiary Information

   94

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk    94

Item 12.

   Description of Securities Other Than Equity Securities    96
PART II       96

Item 13.

   Defaults, Dividend Arrearages and Delinquencies    96

Item 14.

   Material Modification to Rights of Security Holders and Use of Proceeds    96

Item 15.

   Controls and Procedures    96

Item 16A.

   Audit Committee Financial Expert    97

Item 16B.

   Code of Ethics    97

Item 16C.

   Principal Accountant Fees and Services    97

Item 16D.

   Exemption from the Listing Standards for Audit Committees    98

Item 16E.

   Purchase of Equity Securities by the Issuer and Affiliated Purchasers    100
PART IV       101

Item 17.

   Financial Statements    101

Item 18.

   Financial Statements    101

Item 19.

   Exhibits    102

 

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Cautionary Statement Regarding Forward-Looking Statements

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 21E of the U.S. Securities and Exchange Act of 1934. To the extent that statements in this Form 20-F do not relate strictly to historical or current facts, they may constitute forward-looking statements. These forward-looking statements are based upon our current assumptions and beliefs in the light of the information currently available to us, but involve known and unknown risks, uncertainties and other factors. Such risks, uncertainties and other factors may cause our actual actions or results to differ materially from those discussed in or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statement after the date of this Form 20-F, but investors are advised to consult any further disclosures by us in our subsequent filings pursuant to the U.S. Securities Exchange Act of 1934.

Important risks, uncertainties and other factors that may cause our actual results to differ materially from our expectations are generally set forth in Item 3.D “Risk Factors” of this Form 20-F and include, without limitation:

 

   

general conditions in the Japanese or global economy;

 

   

unexpected changes in economic, political and legal conditions in China;

 

   

intense competitive pressures to which our products are subject;

 

   

manufacturing delays or defects resulting from outsourcing or internal manufacturing processes;

 

   

various export risks which may affect the significant percentage of our revenues derived from overseas sales;

 

   

the effect of foreign exchange fluctuations on our results of operations;

 

   

industry demand for skilled employees;

 

   

insufficient protection of our intellectual property;

 

   

expenses associated with licenses we require to continue to manufacture and sell products;

 

   

our research and development not producing desired results;

 

   

our market or supply chains being affected by terrorism, plague, wars or similar events;

 

   

earthquakes and other natural disasters affecting our headquarters and major facilities;

 

   

impairment losses on investments in equity securities;

 

   

our ability to launch innovative products and otherwise meet the advancing technical requirements of our customers, particularly in the highly competitive markets for ceramics, semiconductors and electronic components;

and other risks discussed under Item 3.D “Risk Factors” and elsewhere in this Form 20-F.

 

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Presentation of Certain information

As used in this Form 20-F, references to “Kyocera,” “we,” “our” and “us” are to Kyocera Corporation and, except as the context otherwise requires, its consolidated subsidiaries.

Also, as used in this Form 20-F:

 

   

“U.S. dollar” or “$” means the lawful currency of the United States of America, “yen” or “¥” means the lawful currency of Japan and “Euro” means the lawful currency of the European Union.

 

   

“U.S. GAAP” means accounting principles generally accepted in the United States of America, and “Japanese GAAP” means accounting principles generally accepted in Japan.

 

   

“ADS” means an America Depositary Share, each representing one share of Kyocera’s common stock, and “ADR” means an American Depositary Receipt evidencing ADSs.

 

   

“fiscal 2007” refers to Kyocera’s fiscal year ended March 31, 2007, and other fiscal years are referred to in a corresponding manner.

 

   

Unless otherwise indicated, we have translated the yen amounts for the year ended March 31, 2007, as of March 31, 2007 and thereafter presented in this Form 20-F into U.S. dollars solely for your convenience. The rate we used for such translations was ¥118.00 = $1.00, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 30, 2007, rounded to the nearest yen. These translations do not imply that the yen amounts actually represent, or have been or could be converted into, equivalent amounts in the U.S. dollars.

 

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Table of Contents

PART I

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

The selected consolidated financial data set forth below for each of the five fiscal years ended March 31 have been derived from Kyocera’s consolidated financial statements that are prepared in accordance with accounting principles generally accepted in the United States of America.

You should read the U.S. GAAP selected consolidated financial data set forth below together with Item 5 “Operating and Financial Review and Prospects” and Kyocera’s Consolidated Financial Statements included in this Form 20-F.

 

     (Yen in millions, U.S. dollars and shares in thousands, except per share amounts)
     2003    2004    2005    2006    2007    2007

For the years ended March 31:

                 

Net sales

   ¥ 1,062,013    ¥ 1,132,696    ¥ 1,173,660    ¥ 1,173,544    ¥ 1,283,897    $ 10,880,483

Profit from operations

     78,950      104,810      97,660      99,695      135,102      1,144,932

Income from continuing operations

     39,840      63,357      42,657      66,088      101,329      858,720

Income before cumulative effect of change in accounting principle

     43,421      68,086      45,908      69,696      106,504      902,576

Net income

     41,165      68,086      45,908      69,696      106,504      902,576

Earnings per share :

                 

Income from continuing operations:

                 

Basic

   ¥ 213.81    ¥ 339.46    ¥ 227.52    ¥ 352.44    ¥ 538.52    $ 4.56

Diluted

     213.76      339.45      227.47      352.21      537.35      4.55

Income before cumulative effect of change in accounting principle:

                 

Basic

     233.02      364.79      244.86      371.68      566.03      4.80

Diluted

     232.97      364.78      244.81      371.43      564.79      4.79

Net income:

                 

Basic

     220.91      364.79      244.86      371.68      566.03      4.80

Diluted

     220.86      364.78      244.81      371.43      564.79      4.79

Weighted average number of shares outstanding:

                 

Basic

     186,338      186,643      187,489      187,514      188,160   

Diluted

     186,382      186,649      187,528      187,640      188,573   

Cash dividends declared per share:

                 

Per share of common stock

   ¥ 60    ¥ 60    ¥ 80    ¥ 100    ¥ 110   

U.S. dollars equivalents*

   $ 0.49    $ 0.55    $ 0.74    $ 0.84    $ 0.92   

At March 31:

                 

Total assets

   ¥ 1,635,014    ¥ 1,794,758    ¥ 1,745,519    ¥ 1,931,522    ¥ 2,130,464    $ 18,054,780

Long-term debt

     60,736      70,608      33,557      33,360      7,283      61,720

Common stock

     115,703      115,703      115,703      115,703      115,703      980,534

Stockholders’ equity

     1,000,207      1,150,453      1,174,851      1,289,077      1,514,560      12,835,255

Depreciation

   ¥ 64,913    ¥ 60,745    ¥ 58,699    ¥ 62,942    ¥ 70,155    $ 594,534

Capital expenditures

   ¥ 38,981    ¥ 54,901    ¥ 63,160    ¥ 88,860    ¥ 69,896    $ 592,339

 

* Translated into U.S. dollars based on the exchange rates at each respective payment date.

Note 1. Kyocera sold its entire shares in Kyocera Leasing Co., Ltd. (KLC), a subsidiary engaged in financing services; as a result, business results and profit on sales for KLC for fiscal 2007 have been recorded as income from discontinued operations in conformity with Statement of Financial Accounting Standards (SFAS) No.144, “Accounting for the impairment or disposal of Long-Lived Assets.” Figures for fiscal 2006 have been retrospectively reclassified for comparative purposes.

 

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The following table shows the exchange rates for Japanese yen per $1.00 based upon the noon buying rate in New York City for cash transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York:

 

      High    Low    Average    Period-end

For the years ended March 31,

           

2003

   133.40    115.71    121.94    118.07

2004

   120.55    104.18    112.75    104.18

2005

   114.30    102.26    107.49    107.22

2006

   120.93    104.41    113.15    117.48

2007

   121.81    110.07    116.92    117.56

For most recent 6 months

           

January, 2007

   121.81    118.49    120.45    121.02

February, 2007

   121.77    118.33    120.50    118.33

March, 2007

   118.15    116.01    117.26    117.56

April, 2007

   119.84    117.69    118.93    119.44

May, 2007

   121.79    119.77    120.77    121.76

June, 2007

   124.09    121.08    122.69    123.39

The noon buying rate for Japanese yen on July 3, 2007 was $1.00 = ¥122.40

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

 

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D. Risk Factors

You should carefully read the risks described below before making an investment decision.

(1) The Japanese or global economy may significantly reduce demand for Kyocera’s products

The Japanese economy showed stable growth due mainly to an expanded market for digital consumer equipment from the second half of fiscal 2006. However, the economic outlook has been uncertain and has been negatively affected by inventory reductions in the IT-related industries. Though the current global economic outlook, including for the U.S., also remains to grow, there may continue to be instability in light of the appreciation of the yen and the rise in prices of oil and certain raw materials. Kyocera is substantially dependent for its growth on the markets for semiconductors, mobile phone handsets and PC-related equipment. These markets may be adversely affected by demand in electronics industry and by sluggish consumer spending brought by economic recession.

(2) Unexpected changes in economic, political and legal conditions in China, in which Kyocera is becoming increasingly active, may have an adverse effect on Kyocera’s business

Based on its expectation that the Chinese markets for IT-related products, including electronic components, mobile phone handsets, personal computers (PCs) and PC peripherals will continue to grow continuously, Kyocera has been making substantial investments in new production and marketing facilities in China. Kyocera now has principal production facilities located in Shanghai, Dongguan, and Tianjin, and plans to make additional investments to increase production capacity at these sites and to increase its marketing and distribution capabilities in China. Although the Chinese economy has been growing at a rapid rate in recent years, and the central government has been increasingly utilizing market forces as opposed to central economic planning, growth has been uneven among various regions of the country and among various sectors of the economy. Unexpected changes in the central government’s economic policy or in the business climate, including those due to changes in institutional systems in various parts of the country, may adversely affect its IT-related markets in which Kyocera seeks to sell its products. In addition, China is in the process of developing a comprehensive system of laws and regulations dealing with economic matters, such as currency controls, and foreign corporations currently active in the country, such as Kyocera, face risks and uncertainties including enforcement of contractual terms, administrative intrusion by local governments and difficulty with expatriation of profits.

(3) Kyocera sells a diverse variety of products, and in each of its businesses Kyocera is subject to intense competitive pressures, including in terms of price, technological change, product development, quality and speed of delivery, and these pressures are likely to increase in the near term

Kyocera sells a wide variety of products and therefore faces a broad range of competitors from large international companies to relatively small, rapidly growing and highly specialized companies. Kyocera has a variety of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Kyocera may not fund or invest in certain of its businesses to the same degree as its competitors, or these competitors may have greater financial, technical, and marketing resources available to them than the portion of its business against which they compete. While some of the factors that drive competition vary by product area, price and speed of delivery are factors in all areas of Kyocera’s business. Price pressure has been intense, and thus Kyocera predicts that its production prices will continue to be lower over fiscal 2008 partly depending on the demand and competition situation. In production businesses in which Kyocera develops, produces and distributes specialized parts for its customers’ products, its competitive position depends significantly on being involved early in the process of creating a new product that fits its customers’ needs. This requires maintaining close ties with customers so that Kyocera can ensure that it is able to meet required specifications and be the first supplier to create and deliver the product. Kyocera’s gross margins may be reduced if it cannot maintain these important relationships or market share or if it is forced in the future to further reduce prices in response to the actions of its competitors.

 

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(4) Small manufacturing delays or defects resulting from outsourcing or internal manufacturing processes can adversely affect Kyocera’s production yields and operating results

Kyocera ordinarily outsources the fabrication of certain components and sub-assemblies of its products, often to sole source suppliers or a limited number of suppliers. Kyocera has experienced occasional delays in obtaining components and sub-assemblies because the manufacturing process for these items is very complex and requires a long lead-time. Kyocera’s revenues derived from sales of these products will be materially and adversely affected if Kyocera is unable to obtain a high quality, reliable and timely supply of these components and sub-assemblies. In addition, any reduction in the precision of these components will result in sub-standard end products and will cause delays and interruptions in Kyocera’s production cycle.

Within Kyocera’s manufacturing facilities, minute impurities, difficulties in the production process or other factors can cause a substantial percentage of its products to be rejected or non-functional. These factors can result in lower than expected production yields, which delay product shipments and may materially and adversely affect Kyocera’s operating results. Because the majority of Kyocera’s costs of manufacture are relatively fixed, production yield and capacity utilization rate are critical to its financial results.

(5) Since a significant percentage of Kyocera’s revenues has been derived from foreign sales in recent years, various export risks may disproportionately affect its revenues

Kyocera’s sales to customers located outside Japan accounted for 61.3% of its total revenues in fiscal 2007. Kyocera believes that overseas sales will continue to account for a significant percentage of its revenues. Therefore, the following export risks may disproportionately affect Kyocera’s revenues:

 

   

a strong yen may make Kyocera’s products less attractive to foreign purchasers;

 

   

political and economic instability may inhibit export of Kyocera’s products;

 

   

Kyocera may experience difficulties in the timeliness of collection of accounts receivable due from foreign customers and be forced to write off those receivables;

 

   

tariffs and other barriers may make Kyocera’s products less cost competitive;

 

   

shipping and handling costs of Kyocera’s products may increase;

 

   

Kyocera may have difficulty in staffing and managing its international operations; and

 

   

the laws of certain foreign countries may not adequately protect Kyocera’s trade secrets and intellectual property.

(6) Currency exchange rate fluctuations could adversely affect Kyocera’s financial results

Kyocera conducts business in countries outside of Japan, which exposes it to fluctuations in foreign currency exchange rates. Kyocera may enter into short-term forward exchange transaction to hedge this risk according to its outlook on future exchange rates; nevertheless, fluctuations in foreign currency exchange rates could have an adverse effect on its business. Fluctuations in foreign currency exchange rates may affect its results of operations and the value of its foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. Changes in currency exchange rates may affect the relative prices at which Kyocera and foreign competitors sell products in the same market. In addition, changes in the value of the relevant currencies may affect the cost of imported items required in its operations.

(7) Industry demand for skilled employees, particularly engineering and technical personnel, exceeds the number of personnel available

Kyocera’s future success depends, in part, on its ability to attract and retain certain key personnel, including engineering, operational and management personnel. Kyocera anticipates that it will need to hire additional skilled personnel in all areas of its business. The competition for attracting and retaining these employees, especially engineers in key fields, including software design in telecommunications, is intense. Because of this intense competition for these skilled employees, Kyocera may be unable to retain its existing personnel or attract additional qualified employees in the future.

 

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(8) Insufficient protection of Kyocera’s trade secrets and patents could have a significant adverse impact on its competitive position

Kyocera’s success and competitive position depend on protecting its trade secrets and other intellectual property. Kyocera’s strategy is to rely both on trade secrets and patents to protect its manufacturing and sales processes and products, but reliance on trade secrets is only an effective business practice insofar as trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or independently developed. Kyocera takes certain measures to protect its trade secrets, including executing nondisclosure agreements with certain of its employees, joint venture partners, customers and suppliers. If parties breach these agreements or the measures Kyocera takes are not properly implemented, Kyocera may not have an adequate remedy. Disclosure of its trade secrets or reverse engineering of its proprietary products, processes or devices could materially and adversely affect its business, financial condition and results of operations.

Kyocera is actively pursuing patents on some of its recent inventions, but these patents may not be issued. Even if these patents are issued, they may be challenged, invalidated or circumvented. In addition, the laws of certain other countries may not protect Kyocera’s intellectual property to the same extent as Japanese laws.

(9) Kyocera may require licenses to continue to manufacture and sell certain of its products, the expense of which may adversely affect its results of operations

From time to time Kyocera has received, and may receive in the future, notice of claims of infringement of other parties’ proprietary rights and licensing offers to commercialize third party patent rights. Although Kyocera is not currently involved in any litigations relating to its intellectual property except in the ordinary course of its business, Kyocera cannot assure that:

 

   

infringement claims (or claims for indemnification resulting from infringement claims) will not be asserted against Kyocera,

 

   

future assertions against Kyocera will not result in an injunction against the sale of infringing or allegedly infringing products or otherwise significantly impair its business and results of operations; or

 

   

Kyocera will not be required to obtain licenses, the expense of which may adversely affect its results of operations.

(10) Future initiatives and in-process research and development may not produce the desired results

Kyocera intends to expand its product lines to satisfy customer demand in its target markets. Unexpected technical delays in completing these initiatives could lengthen development schedules and result in lower revenues based on the products or technologies developed from these initiatives. There can be no assurance that the products derived from Kyocera’s in-process research and development activities will achieve market acceptance.

(11) Kyocera’s markets or supply chains may be adversely affected by terrorism, plague, wars or similar events

Kyocera as a global company has been expanding its business worldwide. At the same time, we will be exposed to risks of our getting involved in terrorism, plague, war and other similar events. In the case that those events occur, Kyocera’s operating activities would be suspended. Furthermore, there would be delay, disorder or suspension in Kyocera’s R&D, manufacturing, sales and services. If such delay or disruption occurs and continues for a long period of time, Kyocera’s business, financial condition and results of operations may be adversely affected.

 

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(12) Kyocera’s headquarters and major facilities are subject to devastating effects of earthquakes and other natural disasters

Kyocera’s headquarters and major facilities including plants, sales offices and R&D centre are located not only in Japan but also all over the world. It might be inevitable that Kyocera would suffer from natural disasters such as earthquake, typhoon, and floods and so on. For instance, if a strong earthquake occurs, Kyocera’s R&D or manufacturing facilities will be damaged devastatingly. In this case, Kyocera’s operating activities would be suspended and manufacturing and shipment would be delayed. Due to this, Kyocera would lose its sales and profits. Furthermore, Kyocera may incur a great amount of expenses, for example, medical care expenses for injured employees and damage expenses for the damaged machines or facilities will be incurred. As a consequence, Kyocera’s operating result and financial condition may be adversely affected.

(13) Kyocera may have to incur impairment losses on its investments in debt and equity securities

Kyocera holds investments in equity securities of companies not affiliated with itself, which Kyocera generally holds on a long-term basis for business relationship purposes. A substantial portion of these investments consists of shares of common stock of public companies in Japan, including KDDI Corporation (a Japanese telecommunication service provider), and Japanese financial institutions. As of March 31, 2007, the aggregate fair value of equity securities included in available-for-sale securities was ¥585,274 million ($4,960 million), with gross unrealized gains in the amount of ¥312,724 million ($2,650 million) and gross unrealized losses in the amount of ¥103 million ($1 million). If there is a decline in the fair value, i.e., the market price, of the shares Kyocera holds in those companies over a period of time, and it determines that the decline is other-than-temporary, Kyocera will need to record an impairment loss for the applicable fiscal period. During fiscal 2007, Kyocera recorded losses on impairment of securities (current assets) and investment securities (non-current assets) amounting to ¥955 million ($8 million), which were attribute mainly to management’s estimation that certain debt securities were under fair value over one year and certain non-public companies in which Kyocera invested would need considerable periods to gain profitability in their operating activities. For some of the equity securities Kyocera owns, including the shares of KDDI Corporation, Kyocera intends to keep its ownership at the current level in light of the importance of its business relationships with the issuers of these equity securities. For other equity securities in its portfolio, although Kyocera may dispose of them over time, market conditions may not permit it to do so at the time, speed or price it may wish.

(14) As a holder of ADSs, you will have fewer rights than a shareholder has and you will have to act through the depositary to exercise those rights

The rights of shareholders under Japanese law to take various actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and records and exercising appraisal rights, are available only to holders of record. Because the depositary, through its custodian agents, is the record holder of the Shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited Shares. The depositary will make efforts to vote the Shares underlying your ADSs as instructed by you and will pay to you the dividends and distributions collected from us. However, in your capacity as an ADS holder, you will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights through the depositary.

 

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(15) Rights of shareholders under Japanese law may be more limited than under the law of other jurisdictions

Our Articles of Incorporation, Regulations of the Board of Directors, Regulations of the Board of Corporate Auditors and the Company Law of Japan govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties and shareholders’ rights may be different from those that would apply if we were a U.S. company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of the United States. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a U.S. corporation. In addition, Japanese courts may not be willing to enforce liabilities against us in actions brought in Japan which are based upon the securities laws of the United States or any U.S. state.

(16) Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell your shares of our Common Stock at a particular price on any particular trading day, or at all

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.

(17) Foreign exchange fluctuations may affect the dollar value of our ADSs and dividends payable to holders of our ADSs

Market prices for our ADSs may fall if the value of the yen declines against the U.S. dollar. In addition, the U.S. dollar amount of cash dividends and other cash payments made to holders of our ADSs would be reduced if the value of the yen declines against the U.S. dollar.

Item 4. Information on Kyocera Corporation and its Consolidated Subsidiaries

A. History and Development of Kyocera Corporation and its Consolidated Subsidiaries

Kyocera Corporation is a joint stock corporation that was incorporated under the laws of Japan in 1959 with the name Kyoto Ceramic Kabushiki Kaisha. Its name was changed to Kyocera Kabushiki Kaisha (or Kyocera Corporation) in 1982. Our corporate headquarters is at 6 Takeda Tobadono-cho, Fushimi-ku, Kyoto 612-8501, Japan. Our telephone number is +81-75-604-3500.

Our business originally consisted of the manufacture of ceramic parts for electronic equipment. In the 1960s, we expanded our business and technology horizontally into the design and production of fine ceramic parts, ceramic integrated circuit (IC) packages and electronic components. In the 1970s, we began to produce consumer-related products, including cutting tools, ceramics for medical and dental uses, jewelry and solar energy products.

In the 1980s, we diversified into new strategic fields. In 1982, we merged with Cybernet Electronics Corporation, a telecommunications equipment manufacturer in which we had made an equity investment three years earlier. We expanded into another new business through the acquisition of Yashica Co., Ltd., a camera and camera lens manufacturer. We also played a leading role in the establishment of DDI Corporation (currently KDDI Corporation), which has become one of Japan’s leading providers of telecommunications services. In 1989, we gained a presence in the electronic connector market through our acquisition of Elco International Corporation (currently Kyocera Elco Corporation).

 

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In the 1990s, we strengthened our position as an internationally integrated electronic components manufacturer through our acquisition of AVX Corporation, a maker of capacitors and other passive electronic components, in January 1990.

In the middle of the 1990s, Kyocera developed two main business categories, “the Components Business,” in which Kyocera provides parts and devices such as fine ceramics parts, semiconductor parts, applied ceramic products and electronic components and devices to mainly electronic equipment manufacturers in IT industrial fields, and “the Equipment Business,” in which Kyocera manufactures and sells telecommunications and information equipment and optical instruments, such as mobile handsets, PHS-related products, copier machines, multifunctional systems, ECOSYS printers and digital still cameras to distributors or directly to customers.

Since 2000, we have further enhanced our position as a market leader in telecommunications and information equipment. In February 2000, we acquired the code division multiple access (CDMA) mobile phone handset business from QUALCOMM Inc. to create our U.S. subsidiary, Kyocera Wireless Corp. In April 2000, we invested in Kyocera Mita Corporation, a manufacturer of copier machines and other document solutions equipment, and make it a wholly-owned subsidiary, and in April 2002, we transferred Kyocera Corporation’s printer business into Kyocera Mita Corporation to further enhance our information equipment business by pursuing group synergies.

In addition, we also strengthened the components business resources to become a leading company in IT-related applications. In August 2002, we made Toshiba Chemical Corporation (currently Kyocera Chemical Corporation) a wholly-owned subsidiary through a share exchange in order to reinforce its electronic components and materials businesses by pursuing group synergies between fine chemical technologies and fine ceramic technologies.

With the aim of becoming a more global enterprise and enhancing its profitability, Kyocera has been expanding its production in China through Chinese production bases located in Shanghai and Dongguan. Kyocera also established a sales company, Kyocera (Tianjin) Sales and Trading Corporation, in March 2003 to cultivate the Chinese market. We are enhancing our marketing ability for both our products manufactured in China as well as our products imported into China. In addition, we established a subsidiary, Kyocera (Tianjin) Solar Energy Co., Ltd. to assemble solar modules, production of which commenced in November 2003, and to respond to market needs swiftly.

In August 2003, we made Kinseki, Limited (currently Kyocera Kinseki Corporation), a major producer of artificial crystal-related products, a wholly-owned subsidiary through a share exchange to strengthen our Electronic Device Group. In addition, to further enhance our organic circuit board business by pursuing group synergies, we also made an agreement with IBM Corporation and IBM Japan, Ltd. for the transfer from IBM Japan to Kyocera of its Surface Laminar Circuitry (SLC) business and we completed the transfer of IBM Japan’s SLC business from IBM Japan to a newly-established wholly-owned subsidiary, Kyocera SLC Technologies Corporation (KST) in August 2003. In April 2004, Kyocera integrated the organic material components business into KST and the marketing division of Kyocera Kinseki Corporation was merged into the marketing division of the electronic components of Kyocera Corporation and the manufacturing division of crystal related components of Kyocera Corporation was transferred to Kyocera Kinseki Corporation through corporate splits. In organic circuit board business, KST established Kyocera SLC Components Corporation as a manufacturing company of build-up substrates in Ayabe, Kyoto Prefecture in August 2004.

In September 2004, Kyocera and Kobe Steel, Ltd. established Japan Medical Materials Corporation (JMM) and Kyocera Corporation transferred its medical materials business to JMM through corporate splits. The shareholding ratios of Kyocera and Kobe Steel in JMM are 77% and 23%, respectively.

In October 2004, Kyocera Corporation invested in WILLCOM, Inc. which succeeded PHS business provided by DDI Pocket Inc. to enhance PHS-related business.

To meet with strong demand for solar energy products, Kyocera established Kyocera Solar Europe S.R.O. for assembling of solar modules in the Czech Republic in April 2005.

 

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In August 2006, Kyocera sold its entire of shares in Kyocera Leasing Co., Ltd. to Diamond Lease Company Limited, aimed to concentrate Kyocera’s management resources on its core businesses to enhance and improve its corporate value.

For a discussion of recent and current capital expenditures, please see Item 5 “Operating and Financial Review and Prospects” of this Form 20-F. We have had no recent significant divestitures nor are any significant divestitures currently being made.

B. Business Overview

Overview

Kyocera is engaged in numerous high-tech fields, from fine ceramic components to electronics devices, equipment, services and networks. Our manufacturing and distribution operations are conducted worldwide. As of March 31, 2007, we had 138 subsidiaries and 3 affiliates outside Japan and 31 subsidiaries and 7 affiliates in Japan. Our customers include individuals, corporations, governments and governmental agencies. For information on our sales by category of activity and information on our sales by geographic area and product segment, see Item 5.A “Operating Results” of this Form 20-F.

Business Strategy

Kyocera aims to be a company respected by society from the perspective of corporate ethics, while maintaining continuous sales growth and high profitability. To achieve its management vision, Kyocera’s management policy is to further drive business expansion to be “a creative company that continues to grow.” Kyocera promotes efficient resource management, emphasizes consolidated group management and intends to increase corporate value through improvement in business performance.

<Target of Pre-tax Income to Net Sales Ratio>

To be “a creative company that continues to grow,” Kyocera aims to quickly achieve its target of a pre-tax income to net sales ratio of 15% or higher.

<Medium Term Management Strategy>

Kyocera seeks to implement “high-value-added diversification” as its management strategy to realize its management policy. This involves ensuring that each business is highly profitable and pursuing synergies within Kyocera with the objective of driving sustainable growth in an ever-changing business environment.

Specifically, Kyocera aims to: (1) exploit competitive advantages; (2) strengthen existing businesses; and (3) create new businesses.

(1) Exploit competitive advantages

We believe the “Kyocera Philosophy,” which places people’s hearts at its core, the Amoeba Management System, which is unique to Kyocera and has been a driving force for growth since Kyocera Corporation’s earliest days, and a strong financial structure, are sources of competitive advantage for Kyocera over other companies in implementing its diversification strategy. With these foundations firmly in place, Kyocera seeks to strengthen competitiveness in technological development, sales and marketing in the high-growth potential markets for telecommunications and information processing and for environmental protection, and to translate its diversification strategy into improved business performance.

(2) Strengthen existing businesses

Kyocera strives to continuously improve profitability in all existing businesses within the Kyocera Group. Elsewhere, by strengthening ties and maximizing synergies between Kyocera Corporation and the Kyocera Group companies, Kyocera seeks to improve profitability in each business segment on a consolidated basis. In promoting a global strategy in each business, Kyocera has created development, manufacturing and sales systems in optimal locations, while the integration of group-wide resources helps boost the competitiveness of existing businesses. Kyocera regularly reviews those businesses that have lost market competitiveness and that show little promise of expansion going forward.

 

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(3) Create new businesses

Kyocera endeavors to create businesses that will become part of its core going forward in order to improve consolidated performance over the medium term. To achieve this goal, Kyocera seeks to integrate group-wide management resources to develop new technologies and products and create new markets. The focus of Kyocera’s business creation strategy lies in the markets for telecommunications and information processing and for environmental protection.

Challenges

To be “a creative company that continues to grow,” Kyocera seeks to continuously expand sales and to attain high profitability in its Components and Equipment Businesses. To accomplish these goals, Kyocera continues reinforcing the “Amoeba Management System” (go back to the origin of “Amoeba Management”) and create new value in fiscal 2008.

Kyocera plans to strengthen “operational excellence,” which refers to vitality in the workplace, across development, manufacturing, sales and back office divisions. The goal is to boost “executional excellence,” which means the ability to achieve targets, and thus create a highly profitable company.

In addition, Kyocera aims to improve its quality, optimize manufacturing locations worldwide and expand production capacity in order to enhance management foundations in the mid-to long-term range. Kyocera will seek to create new businesses and markets by pursuing Group synergies. Efforts will also be made to strengthen strategic businesses and to improve efficiency in operation of assets.

Operations

Kyocera is classified into eight reporting segments: (1) Fine Ceramic Parts Group, (2) Semiconductor Parts Group, (3) Applied Ceramic Products Group, (4) Electronic Device Group, (5) Telecommunications Equipment Group, (6) Information Equipment Group, (7) Optical Equipment Group and (8) Others.

Our principal products and services offered in each reporting segment are shown below.

(1) Fine Ceramic Parts Group

Information & Telecommunication Components,

Sapphire Substrates,

Components for Semiconductor Processing Equipment,

Components for LCD Manufacturing Equipment,

Automotive Components,

ITS related Components,

General Industrial Ceramic Components

(2) Semiconductor Parts Group

Surface Mount Device (SMD) Ceramic Packages,

CCD/CMOS Sensor Ceramic Packages,

LSI Ceramic Packages,

Wireless Communication Device Packages,

Optical Communication Device Packages / Components,

Organic Multilayer Packages / Substrates

(3) Applied Ceramic Products Group

Residential & Industrial Solar Power Generating Systems,

Solar Cells / Modules

Cutting Tools,

Printed Circuit Board Micro Drills,

Jewelry & Applied Ceramic Related Products,

Dental Implants, Artificial Bone and Joint Prosthesis

 

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(4) Electronic Device Group

Ceramic Capacitors, Tantalum Capacitors,

Timing Devices (Temperature Compensated Crystal Oscillators (TCXOs), Ceramic Resonators, Crystal Units),

RF Modules,

Surface Acoustic Wave (SAW) Filters,

Connectors,

Thermal Printheads, LED Printheads,

Amorphous Silicon Photoreceptor Drums,

LCDs

(5) Telecommunications Equipment Group

CDMA Mobile Phone Handsets,

Personal Handy Phone System (PHS) Related Products (PHS Mobile Phone Handsets, PHS Base Stations, High Speed Wireless Data     Transmission Systems)

(6) Information Equipment Group

ECOSYS Printers,

Copying Machines,

Multifunctional Systems

(7) Optical Equipment Group

Optical Modules, Lenses

(8) Others

Chemical Materials for Electronic Components,

Electrical Insulators,

Synthetic Resin Molded Parts,

Telecommunications Engineering Business,

Information and Communication Technology Business,

Management Consulting Business,

Hotel Business,

Realty Development Business,

Insurance Agent and Travel Agent Businesses

(1) Fine Ceramic Parts Group

Products in this reporting segment are widely used in the computing, telecommunications, automotive and various industrial sectors. These products are made from a variety of ceramic materials, such as silicon carbide, silicon nitrides and zirconia as well as alumina, utilizing their characteristics of heat resistance, corrosion resistance and wear resistance.

Products Kyocera develops, manufactures and sells in this reporting segment include substrates, which are thin ceramic bases used by manufacturers for hybrid integrated circuit (“IC”) foundations. Kyocera also develops, manufactures and sells substrates for thermal printheads, ceramic/alumina tape substrates for chip resistors, substrates for HDD thin film magnetic heads, sapphire substrates for LCD projectors and LEDs, components for LCD manufacturing equipment, components for semiconductor processing equipment, mechanical seals for pumps, engine components for the automobile industry, friction tight discs and thread guides for yarn texturing machines in the textile industry, rings for fishing rods, nozzles and parts for paper-making machinery.

(2) Semiconductor Parts Group

Kyocera develops, manufactures and sells inorganic (ceramic) and organic packages in this reporting segment. Ceramic packages have the characteristics of air and water tight and corrosion resistance as well as having the ability to dissipate heat efficiently. In addition, they have a superior capacity for use in high frequency and embedded passive components. Kyocera develops, manufactures and sells ceramic packages for IC or other semiconductor and electronic components.

 

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The most common types of the ceramic packages Kyocera develops, manufactures and sells are multilayer packages, including surface mount device (SMD) ceramic packages and pin grid array packages. Kyocera also develops, manufactures and sells optical communication device packages and ceramic parts for fiber-optic communications connectors. SMD ceramic packages are used for surface acoustic wave (SAW) filters and temperature compensated crystal oscillators (TCXOs), which are mostly inserted into mobile phone handsets. Pin grid array packages are sold to manufacturers of MPUs and of other logic ICs, which are principally inserted into information equipment and peripherals. Kyocera also develops, manufactures and sells ceramic packages for charge-coupled-devices (CCDs) and complementary metal oxide semiconductor (CMOS) devices, which are mainly used in camera-equipped mobile phone handsets and digital still cameras.

In the organic package business, Kyocera established a specialized high density organic circuit board manufacturer, Kyocera SLC Technologies Corporation (KST). KST develops, manufactures and sells system in a package substrates (SiP) used in mobile phone handsets and organic flip-chip packages for high-end application specific integrated circuits (ASICs). KST aims to increase sales of organic package for new micro processor units (MPUs) and its peripheral devices for digital consumer equipment.

(3) Applied Ceramic Products Group

This reporting segment consists of four product lines: 1) Solar Energy Products, 2) Cutting Tools, 3) Jewelry and Applied Ceramic Related Products, 4) Dental Implants, Artificial Bone and Joint Prosthesis.

1) Solar Energy Products

Kyocera develops, manufactures and sells solar cells and modules, applied solar cell products and residential and industrial solar power generating systems. We are expanding our solar cell production capacity in Japan and commenced assembly of solar modules by Kyocera (Tianjin) Solar Energy Co., Ltd. in China, which was established as our manufacture and sales subsidiary of solar modules in May 2003. In addition, Kyocera commenced assembly of solar module in Kyocera Solar, Inc. Mexico Plant in Tijuana, Mexico, for the U.S. market in October 2004. To increase sales in Europe, Kyocera also commenced assembly of solar modules in the Czech Republic in October 2005. Kyocera produces solar cells and modules through a global quadripartite production system.

2) Cutting Tools

Kyocera develops, manufactures and sells cutting tools for metal processing in industrial production, particularly in the automotive industry. To expand its cutting tools business, Kyocera Corporation acquired Tycom Corporation (currently Kyocera Tycom Corporation, a consolidated subsidiary), which was a manufacturer of micro drills for printed circuit boards in the United States, in January 2001. Kyocera aims to be a market leader in the cutting tools business by pursuing synergies between Kyocera Tycom Corporation and Kyocera Corporation via worldwide manufacturing and sales channels.

3) Jewelry and Applied Ceramic Related Products

Recrystallized jewelry comprises mainly synthetic emeralds, alexandrines and rubies. These stones are manufactured using a single crystal growth technology developed by us, and are chemically and physically equivalent to natural stones. We introduce recrystallized jewelry products to meet consumer needs and to cultivate our sales network. Kyocera also produces and sales applied ceramic related products such as kitchen knives utilizing ceramic characteristics of wear and corrosion resistance from acid and alkalinity.

 

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4) Dental Implants, Artificial Bone and Joint Prosthesis

Kyocera established Japan Medical Materials Corporation (JMM) with Kobe Steel, Ltd. by integrating the two companies’ medical material businesses in September 2004. JMM produces a wide range of products such as dental implants, artificial bone and joint prosthesis, artificial knee joint replacement systems, and ceramic materials helping heal hip fractures by combinations of material, processing technologies of ceramics and titanium alloys and integrating business resources such as development, manufacturing, marketing and sales channels of Kyocera and Kobe Steel, Ltd.

(4) Electronic Device Group

Kyocera develops, manufactures and sells high quality and cost competitive electronic components and devices for the telecommunications and information processing industry. This field creates demand for miniaturization, low voltage, high frequency and low energy consumption, and we develop, manufacture and sell high-value-added products such as miniature ceramic capacitors with high capacitance capacitors, tantalum capacitors, miniature timing devices like TCXOs, RF modules and connectors for mobile phone handsets and PCs. We also develop, manufacture and sell thin-film products such as thermal printheads, amorphous silicon photoreceptor drums and LCDs for audio visual electronic equipment, office automation equipment and industrial equipment.

We are strengthening our manufacturing and sales in China to enhance price competition and to cultivate new markets. Shanghai Kyocera Electronics Co., Ltd. mainly produces ceramic capacitors and timing devices. We aim to expand sales in China through our sales company in Tianjin which markets our products made both in China and outside China.

To expand this reporting segment business, we are pursuing the synergies with subsidiaries. AVX Corporation and its consolidated subsidiaries (AVX), which develops, manufactures and sells ceramic capacitors, tantalum capacitors and other passive components for telecommunications and information equipment, has a global manufacturing and sales network. AVX is a major contributor to our Electronic Device Group sales and pursue synergies with development and manufacturing in ceramic capacitor business. In our timing device business, Kyocera Corporation acquired Kinseki, Limited (currently Kyocera Kinseki Corporation, a consolidated subsidiary) through a share exchange in August 2003. The marketing division of Kyocera Kinseki Corporation was merged into the marketing division of the electronic components of Kyocera Corporation and the manufacturing division of crystal related components of Kyocera Corporation was transferred to Kyocera Kinseki Corporation through corporate splits to pursue synergies in development, manufacture and marketing in April 2004. Kyocera Kinseki Corporation acquired Hertz Technology Inc. (currently Kyocera Kinseki Hertz Corporation, a consolidated subsidiary) in order to enhance its crystal devices business and gained new technology for tuning-fork crystal units, in July 2006.

(5) Telecommunications Equipment Group

This reporting segment includes CDMA mobile phone handsets and PHS-related products such as PHS mobile phone handsets and base stations. These products are produced and distributed mainly for KDDI Corporation (KDDI) and WILLCOM, Inc. (WILLCOM), as well as for other Asian and U.S. telecommunication service providers. KDDI is a telecommunications service company, in which we made an equity investment when it was founded in 1984, at a time when the telecommunications business in Japan, which had previously been monopolized by a national telephone company, was opened to private companies. KDDI and KDDI’s subsidiaries are currently engaged in providing domestic, long distance, international telephone services and mobile phone services. WILLCOM provides PHS services and our shareholder ratio in WILLCOM is 30%.

One of our major businesses in the Telecommunications Equipment Group is mobile phone handset business focused on CDMA protocol. This technology has become one of the fastest growing mobile phone protocols. We acquired the CDMA mobile phone handset business of Qualcomm Inc. and established Kyocera Wireless Corp. as a wholly-owned subsidiary in February 2000. In addition, we established Kyocera Wireless (INDIA) PVT. LTD., a subsidiary for developing software for CDMA mobile phone handsets in June 2003.

 

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In September 2005, we decided to outsource the manufacturing division of Kyocera Wireless Corp. to Flextronics International Ltd., a leading provider of electronics manufacturing services. With regard to the mobile phone handsets business, we expect to increase sales of CDMA mobile phone handsets through the outsourcing and global development structures based in Japan, the United States and India.

Our other major business in the Telecommunications Equipment Group is the PHS-related business. We are expanding this business by cultivating new markets through expansion of application of PHS technology. Specifically, we are promoting new PHS mobile phone handsets and base stations that work with the high speed data transmission services offered in Japan. We also promote wireless Internet systems, which enable internet services to be used at broadband speed with wireless technology. By promoting these businesses in appropriate market, we will seek to increase sales of PHS-related products.

(6) Information Equipment Group

The major products in this reporting segment comprise page printers, digital copying machines and multifunctional systems. Our products are marketed under the name of “ECOSYS” with a long life cycle, ecology and economy concept utilizing our thin film products, amorphous silicon photoreceptor drums.

In April 2000, Kyocera Mita Corporation became our wholly-owned subsidiary. Kyocera Corporation’s ECOSYS printer unit was merged into this subsidiary, enabling us to build a unified presence in the document solutions business. Further efficiencies have resulted from the merger of our printer and copier sales operations with those of Kyocera Mita Corporation. We have enhanced our product line through the standardization of engines between the printers, copying machines and multifunctional systems. We established Kyocera Mita Office Equipment (Dongguan) Co., Ltd, in Dongguan, China due mainly to strengthen price competitiveness in December 2001.

We expect further strong demand for color ECOSYS printers, copying machines and multifunctional systems. We focus on expanding our comprehensive color-capable product line up of ECOSYS printers, copying machines and multifunctional systems with the original “ECOSYS” concept as well as monochrome products.

(7) Optical Equipment Group

The major products in this reporting segment include optical modules for camera-equipped mobile phone handsets and various lenses such as aspherical lenses.

We are developing our optical components business through the integration of internal technologies such as lense design, manufacturing process and of expertise in electronic devices.

(8) Others

This reporting segment includes revenues from telecommunication network systems and our office leasing business in Japan and Asia. This segment also develops, manufactures and sells electronic component materials, electric insulators and synthetic resin molded parts.

Kyocera Communication Systems Co., Ltd. (KCCS) operates a total telecommunications network system business, from system development to design, construction and maintenance services. KCCS is also expanding data center services for mobile phone content distribution services and IT solutions services for business users by developing new products featuring network as well as system integration services.

Kyocera Chemical Corporation, which joined Kyocera in August 2002, mainly produces electronic component materials. We develop new products by pursuing synergies with fine chemical technologies and our components technologies such as the Electronic Device Group.

In August 2006, Kyocera sold its entire of shares in Kyocera Leasing Co., Ltd.,a subsidiary engaged in financing services, to enhance and improve its corporate value by concentrating Kyocera’s management resources on its core businesses.

 

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Sales and Distribution

Our products are marketed worldwide by our sales personnel, as well as through sales companies within our group compensated solely on a commission basis, and by independent distributors. We have regional sales and design application personnel in strategic locations to provide technical and sales support for independent manufacturers’ representatives and independent distributors. We believe that this combination of distribution channels leads to a high level of market penetration and efficient coverage for our customers on a cost-effective basis.

Most of the sales of the Fine Ceramic Parts Group, the Semiconductor Parts Group and the Electronic Device Group are made directly to manufacturers worldwide who incorporate them into their own products. However, the Applied Ceramic Products Group, which creates products such as cutting tools, recrystallized jewelry, solar energy products and various other applied fine ceramics products, tend to be sold to distributors and wholesalers. Jewelry sales are made mainly through direct retail shops and agencies in Japan. Sales of consumer solar energy products are made through direct sales companies, as well as through sales distributors. Dental implants, artificial bone and joint prosthesis are mainly sold through distributors. In the Telecommunications Equipment Group, our domestic sales of mobile handsets comprise sales to KDDI Corporation and PHS handsets to WILLCOM INC., and we also sell our handsets directly to telecommunication providers in overseas markets. The Information Equipment Group markets products such as ECOCSYS printers, copier machines and multifunctional systems both in Japan and abroad under our brand name through distributors and wholesalers. In the Optical Equipment Group, optical modules for mobile phone handsets are marketed directly to mobile phone handsets manufacturers. Office renting and other services are provided to companies outside our group, mainly in Japan. Our telecommunication network engineering and data center services are provided directly to customers and users.

Domestic sales are made in the yen, while overseas sales are made in a variety of currencies, but predominantly in the U.S. dollars and Euro.

Sources and Availability of Raw Materials and Supplies

We purchase a variety of raw materials. The principal ones in terms of volume are alumina (a mineral substance produced from bauxite and from which aluminum is made), zirconia, titania, silicon nitride, tungsten, tantalum and silicon used for the products of the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group and the Electronic Device Group. Each of these materials is subject to price volatility.

In terms of costs, gold, which is primarily used in the production process for ceramic packages in the Semiconductor Parts Group, is also subject to price volatility, and is our most significant raw material. Our policy is to hedge against fluctuations in the price of gold by keeping a small gold inventory and by generally pricing products on a “gold adder” system so that customers pay for the gold contained in semiconductor parts at a rate which approximates our cost.

Our main supplies are ICs, LCDs and Printed Circuit Board, used for products in the Electronic Device Group, the Telecommunications Equipment Group and the Information Equipment Group, such as thin-film devices, mobile phone handsets, ECOSYS printers, copier machines and multifunctional systems.

As we typically receive our supply of these raw materials and supplies from several large companies which we believe are reliable sources, we have not generally experienced, and we do not anticipate experiencing in the near future, any difficulty in obtaining raw materials or supplies or in meeting fuel requirements. Although oil prices have risen recently, the increases have not materially affected our purchase price of certain oil-related supplies.

During fiscal 2007, no single supplier accounted for a significant portion of our consolidated purchases of raw materials and supplies. However, a number of components and sub-assemblies used in our products are sourced by sole source suppliers. These tend to be complex, precision components that are sometimes produced only by a limited number of suppliers or a single supplier that may own intellectual property related to the component or sub-assembly.

 

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Patents and Licenses

Our success and competitive position depend on a number of significant patents, licenses and trade secrets relating to our manufacturing and sales processes and products. The following table sets forth information, as of March 31, 2007, with respect to our significant patents and license agreements.

(a) License permitted to produce products

 

Counterparty

  

Country

  

Contents

  

Period

Qualcomm Incorporated    United States    License under patents regarding mobile phone    From August 31, 1996 to patent expiration
Interdigital Group    United States    License under patents regarding mobile phone    From July 1, 2004 to June 30, 2009
Monotype Imaging    Japan    License under patents regarding font software    From June 25, 1999 to patent expiration
(b) License – cross agreements         

Counterparty

  

Country

  

Contents

  

Period

Motorola, Inc.    United States    License under patents regarding mobile phone    From July 1, 2004 to June 30, 2009
Lucent Technologies International Sales Limited    United States    License under patents regarding mobile phone    From September 26, 2005 to December 31, 2009
Nokia Corporation    Finland    License under patents regarding mobile phone    From October 1, 2005 to September 30, 2008
Canon Incorporated    Japan    License under patents regarding electric photo printer    From April 1, 2002 to patent expiration

Competitive Position

(1) Fine Ceramic Parts Group

Products in this reporting segment are highly customized, and major customers are primarily secondary manufacturers who incorporate our products in their products. Therefore, our competitive position largely depends on maintaining close contacts with, and being the first to meet the needs of, secondary manufacturers. We compete with different ceramic manufacturers depending on the product.

(2) Semiconductor Parts Group

In this reporting segment, our goal is to further strengthen our competitive position in both the ceramic and organic materials package business in the world market. To meet with the latest technologies, we seek to strengthen our R&D activities to develop new applications such as wireless and optical communications, digital consumer equipment, and in the automobile and medical areas.

 

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In the ceramic package field, we believe surface mount device packages for electronic components and CCD/CMOS sensor ceramic packages are already market leaders. We also aim to be a market leader in the ceramic packages and to satisfy customer needs by applying our technological and managerial expertise.

In the organic package field, in which we are a relatively late comer, we compete with plastic electronic device manufacturers. To strengthen our technological expertise and expand our business in this area, we acquired the Surface Laminar Circuitry business of IBM Japan in September 2003 and established Kyocera SLC Technologies Corporation (KST). We integrated our management resources into KST in April 2004, and Kyocera SLC Components Corporation, a wholly-owned subsidiary of KST established a new plant in Kyoto, Japan in June 2005. We aim to strengthen our organic material components business going forward by fully utilizing this new plant.

(3) Applied Ceramic Products Group

The awareness of the importance of environmental protection is evident worldwide. We are one of major manufacturer of solar cells and modules in the world. To be a market leader in the solar energy products business, we expanded solar cell production line with 20MW capacity per month in Japan in fiscal 2006 and established solar modules assembling bases in quadripartite plants in Japan, China, Mexico and the Czech Republic. From fiscal 2008, we expect to expand production volume of solar cells and aim to achieve 500MW/year production in fiscal 2011.

We believe we are the major supplier of cutting tools in Japan, and our major application of cutting tools is for the automotive industry. Although we have many global competitors, we introduced new facilities to handle material processing and started vertically in-house integrated production in fiscal 2006. We intend to expand our market share on a global basis by utilizing our vertically integrated production line.

(4) Electronic Device Group

We believe we are a unique electronic device manufacturer compared with our competitors, who specialize in passive components. We produce not only passive components but also crystal related products, connectors and thin-film devices. In this reporting segment, one of our advantages is that we can supply a variety of components. Since products in this reporting segment are largely standardized, competition is based largely on price, quality and delivery time.

Kyocera is one of the major manufacturers of capacitors and crystal-related components. Most of our competitors in this reporting segment are Japanese manufacturers. However, AVX Corporation, a U.S. subsidiary, competes with overseas manufacturers in producing tantalum capacitors. We believe our thin-film products, such as thermal printheads, and amorphous silicon photoreceptor drums, are market-leading products in applications for printers and copier machines.

We are also continuing to seek synergies within Kyocera and reduce costs in order to expand this business. We strive to optimize our development, production, and sales throughout our global network, reduce manufacturing costs, and enhance price competitiveness. Specifically, we believe these goals can be achieved by maximizing our production capability of Chinese production bases.

(5) Telecommunications Equipment Group

In the Japanese market, our main competitors for mobile phone handsets are Japanese manufacturers. In the mobile phone handsets market outside Japan, Kyocera competes with U.S., European and Asian manufacturers. We are currently a middle-class supplier in terms of sales volume in the global CDMA handsets market. During fiscal 2006, Kyocera outsourced its CDMA handset production at Kyocera Wireless Corp. to Flextronics International Ltd. to reduce manufacturing costs and improve profitability. In terms of PHS-related products in Japan, our main competitors are Japanese manufacturers.

 

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(6) Information Equipment Group

We compete with both Japanese and overseas manufacturers in the information equipment such as copier machines, printers and multifunctional systems. Our products are based on our unique “ECOSYS” concept that provide long life cycle, ecology and economy concept by utilizing our highly durable amorphous silicon photoreceptor drums. Our ECOSYS concept is widely used in our printers, copier machines and multifunctional systems as well as monochrome and color, low speed to high speed models, and we believe it differentiates us from other manufacturers.

(7) Optical Equipment Group

We compete against both Japanese and overseas competitors for our camera modules for mobile phone handsets. We focus on high-value-added, small optical modules for mobile phone handsets with high pixels by utilizing our in-house lens design technology, manufacturing process technology and integrated expertise in electronic device and in semiconductor parts.

Government Regulation

There are some governmental regulations specifically applicable to industries in which Kyocera operates. However, we do not believe that such governmental regulations currently have material effects on Kyocera’s business.

C. Organizational Structure

We had 179 subsidiaries and affiliates as of March 31, 2007. Our management structure is based on a business segment structure. Therefore, the management of each segment is conducted uniformly regardless of whether our operations are conducted by the parent company or by one of our subsidiaries.

The following table sets forth information, as of March 31, 2007, with respect to our significant subsidiaries.

 

Name

  

Country of
Incorporation

   Percentage
held by
Kyocera
   

Main Business

(1) Fine Ceramic Parts Group        
Kyocera Industrial Ceramics Corporation    United States    100.00 %   Manufacture and sale of fine ceramic-related products and sale of electronic devices
Kyocera Asia Pacific Pte. Ltd.    Singapore    100.00 %   Sale of fine ceramic-related products and electronic devices
(2) Semiconductor Parts Group        
Kyocera SLC Technologies Corporation    Japan    100.00 %   Manufacture and sale of organic multilayer printed circuit board

Kyocera SLC Components

Corporation

   Japan    100.00 %   Manufacture of organic multilayer printed circuit board
Kyocera America, Inc.    United States    100.00 %   Manufacture and sale of fine ceramic-related products
Kyocera Korea Co., Ltd.    Korea    100.00 %   Sale of fine ceramic-related products

 

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Name

  

Country of
Incorporation

   Percentage
held by
Kyocera
   

Main Business

Shanghai Kyocera Electronics Co.,

Ltd.

   China    100.00 %  

Manufacture and sale of fine ceramic-related products

and electronic devices

(3) Applied Ceramic Products Group        
Kyocera Solar Corporation    Japan    100.00 %   Sale of solar energy products
Japan Medical Materials Corporation    Japan    77.00 %   Development, manufacture and sale of medical materials and equipment
Kyocera Solar, Inc.    United States    100.00 %   Manufacture and sale of solar energy products
Kyocera Tycom Corporation    United States    100.00 %   Manufacture and sale of micro drills
Kyocera (Tianjin) Solar Energy Co., Ltd.    China    90.00 %   Manufacture and sale of solar energy products
Kyocera Fineceramics GmbH    Germany    100.00 %   Sale of fine ceramic-related products, thin-film devices and solar energy products
Kyocera Precision Tools Korea Co., Ltd.    Korea    90.00 %   Manufacture and sale of cutting tools
Kyocera Solar Europe S.R.O.    Czech    100.00 %   Manufacture of solar energy products
Kyocera Mexicana, S.A. de C.V.    Mexico    100.00 %   Manufacture of ceramic-related products and solar modules
(4) Electronic Device Group        
Kyocera Kinseki Corporation    Japan    100.00 %   Manufacture of electronic devices
Kyocera Elco Corporation    Japan    100.00 %   Manufacture and sale of electronic devices
Kyocera Display Institute Co., Ltd.    Japan    100.00 %   R&D of organic electro luminescence display

 

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Name

  

Country of
Incorporation

   Percentage
held by
Kyocera
   

Main Business

AVX Corporation

   United States    70.95 %   Manufacture and sale of electronic devices

Kyocera Elco Korea Co., Ltd.

   Korea    100.00 %   Manufacture of electronic devices

Kyocera Elco Hong Kong Ltd.

   China    100.00 %  

Sale of electronic devices

Kyocera (Tianjin) Sales & Trading Corporation    China    90.00 %   Sale of electronic devices, fine ceramic-related products and information equipment

(5) Telecommunications Equipment

Group

       

Kyocera Wireless Corp.

   United States    100.00 %   Manufacture and sale of telecommunications equipment

Kyocera Wireless (India) PVT. Ltd.

   India    100.00 %   R&D of telecommunications equipment

Kyocera Telecommunications

Research Corporation

   United States    100.00 %   R&D of telecommunications equipment

(6) Information Equipment Group

       

Kyocera Mita Corporation

   Japan    100.00 %   Manufacture and sale of information equipment

Kyocera Mita Japan Corporation

   Japan    100.00 %   Sale of information equipment

Kyocera Mita America, Inc.

   United States    100.00 %   Sale of information equipment
Kyocera Mita Office Equipment (Dongguan) Co., Ltd.    China    90.00 %   Manufacture and sale of information equipment

Kyocera Mita Europe B.V.

   Netherlands    100.00 %   Sale of information equipment

Kyocera Mita Deutschland GmbH

   Germany    100.00 %   Sale of information equipment

 

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Name

  Country of
Incorporation
   Percentage
held by
Kyocera
   

Main Business

(7) Optical Equipment Group

      

Kyocera Optec Co., Ltd.

  Japan    100.00 %   Manufacture and sale of optical components

Universal Optical Industries, Ltd.

  China    100.00 %   Manufacture and sale of optical components, cutting tools and thin-film devices

Dongguan Shilong Kyocera Optics Co., Ltd.

  China    90.00 %   Manufacture and sale of optical components, cutting tools and thin-film devices

(8) Others

      

Kyocera Communication Systems Co., Ltd.

  Japan    76.30 %   Provision of IT services

Kyocera Realty Development Co., Ltd.

  Japan    100.00 %   Real estate services

Hotel Kyocera Co., Ltd.

  Japan    100.00 %   Hotel management and operations

Hotel Princess Kyoto Co., Ltd.

  Japan    100.00 %   Hotel management and operations

Kyocera International Co., Ltd.

  Japan    100.00 %   Insurance and travel agency

Kyocera Chemical Corporation

  Japan    100.00 %   Manufacture and sale of electronic materials

Piazza Investment Co., Ltd.

  China    100.00 %   Real estate leasing

Shanghai Kyocera Realty Development Co., Ltd.

  China    100.00 %   Real estate leasing

In addition to the above consolidated subsidiaries, Kyocera had 124 other consolidated subsidiaries as of March 31, 2007, including Kyocera International Inc., a wholly-owned U.S. subsidiary which is a holding company established to own Kyocera’s subsidiaries in North America. Kyocera also had interests in two subsidiaries accounted for by the equity method and 10 affiliates accounted for by the equity method as of March 31, 2007.

AVX Corporation, in our Electronic Device Group, is one of our most significant subsidiaries. Most of the electronic devices we produce for overseas sales are distributed by AVX Corporation by utilizing AVX Corporation’s wide range of marketing channels. In addition, we market passive components produced by AVX Corporation in the Japanese market. We also utilize AVX Corporation’s manufacturing process for ceramic capacitors to improve productivity and to enhance our competitiveness. In addition, AVX Corporation introduced our materials technologies into its ceramic capacitor production. We have been seeking better ways to cooperate in expanding our electronic device businesses. Currently, four of our directors are members of AVX Corporation’s board of directors and AVX Corporation’s chief executive officer is one of our directors. Within the Electronic Device Group, we have a close relationship with AVX Corporation in marketing, manufacturing, and research and development, and we are seeking and pursuing synergies to be a leading passive component manufacturer. AVX Corporation posted net income of $153,865 thousand in fiscal 2007, compared to $81,752 thousand in fiscal 2006, and its strong performance contributed significantly to Kyocera’s results of operations and financial condition for fiscal 2006 and 2007. See Item 5.A “Operating Results” of this Form 20-F.

 

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D. Property, Plants and Equipment

Our manufacturing operations are conducted in Japan, the United States, Mexico, El Salvador, Brazil, the United Kingdom, Germany, France, the Czech Republic, Singapore, South Korea, China, Taiwan, Malaysia, Israel, Thailand and Philippines. As of March 31, 2007, we had property, plants and equipment with a net book value of ¥280,906 million ($2,381 million). During the five years ended March 31, 2007, we invested a total of ¥315,798 million ($2,676 million) for additions to property, plants and equipment. Our property, plants and equipment are not subject to any material encumbrances or environmental issues.

The following table sets forth information, as of March 31, 2007, with respect to our manufacturing facilities with floor space of more than 100,000 square feet.

 

Name of Plant

  

Location

   Status    Floor Space    Lease
Expires
  

Principal Products Manufactured

               (in thousands
of square feet)
         

Japan

              

Hokkaido Kitami Plant

   Kitami, Hokkaido    Owned    295       Telecommunications equipment, Semiconductor parts, Fine ceramic parts

Fukushima Tanagura Plant

   Higashi-Shirakawa, Fukushima    Owned    126       Telecommunications equipment

Koriyama Plant

   Koriyama, Fukushima    Owned    157       Electronic parts and materials

Nagano Okaya Plant

   Okaya, Nagano    Owned    382      

Fine ceramic parts, Electronic components,

Cutting tools

Kawasaki Plant

   Kawasaki, Kanagawa    Owned    159       Electronic parts and materials

Kawaguchi Plant

   Kawaguchi, Saitama    Owned    389       Electronic parts and materials

Ise Plant

   Ise, Mie    Owned    102       Solar modules

Tamaki Plant

   Watarai, Mie    Owned    200       Information equipments

Shiga Gamo Plant

   Higashi-Ohmi, Shiga    Owned    724       Fine ceramic parts, Semiconductor parts

Shiga Yokaichi Plant

   Higashi-Ohmi, Shiga    Owned    1,417       Fine ceramic parts, Electronic components, Solar cells, Cutting tools

Hirakata Plant

   Hirakata, Osaka    Owned    421       Information equipment

Kagoshima Sendai Plant

   Satsuma-Sendai, Kagoshima    Owned    1,522      

Fine ceramic parts, Semiconductor parts, Electronic components,

Cutting tools

 

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Name of Plant

  

Location

   Status    Floor Space    Lease
Expires
  

Principal Products Manufactured

               (in thousands
of square feet)
         

Kagoshima Kokubu Plant

   Kirishima, Kagoshima    Owned    2,092       Fine ceramic parts, Semiconductor parts, Electronic components

Kagoshima Hayato Plant

   Kirishima, Kagoshima    Owned    278       Electronic components

Hokkaido Ebetsu Plant

   Ebetsu, Hokkaido    Owned    100       Electronic components

Yamagata Higashine Plant

   Higashine, Yamagata    Owned    379       Electronic components

Shiga Yasu Plant

   Yasu, Shiga    Owned    146       Organic multilayer printed circuit boards

Ayabe Plant

   Ayabe, Kyoto    Owned    291       Organic multilayer printed circuit boards

United States

              

Balboa Plant

   San Diego, California    Owned    300       Semiconductor parts

Mountain Home Plant

   Mountain Home, North Carolina    Owned    134       Cutting tools

Myrtle Plant

   Myrtle Beach, South Carolina    Owned    604       Electronic components

Olean Plant

   Olean, New York    Owned    113       Electronic components

Raleigh Plant

   Raleigh, North Carolina    Owned    203       Electronic components

South Carolina Plant

   Fountain Inn, South Carolina    Owned    300       Information equipments

Mexico

              

Tijuana Plant

   Tijuana    Owned    117      

Semiconductor parts,

Solar modules

El Salvador

              

San Salvador Plant

   San Salvador    Owned    438       Electronic components

United Kingdom

              

Paignton Plant

   Paignton, England    Owned    127       Electronic components

Coleraine Plant

   Coleraine, Northern Ireland    Owned    171       Electronic components

Germany

              

Betzdorf Plant

   Betzdorf    Owned    115       Electronic components

France

              

Saint-Apollinaire Plant

   Saint-Apollinaire    Leased    387    2010    Electronic components

Czech Republic

              

Lanskroun Plant

   Lanskroun    Leased    219    2017    Electronic components

Lanskroun Plant

   Lanskroun    Owned    308       Electronic components

Uherske Hradiste Plant

   Uherske Hradiste    Owned    258       Electronic components

Kadan Plant

   Kadan    Owned    134       Solar modules

 

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Name of Plant

  

Location

   Status    Floor Space    Lease
Expires
  

Principal Products Manufactured

               (in thousands
of square feet)
         

China

              

Tianjin Plant

   Tianjin    Owned    520       Electronic components

Shilong Plant

   Dongguan, Canton    Leased    2,331    2020    Information equipments

Shilong Plant

   Dongguan, Canton    Leased    156    2008    Information equipments

Shilong Plant

   Dongguan, Canton    Leased    776    2016   

Optical Equipment,

Cutting tools

Shanghai Pudong Plant

   Shanghai    Leased    1,040    2010   

Semiconductor parts,

Electronic components

Hong Kong Plant

   Hong Kong    Leased    183    2008    Information equipments

Malaysia

              

Penang Plant

   Penang    Owned    162       Electronic components

Singapore

              

Singapore Plant

   Singapore    Owned    129       Electronic parts and materials

Thailand

              

Thailand Plant

   Thailand    Owned    264       Electronic components

Philippines

              

Philippines Plant

   Philippines    Owned    332       Electronic components

Item 4A. Unresolved Staff Comments

We are a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. There are no written comments which have been provided by the staff of the Securities and Exchange Commission regarding our periodic reports under that Act not less than 180 days before the end of the fiscal year ended March 31, 2007 and which remain unresolved as of the date of the filing of this Form 20-F with the Commission.

Item 5. Operating and Financial Review and Prospects

A. Operating Results

You should read the discussion of our financial condition and results of operations together with our consolidated financial statements and information included in this Form 20-F. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under Item 3.D “Risk Factor” and elsewhere in this Form 20-F.

 

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Overview

Kyocera develops, produces and distributes various kinds of products mainly for the telecommunications and information processing and environmental protection markets. Kyocera Corporation was established in 1959 as a manufacturer of ceramic parts for electronic equipment and has been expanding and diversifying its business mainly through active mergers and acquisitions, as well as applying its fine ceramic technologies to the areas of semiconductor parts, electronic devices, telecommunication, metal processing, medical and dental implants and solar energy fields. Kyocera develops, produces and distributes a variety of parts and devices for electronic equipment such as computers, automobiles, printers, copying machines and multifunctional systems, as well as consumer electronic equipment such as mobile phone handsets, digital still cameras and digital TVs Kyocera earns revenue and income and generates cash through sales of these products.

Kyocera’s operations are classified into eight reporting segments: (1) Fine Ceramic Parts Group, (2) Semiconductor Parts Group, (3) Applied Ceramic Products Group, (4) Electronic Device Group, (5) Telecommunications Equipment Group, (6) Information Equipment Group, (7) Optical Equipment Group and (8) Others. Kyocera categorizes the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group and the Electronic Device Group into one main business referred to as “the Components Business,” and categorizes the Telecommunications Equipment Group, the Information Equipment Group and the Optical Equipment Group into another main business referred to as “the Equipment Business.”

Most of Kyocera’s profits are derived from sales of products and provision of services in the information technology (IT) markets, including the electronic equipment related market. In fiscal 2007, production of digital consumer equipment such as mobile phone handsets, digital TVs and new game consoles recorded a significant year-on-year increase, which led to strong components demand for such electronic equipment. Amid a favorable market environment with strong demand for digital consumer equipment throughout fiscal 2007, Kyocera worked aggressively to launch new products and to improve productivity with the goal of achieving continuous sales expansion and high profitability. In addition, during fiscal 2007, efforts were made to strengthen the “Amoeba Management System,” Kyocera’s unique management system, in order to revitalize all business segments (“operational excellence”) within the Kyocera Group and to boost ability to achieve goals (“executional excellence”) across the Kyocera Group. As a result, sales and profits increased both in the Components and the Equipment Businesses compared with fiscal 2006.

 

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Results of Operations

Fiscal 2007 compared with Fiscal 2006

The following table shows a summary of Kyocera’s results of operations for fiscal 2006 and fiscal 2007:

 

     (Yen in millions and U.S. dollars in thousands)  
     Years ended March 31,        
     2006     2007    

Increase

(Decrease)

 
     Amount     %     Amount     %     %  

Net sales

   ¥ 1,173,544     100.0     ¥ 1,283,897     $ 10,880,483     100.0     9.4  

Cost of sales

     835,042     71.2       900,470       7,631,102     70.1     7.8  
                                          

Gross profit

     338,502     28.8       383,427       3,249,381     29.9     13.3  

Selling, general and administrative expenses

     238,807     20.3       248,325       2,104,449     19.4     4.0  
                                          

Profit from operations

     99,695     8.5       135,102       1,144,932     10.5     35.5  

Interest and dividend income

     8,990     0.8       15,472       131,119     1.2     72.1  

Interest expense

     (1,301 )   (0.1 )     (1,647 )     (13,958 )   (0.1 )   —    

Foreign currency transaction losses, net

     (316 )   (0.0 )     (65 )     (551 )   (0.0 )   —    

Equity in (losses) earnings of affiliates and unconsolidated subsidiaries

     (1,216 )   (0.1 )     2,621       22,212     0.2     —    

Gains on sales and maturities of securities, net

     1,472     0.1       3,819       32,365     0.3     159.4  

Gains on exchange for the shares

     5,294     0.4       24       203     0.0     (99.5 )

Gain on sale of investment in an affiliate

     6,931     0.6       26       220     0.0     (99.6 )

Loss on impairment of investment in an affiliate

     (3,492 )   (0.3 )     —         —       —       —    

Other, net

     1,180     0.1       1,188       10,068     0.1     0.7  
                                          
     17,542     1.5       21,438       181,678     1.7     22.2  
                                          

Income from continuing operations before income taxes and minority interests

     117,237     10.0       156,540       1,326,610     12.2     33.5  

Income taxes

     46,760     4.0       48,887       414,297     3.8     4.5  
                                          

Income from cotinuing operations before minority interests

     70,477     6.0       107,653       912,313     8.4     52.7  

Minority interests

     (4,389 )   (0.4 )     (6,324 )     (53,593 )   (0.5 )   —    
                                          

Income from continuing operations

     66,088     5.6       101,329       858,720     7.9     53.3  

Income from discontinued operations

     3,608     0.3       5,175       43,856     0.4     43.4  
                                          

Net income

   ¥ 69,696     5.9     ¥ 106,504     $ 902,576     8.3     52.8  
                                          

Note 2: For the reasons set forth in Note 1, figures for fiscal 2006 have been retrospectively reclassified for comparative purposes. As a result, reclassified consolidated net sales for fiscal 2006 decreased by ¥7,945 million compared with the result previously reported, reclassified profit from operations decreased by ¥3,512 million and income from continuing operations before income taxes and minority interests for fiscal 2006 decreased by ¥4,151 million, respectively.

Net sales

Consolidated net sales for fiscal 2007 increased by ¥110,353 million ($935 million), or 9.4%, to ¥1,283,897 million ($10,880 million) compared with ¥1,173,544 million in fiscal 2006.

Consolidated net sales in the Components Business in fiscal 2007 increased by ¥69,058 million ($585 million), or 11.9%, to ¥650,877 million ($5,516 million) compared with fiscal 2006. In particular, sales in the Electronic Device Group were strong throughout the year, notably ceramic capacitors and timing devices. As a result, sales in the Electronic Device Group resulted in an increase of ¥26,564 million ($225 million), or 10.2% compared with fiscal 2006. In addition, sales in the Fine Ceramic Parts Group, the Semiconductor Parts Group and the Applied Ceramic Products Group also achieved growth of 17.2%, 12.6% and 11.5%, respectively, compared with fiscal 2006.

 

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Consolidated net sales in the Equipment Business increased by ¥38,305 million ($325 million), or 7.8%, to ¥531,668 million ($4,506 million) compared with fiscal 2006. Sales in the Telecommunications Equipment Group and the Information Equipment Group increased by ¥22,148 million ($188 million), or 9.7% and ¥19,400 million ($164 million), or 7.8% compared with fiscal 2006. These increases were due to strong demand in mobile phone handsets and new printers and multifunctional systems.

A detailed analysis and discussion of Kyocera’s net sales by reporting segment and geographic segment are as follows:

Net sales by reporting segment

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2006 and fiscal 2007 by the eight reporting segments:

 

     (Yen in millions and U.S. dollars in thousands)  
     Years ended March 31,        
     2006     2007    

Increase

(Decrease)

 
     Amount     %     Amount     %     %  

Fine Ceramic Parts Group

   ¥ 69,373     5.9     ¥ 81,326     $ 689,203     6.3     17.2  

Semiconductor Parts Group

     135,299     11.6       152,292       1,290,610     11.9     12.6  

Applied Ceramic Products Group

     117,555     10.0       131,103       1,111,042     10.2     11.5  

Electronic Device Group

     259,592     22.1       286,156       2,425,051     22.3     10.2  
                                          

Total Components Business

     581,819     49.6       650,877       5,515,906     50.7     11.9  

Telecommunications Equipment Group

     229,035     19.5       251,183       2,128,670     19.6     9.7  

Information Equipment Group

     249,381     21.2       268,781       2,277,805     20.9     7.8  

Optical Equipment Group

     14,947     1.3       11,704       99,187     0.9     (21.7 )
                                          

Total Equipment Business

     493,363     42.0       531,668       4,505,662     41.4     7.8  

Others

     117,409     10.0       125,656       1,064,881     9.8     7.0  

Adjustments and eliminations

     (19,047 )   (1.6 )     (24,304 )     (205,966 )   (1.9 )   —    
                                          
   ¥ 1,173,544     100.0     ¥ 1,283,897     $ 10,880,483     100.0     9.4  
                                          

Note 3: Commencing in fiscal 2007, the Precision Machine Division of Kyocera Corporation, formerly included within “Corporate,” has been reclassified into “Others.” Accordingly, previously reported results of these reporting segments for fiscal 2006 have been retrospectively reclassified.

Note 4: For the reasons set forth in Note 1 and Note 3, net sales of “Others” in fiscal 2006 decreased by ¥7,565 million and “Adjustments and eliminations” increased by ¥(380) million compared with those previously reported.

(1) Fine Ceramic Parts Group

Sales in this segment in fiscal 2007 increased by ¥11,953 million ($101 million), or 17.2%, to ¥81,326 million ($689 million) compared with ¥69,373 million in fiscal 2006. This increase was due primarily to expanded demand for components for semiconductor processing equipment, spurred by strong production activities in the semiconductor industry.

 

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(2) Semiconductor Parts Group

Sales in this segment increased by ¥16,993 million ($144 million), or 12.6%, to ¥152,292 million ($1,291 million) compared with ¥135,299 million in fiscal 2006. This increase was due mainly to increased demand for ceramic packages used in mobile phone handsets and digital-still-cameras.

(3) Applied Ceramic Products Group

Sales in this segment increased by ¥13,548 million ($115 million), or 11.5%, to ¥131,103 million ($1,111 million) compared with ¥117,555 million in fiscal 2006. This increase was due mainly to sales growth of solar energy products, particularly in the European market, combined with increased demand for medical materials and cutting tools.

(4) Electronic Device Group

Sales in this segment increased by ¥26,564 million ($225 million), or 10.2%, to ¥286,156 million ($2,425 million) compared with ¥259,592 million in fiscal 2006. Demand for products such as ceramic capacitors, crystal-related components and connectors, expanded due primarily to strong production activity for digital consumer equipment. In addition, AVX Corporation (AVX), a U.S. subsidiary, also recorded increased sales.

(5) Telecommunications Equipment Group

Sales in this segment increased by ¥22,148 million ($188 million), or 9.7%, to ¥251,183 million ($2,129 million) compared with ¥229,035 million in fiscal 2006. This increase was due to sales growth of new mobile phone handsets in Japan and overseas.

(6) Information Equipment Group

Sales in this segment increased by ¥19,400 million ($164 million), or 7.8%, to ¥268,781 million ($2,278 million) compared with ¥249,381 million in fiscal 2006. Sales of multifunctional systems and ECOSYS printers expanded in overseas resulting from the aggressive introduction of new products and enhanced marketing activities.

(7) Optical Equipment Group

Sales in this segment decreased by ¥3,243 million ($27 million), or 21.7%, to ¥11,704 million ($99 million) compared with ¥14,947 million in fiscal 2006. This decrease was due mainly to the downsizing of the camera business and slow demand for camera modules for mobile phone handsets.

(8) Others

Sales in this segment increased by ¥8,247 million ($70 million), or 7.0%, to ¥125,656 million ($1,065 million) compared with ¥117,409 million in fiscal 2006. This increase was due mainly to growth of sales in the telecommunications engineering business at Kyocera Communication Systems Co., Ltd (KCCS).

 

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Net sales by geographic segment

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2006 and fiscal 2007, distinguishing between domestic and overseas sales and, with respect to overseas sales, showing the geographical areas in which such sales were made:

 

     (Yen in millions and U.S. dollars in thousands)
     Years ended March 31,     
     2006    2007   

Increase

(Decrease)

     Amount    %    Amount    %    %

Japan

   ¥ 467,035    39.8    ¥ 496,959    $ 4,211,517    38.7    6.4

United States of America

     253,696    21.6      274,361      2,325,093    21.4    8.1

Asia

     198,731    16.9      216,663      1,836,127    16.9    9.0

Europe

     184,351    15.7      210,726      1,785,814    16.4    14.3

Others

     69,731    6.0      85,188      721,932    6.6    22.2
                                   
   ¥ 1,173,544    100.0    ¥ 1,283,897    $ 10,880,483    100.0    9.4
                                   

Note 5: For the reasons set forth in Note 1, consolidated sales in Japan in fiscal 2006 decreased by ¥7,945 million, compared with those previously reported.

Sales in Japan, which comprised 38.7% of consolidated net sales, increased by ¥29,924 million ($254 million), or 6.4%, to ¥496,959 million ($4,212 million) compared with ¥467,035 million in fiscal 2006 due to sales growth in mobile phone handsets and products in the Fine Ceramic Parts Group, such as components for semiconductor processing equipment. Overseas sales, which comprised 61.3% of consolidated net sales, increased by ¥80,429 million ($682 million), or 11.4%, to ¥786,938 million ($6,669 million) compared with ¥706,509 million in fiscal 2006, due to sales growth of the Electronic Device Group in Asia, the Information Equipment and solar energy business in Europe, and of mobile phone handsets and the Semiconductor Parts Group in the United States.

Since almost all overseas sales were denominated in U.S. dollars or Euro, the depreciation of the yen against these currencies during fiscal 2007 produced a positive impact of approximately ¥39.6 billion ($336 million) in net sales compared with fiscal 2006, after translation into yen.

Sales in the United States increased by ¥20,665 million ($175 million), or 8.1%, to ¥274,361 million ($2,325 million) compared with ¥253,696 million in fiscal 2006 due to sales growth of mobile phone handsets at Kyocera Wireless Corp. (KWC), of the Semiconductor Parts Group and of the Information Equipment Group. Sales in Asia increased by ¥17,932 million ($152 million), or 9.0%, to ¥216,663 million ($1,836 million) compared with ¥198,731 million in fiscal 2006 due to higher sales growth of the Electronic Device Group for digital consumer equipment and of the Semiconductor Parts Group. Sales in Europe increased by ¥26,375 million ($224 million), or 14.3%, to ¥210,726 million ($1,786 million) compared with ¥184,351 million in fiscal 2006 due mainly to sales growth of the Information Equipment Group such as ECOSYS printers and multifunctional systems and the Electronic Device Group, combined with expanded sales in solar energy products. Sales in Others increased by ¥15,457 million ($131 million), or 22.2%, to ¥85,188 million ($722 million) compared with ¥69,731 million in fiscal 2006 due primarily to sales growth of mobile phone handsets.

 

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Cost of sales and gross profit

In fiscal 2007, cost of sales increased by ¥65,428 million ($554 million), or 7.8%, to ¥900,470 million ($7,631 million) from ¥835,042 million in fiscal 2006. This is due mainly to an increase in raw material costs as well as expansion of production due to strong demand in the Components Business and the Equipment Business.

Raw material costs of ¥388,095 million ($3,289 million) accounted for 43.1%, and labor costs of ¥163,836 million ($1,388 million) accounted for 18.2% out of the total cost of sales. The ratio of cost of sales to net sales was 70.1%, a decrease of 1.1 points compared with 71.2% in fiscal 2006, which was led by improved productivity. Reduction of production costs at KWC as a result of structural reforms as well as cost reduction in the Optical Equipment Group due mainly to the downsizing of the camera business contributed to this improvement.

As a result, gross profit increased by ¥44,925 million ($381 million), or 13.3%, in fiscal 2007 to ¥383,427 million ($3,249 million) from ¥338,502 million in fiscal 2006. The gross profit to net sales ratio increased by 1.1 points from 28.8% to 29.9%.

SG&A expenses and profit from operations

Selling, general and administrative (SG&A) expenses in fiscal 2007 increased by ¥9,518 million ($81 million), or 4.0%, to ¥248,325 million ($2,104 million) compared with ¥238,807 million in fiscal 2006. This primarily reflected increases in sales promotion costs due to strengthened marketing efforts and in software development costs in the Equipment Business. Labor cost was ¥119,267 million ($1,011 million), or 48.0% of total SG&A expenses, and sales promotion and advertising cost was ¥41,337 million ($350 million), or 16.6% of total SG&A expenses. The proportion of SG&A expenses to net sales dropped by 0.9 points to 19.4% in fiscal 2007 compared with 20.3% in fiscal 2006.

Although SG&A expenses increased as above, profit from operations increased by ¥35,407 million ($300 million), or 35.5%, to ¥135,102 million ($1,145 million) compared with ¥99,695 million in fiscal 2006 due to further increase of gross profit. The operating margin rose by 2.0 points to 10.5% in fiscal 2007 compared with 8.5% in fiscal 2006.

Interest and dividend income

Interest and dividend income in fiscal 2007 increased by ¥6,482 million ($55 million), or 72.1%, to ¥15,472 million ($131 million) compared with ¥8,990 million in fiscal 2006. This was mainly due to favorable investment management results and an increase in dividend income from KDDI Corporation. Kyocera has an investment policy aimed at low risk, stability and liquidity, and does not typically invest in high-risk financial instruments only for pursuing profits.

Interest expense

Interest expense in fiscal 2007 increased by ¥346 million ($3 million), or 26.6%, to ¥1,647 million ($14 million) compared with ¥1,301 million in fiscal 2006. This was mainly due to an increase in interest expense at foreign subsidiaries and a slight upward trend of interest rates in Japanese financial market.

 

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Foreign currency translation

During fiscal 2007, the average exchange rate for the yen depreciated by ¥4, or 3.5%, against the U.S. dollar and depreciated by ¥12, or 8.7%, against Euro compared with fiscal 2006, respectively. At March 31, 2007, the yen depreciated by ¥1, or 0.9%, against the U.S. dollar and depreciated by ¥14, or 9.8%, against Euro compared with at March 31, 2006, respectively. Kyocera recorded foreign currency transaction losses of ¥65 million ($1 million) in fiscal 2007.

Kyocera typically enters into forward exchange contracts to minimize currency exchange risks on foreign currency denominated receivables and payables. Kyocera confines its use of derivative financial instruments to the hedging of its foreign exchange exposures, and does not utilize derivative transactions for trading purposes.

Gains and losses from investments

In fiscal 2007, Kyocera’s earnings or losses on equity-method investments resulted in earnings of ¥2,621 million ($22 million), an increase of ¥3,837 million ($33 million) compared with losses of ¥1,216 million in fiscal 2006. Kyocera’s equity in earnings of affiliates and unconsolidated subsidiaries in fiscal 2007 was derived mainly from interests in WILLCOM INC. (WILLCOM).

Kyocera Corporation owns a 30% interest in WILLCOM, which operates a PHS service in Japan. Kyocera Corporation accounted for this investment using the equity method. WILLCOM recorded net losses due mainly to temporary sales commission in fiscal 2006. However, WILLCOM recorded net income derived from an increase in net sales originated by a steady increase of customers in fiscal 2007. As a result, Kyocera recognized earnings on equity method investments.

Gains on sales and maturities of securities, net in fiscal 2007 increased by ¥2,347 million ($20 million), or 159.4%, to ¥3,819 million ($32 million) compared with ¥1,472 million in fiscal 2006. This was due mainly to realization of unrealized gains by sale of investment securities.

Following the merger of Mitsubishi Tokyo Financial Group, Inc. and UFJ Holdings, Inc., on October 1, 2005, Kyocera’s shares of UFJ Holdings, Inc. were exchanged for the shares of the new company, Mitsubishi UFJ Financial Group, Inc. As a result of this share exchange, Kyocera recorded a gain of ¥5,281 million in fiscal 2006.

Kyocera Corporation owned a 36.02% interest in Taito Corporation, a major affiliate which operates in the electric amusement business. Kyocera accounted for its investment under the equity method. On September 28, 2005, Kyocera Corporation sold its entire holding of shares of Taito Corporation in a tender offer bid for the shares of Taito Corporation by Square Enix Co., Ltd., one of the leading companies in the game software industry. As a result of this sale of the shares of Taito Corporation, Kyocera Corporation recorded a gain on sales of investment in an affiliate of ¥6,931 million in fiscal 2006.

Kyocera Mita Corporation (KMC) owns a 30% interest in Triumph-Adler AG Group (TA), which is a distributor of office equipment and accounted for its investment under the equity method. Kyocera recognized loss on impairment of investment in TA of ¥3,492 million due to an extended decline in its market value in fiscal 2006. Kyocera did not recognize loss on impairment of investment in TA due to an increase of its market value in fiscal 2007.

Income from continuing operations before income taxes

Enhanced profitability through the effects of increased sales and improved productivity contributed to increased operating profit of all reporting segments in the Components Business and the Equipment Businesses. In addition, interest and dividend income and equity in earnings of affiliates and unconsolidated subsidiaries increased compared with fiscal 2006. As a result, income from continuing operations before income taxes for fiscal 2007 increased by ¥39,303 million ($333 million), or 33.5%, to ¥156,540 million ($1,327 million) compared with ¥117,237 million in fiscal 2006. Operating profit in the Components Business resulted in an increase of ¥26,906 million ($228 million), or 34.6% due primarily to sales growth and improvement productivity in the Electronic Device Group. Operating profit in the Equipment Business significantly increased by ¥13,434 million ($114 million), or 71.0% due to rising sales of the Information Equipment Group, making a profit in the Telecommunications Equipment Group and decreased operating loss in the Optical Equipment Group.

 

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Operating profit by reporting segment

The following table shows a breakdown of Kyocera’s consolidated income from continuing operations before income taxes, and operating profit for fiscal 2006 and fiscal 2007 by the eight reporting segments:

 

     (Yen in millions and U.S. dollars in thousands)  
     Years ended March 31,       
     2006    2007   

Increase

(Decrease)

 
     Amount     %    Amount     %    %  

Fine Ceramic Parts Group

   ¥ 11,014     15.9    ¥ 15,677     $ 132,856     19.3    42.3  

Semiconductor Parts Group

     17,742     13.1      22,210       188,220     14.6    25.2  

Applied Ceramic Products Group

     21,876     18.6      22,334       189,271     17.0    2.1  

Electronic Device Group

     27,170     10.5      44,487       377,009     15.5    63.7  
                                        

Total Components Business

     77,802     13.4      104,708       887,356     16.1    34.6  

Telecommunications Equipment Group

     (1,706 )   —        291       2,466     0.1    —    

Information Equipment Group

     26,412     10.6      33,970       287,881     12.6    28.6  

Optical Equipment Group

     (5,774 )   —        (1,895 )     (16,059 )   —      —    
                                        

Total Equipment Business

     18,932     3.8      32,366       274,288     6.1    71.0  

Others

     8,983     7.7      8,776       74,373     7.0    (2.3 )
                                        

Operating profit

     105,717     9.0      145,850       1,236,017     11.4    38.0  

Corporate

     12,785     —        8,569       72,618     —      (33.0 )

Equity in (losses) earning of affiliates and unconsolidated subsidiaries

     (1,216 )   —        2,621       22,212     —      —    

Adjustments and eliminations

     (49 )   —        (500 )     (4,237 )   —      —    
                                        

Income from continuing operations before income taxes

   ¥ 117,237     10.0    ¥ 156,540     $ 1,326,610     12.2    33.5  
                                        

Note 6: For the reasons set forth in Note 1 and Note 3, operating profit of “Others” in fiscal 2006 decreased by ¥3,577 million, “Corporate” decreased by ¥573 million and “Adjustments and eliminations” increased by ¥(1) million compared with those previously announced.

(1) Fine Ceramic Parts Group

Operating profit in this segment increased by ¥4,663 million ($40 million), or 42.3%, to ¥15,677 million ($133 million) compared with ¥11,014 million in fiscal 2006. This was primarily due to sales growth of components for semiconductor processing equipment, which are the core products in this reporting segment.

(2) Semiconductor Parts Group

Operating profit in this segment increased by ¥4,468 million ($38 million), or 25.2%, to ¥22,210 million ($188 million) compared with ¥17,742 million in fiscal 2006. This increase was due mainly to sales growth of ceramic packages for mobile phone handsets and digital still cameras.

 

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(3) Applied Ceramic Products Group

Operating profit in this segment increased by ¥458 million ($4 million), or 2.1%, to ¥22,334 million ($189 million) compared with ¥21,876 million in fiscal 2006. Operating profit in this segment grew mainly due to increased profit in dental implants, artificial bone and joint prosthesis and jewelry and applied ceramic related products.

(4) Electronic Device Group

Operating profit in this segment increased by ¥17,317 million ($147 million), or 63.7%, to ¥44,487 million ($377 million) compared with ¥27,170 million in fiscal 2006. Demand for products such as capacitors, crystal-related components and connectors expanded due primarily to strong production activity for digital consumer equipment throughout the year. In addition, AVX in particular, improved its operating profit.

(5) Telecommunications Equipment Group

Operating profit in this segment improved by ¥1,997 million ($17 million) to ¥291 million ($2 million) compared with ¥1,706 million in operating loss in fiscal 2006. Despite the impairment loss of inventory in the PHS business in fiscal 2007, operating profit in this segment improved due to reduction of operating loss at KWC as a result of structural reforms along with sales growth of new mobile phone handsets in Japan.

(6) Information Equipment Group

Operating profit in this segment increased by ¥7,558 million ($64 million), or 28.6%, to ¥33,970 million ($288 million) compared with ¥26,412 million in fiscal 2006. This was due to sales growth of ECOSYS printers, multifunctional systems and consumables as well as the positive effects of the yen’s depreciation against the European currencies and the U.S. dollar.

(7) Optical Equipment Group

Operating loss in this segment decreased by ¥3,879 million ($33 million), to ¥1,895 million ($16 million) compared with ¥5,774 million in fiscal 2006 due mainly to the downsizing of the camera business and absence of expenses for structural reform.

(8) Others

Operating profit in this segment decreased by ¥207 million ($2 million), or 2.3%, to ¥8,776 million ($74 million) compared with ¥8,983 million in fiscal 2006. This decline was due mainly to impairment of goodwill, which was caused by stagnant sales and profit results, amounting to ¥1,478 million ($13 million) at a domestic subsidiary.

(9) Corporate

Corporate income and losses constitute income and expenses related to the provision of management-related services by Kyocera’s head office to each reporting segment, together with any profit-and-loss items that management judges not to belong within the above reporting segments, such as gains or losses relating to investment securities. Corporate income decreased by ¥4,216 million ($36 million), or 33.0%, to ¥8,569 million ($73 million) compared with ¥12,785 million in fiscal 2006. Interest and dividend income, which were the main contributors, increased compared with fiscal 2006. However, the income in fiscal 2006 included a gain of ¥6,931 million through the sale of entire shares of Taito Corporation, an exchange gain of ¥5,281 million on shares of UFJ Holdings, Inc. in connection with the exchange of shares for the shares of Mitsubishi UFJ Financial Group, and a loss of ¥3,492 million on impairment of investment in TA, an affiliate of KMC. As a result, corporate profit decreased compared with fiscal 2006.

 

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Taxes

Current and deferred income taxes in fiscal 2007 increased by ¥2,127 million ($18 million), or 4.5%, to ¥48,887 million ($414 million) compared with ¥46,760 million in fiscal 2006.

Current income taxes in fiscal 2007 included the tax refunds of ¥4,305 million ($36 million). The tax refunds were related to the cancellation of a portion of ¥12,748 additional taxes imposed by Osaka Regional Tax Bureau on March 28, 2005 which Kyocera had expensed in the year ended March 31, 2005. For detailed information, see Note 14 to the Consolidated Financial Statements in this annual report.

The effective tax rate of 31.2% in fiscal 2007 was 8.7 points lower than 39.9% in fiscal 2006. The decrease in the effective tax rate is due mainly to the changes in valuation allowance against deferred tax assets. In fiscal 2006, Kyocera recognized additional valuation allowance against deferred tax assets at several subsidiaries with continued losses, which made the effective tax rate 5.8% higher than the Japanese statutory tax rate. In fiscal 2007, there were no significant changes in valuation allowance against deferred tax assets. The tax refunds related to the transfer pricing adjustments also contributed to the lower effective tax rate in fiscal 2007, which made the effective tax rate 2.8% lower than the Japanese statutory tax rate. For detailed information, see Note 16 to the Consolidated Financial Statements in this annual report.

Minority interests

Kyocera’s minority interests are principally related to AVX, which accounted for approximately 30% of all minority ownership interests. Minority interests increased by ¥1,935 million ($16 million) to ¥6,324 million ($54 million) in fiscal 2007 compared with ¥4,389 million in fiscal 2006. This was due mainly to a large increase in net income at AVX.

Sale of the shares of Kyocera Leasing Co., Ltd.

On August 1, 2006, Kyocera sold its entire of shares in KLC (presently Diamond Asset Finance Company Limited) to Diamond Lease Company Limited (presently Mitsubishi UFJ Lease & Finance Company Limited) for ¥25,274 million ($214 million), aimed to concentrate Kyocera’s management resources on its core businesses to enhance and improve its corporate value. In recent years, within the financing industry, active reorganization has been ongoing. Amid such circumstances, Kyocera considered it was better for KLC to work with Diamond Lease Company Limited, not with Kyocera which is mainly engaged in manufacturing, to enable KLC to continue to grow and further develop its businesses. Kyocera also believed this sale would enable Kyocera to concentrate management resources on its businesses requiring enhancement to improve its corporate value.

Kyocera has accounted for the results of operations and the sale of KLC less appreciable income taxes, as discontinued operations in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in its consolidated statements of income.

 

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Fiscal 2006 compared with Fiscal 2005

The following table shows a summery of Kyocera’s results of operations for fiscal 2005 and fiscal 2006:

 

     (Yen in millions)  
     Years ended March 31,        
     2005     2006    

Increase

(Decrease)

 
     Amount     %     Amount     %     %  

Net sales

   ¥ 1,173,660     100.0     ¥ 1,173,544     100.0     (0.0 )

Cost of sales

     852,527     72.6       835,042     71.2     (2.1 )
                                  

Gross profit

     321,133     27.4       338,502     28.8     5.4  

Selling, general and administrative expenses

     223,473     19.0       238,807     20.3     6.9  
                                  

Profit from operations

     97,660     8.4       99,695     8.5     2.1  

Interest and dividend income

     6,443     0.5       8,990     0.8     39.5  

Interest expense

     (1,275 )   (0.1 )     (1,301 )   (0.1 )   —    

Foreign currency transaction gains (losses), net

     2,606     0.2       (316 )   (0.0 )   —    

Equity in losses of affiliates and unconsolidated subsidiaries

     (1,678 )   (0.1 )     (1,216 )   (0.1 )   —    

(Losses) gains on sales and maturities of securities, net

     (2,084 )   (0.2 )     1,472     0.1     —    

Gains on exchange for the shares

     —       —         5,294     0.4     —    

Gain on sale of investment in an affiliate

     —       —         6,931     0.6     —    

Loss on impairment of investment in an affiliate

     —       —         (3,492 )   (0.3 )   —    

Other, net

     2,341     0.2       1,180     0.1     (49.6 )
                                  
     6,353     0.5       17,542     1.5     176.1  
                                  

Income from continuing operations before income taxes and minority interests

     104,013     8.9       117,237     10.0     12.7  

Income taxes

     58,214     5.0       46,760     4.0     (19.7 )
                                  

Income from continuing operations before minority interests

     45,799     3.9       70,477     6.0     53.9  

Minority interests

     (3,142 )   (0.3 )     (4,389 )   (0.4 )   —    
                                  

Income from continuing operations

     42,657     3.6       66,088     5.6     54.9  

Income from discontinued operations

     3,251     0.3       3,608     0.3     11.0  
                                  

Net income

   ¥ 45,908     3.9     ¥ 69,696     5.9     51.8  
                                  

Note 7: For the reasons set forth in Note 1, KLC’s business results for fiscal 2005 and 2006 retrospectively reclassified as income from discontinued operations in conformity with SFAS No. 144, “Accounting for the impairment or disposal of Long-Lived Assets.”

Net sales

Consolidated net sales in fiscal 2006 decreased by ¥116 million, or (0.0)%, to ¥1,173,544 million compared with ¥1,173,660 million in fiscal 2005.

In the component business, demand for electronic equipment only showed a slight recovery in the first quarter of fiscal 2006, and performance was affected negatively by a considerable decline in component prices. In the equipment business, structural reforms of the mobile phone handset business at Kyocera Wireless Corp., a U.S. subsidiary, were conducted in the first half of fiscal 2006. At the same time, the camera business of the Optical Equipment Group was considerably reduced. As a result, consolidated net sales in the first half amounted to ¥542,238 million.

 

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On the other hand, production activities for core digital consumer equipment such as mobile phone handsets, PCs and digital home appliances expanded markedly from last summer. Furthermore, demand for electronic components remained high into the fourth quarter. In addition, the introduction of new mobile phone handsets and PHS-related products coupled with aggressive efforts in expanding sales of printers and digital- multifunction products led to a substantial increase in sales in the equipment business in the second half. Consequently, consolidated net sales in the second half were ¥631,306 million, which showed a significant increase of ¥89,068 million, or 16.4%, compared with the first half.

Consolidated net sales in the components business in fiscal 2006 increased by ¥23,272 million, or 4.2%, compared with fiscal 2005. In particular, sales in the Applied Ceramic Products Group were strong throughout the year, notably solar energy products and cutting tools. Sales in the Applied Ceramic Products Group resulted in an increase of ¥23,676 million, or 25.2%, compared with fiscal 2005.

Consolidated net sales in the equipment business decreased by ¥34,476 million, or 6.5%, compared with fiscal 2005. Sales in the Telecommunications Equipment Group and the Optical Equipment Group declined by ¥21,883 million and ¥20,829 million, or 8.7% and 58.2%, respectively, compared with fiscal 2005, due to continued structural reforms.

A detailed analysis and discussion of Kyocera’s net sales by the reporting and the geographic segments are as follows:

Net sales by reporting segment

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2005 and fiscal 2006 by the eight reporting segments:

 

     (Yen in millions)  
     Years ended March 31,        
     2005     2006    

Increase

(Decrease)

 
     Amount     %     Amount     %     %  

Fine Ceramic Parts Group

   ¥ 73,711     6.3     ¥ 69,373     5.9     (5.9 )

Semiconductor Parts Group

     127,960     10.9       135,299     11.6     5.7  

Applied Ceramic Products Group

     93,879     8.0       117,555     10.0     25.2  

Electronic Device Group

     262,997     22.4       259,592     22.1     (1.3 )

Telecommunications Equipment Group

     250,918     21.4       229,035     19.5     (8.7 )

Information Equipment Group

     241,145     20.5       249,381     21.2     3.4  

Optical Equipment Group

     35,776     3.1       14,947     1.3     (58.2 )

Others

     110,595     9.4       117,409     10.0     6.2  

Adjustments and eliminations

     (23,321 )   (2.0 )     (19,047 )   (1.6 )   —    
                                  
   ¥ 1,173,660     100.0     ¥ 1,173,544     100.0     (0.0 )
                                  

Note 8: For the reasons set forth in Note 1 and Note 3, previously reported results of related segments in fiscal 2005 and 2006 were reclassified.

(1) Fine Ceramic Parts Group

Sales in this reporting segment in fiscal 2006 decreased by ¥4,338 million, or 5.9%, to ¥69,373 million compared with ¥73,711 million in fiscal 2005. This decrease was due to less demand for ceramic parts used in semiconductor fabrication equipment than in fiscal 2005, and to decreased sales of sapphire products for LCD projectors resulting from intensified market competition with other substitute materials.

 

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(2) Semiconductor Parts Group

Sales in this reporting segment increased by ¥7,339 million, or 5.7%, to ¥135,299 million compared with ¥127,960 million in fiscal 2005. Demand for ceramic packages for digital consumer products such as mobile phone handsets and digital cameras recovered in the second half. Furthermore, sales of organic packages for servers and digital consumer products increased. Approximately 85% of sales in this reporting segment were sales of ceramic packages.

(3) Applied Ceramic Products Group

Sales in this reporting segment increased by ¥23,676 million, or 25.2%, to ¥117,555 million compared with ¥93,879 million in fiscal 2005. This increase was due to strong sales growth recorded in the solar energy business amid an expanding global market spurred by rising environmental awareness. Sales of cutting tools also grew due to healthy production activity in the automobile industry.

(4) Electronic Device Group

Sales in this reporting segment decreased by ¥3,405 million, or 1.3%, to ¥259,592 million compared with ¥262,997 million in fiscal 2005. Components demand for digital consumer products such as mobile phone handsets started to recover last summer. However, this was insufficient to compensate for a decline in sales in the first half of fiscal 2006, mainly due to slow sales of thin-film devices resulting from decreased demand for LCDs for mobile phone handsets and crystal related components for digital still cameras and mobile phone handsets. However sales at AVX Corporation, a key subsidiary in this reporting segment, grew steadily, especially in the digital consumer equipment and telecommunications equipment markets.

(5) Telecommunications Equipment Group

Sales in this reporting segment decreased by ¥21,883 million, or 8.7%, to ¥229,035 million compared with ¥250,918 million in fiscal 2005. Although domestic sales of new mobile phone handsets and PHS handsets were strong, overseas sales of mobile phone handsets decreased as Kyocera Wireless Corp. was in the process of executing structural reforms in the first half of fiscal 2006. Slow overseas sales of PHS-related products also contributed to the decrease.

(6) Information Equipment Group

Sales in this reporting segment increased by ¥8,236 million, or 3.4%, to ¥249,381 million compared with ¥241,145 million in fiscal 2005. This increase reflected the introduction of new printers and digital multifunction products and encouraged sales activities, which contributed to higher sales volume.

(7) Optical Equipment Group

Sales in this reporting segment decreased by ¥20,829 million, or 58.2%, to ¥14,947 million compared with ¥35,776 million in fiscal 2005. The main reason for the considerable decrease was the withdrawal from the digital still camera business as a result of the structural reform of Kyocera’s camera business in fiscal 2005.

(8) Others

Sales in this reporting segment increased by ¥6,814 million, or 6.2%, to ¥117,409 million compared with ¥110,595 million in fiscal 2005. The increase was due in part to strong sales recorded in the telecommunications engineering business of Kyocera Communication Systems Co., Ltd. Sales at a subsidiary of Kyocera Communication Systems Co., Ltd., which was newly consolidated in fiscal 2005, also contributed to the overall increase in sales. However, sales of Kyocera Chemical Corporation decreased compared with fiscal 2005 due to slow sales of molding products and flexible print boards.

 

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Net sales by geographic segment

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2005 and fiscal 2006, distinguishing between domestic and overseas sales and, in respect of overseas sales, showing the geographical areas in which such sales were made:

 

     (Yen in millions)  
     Years ended March 31,       
     2005    2006   

Increase

(Decrease)

 
     Amount    %    Amount    %    %  

Japan

   ¥ 465,422    39.6    ¥ 467,035    39.8    0.3  

United States of America

     248,333    21.2      253,696    21.6    2.2  

Asia

     203,848    17.4      198,731    16.9    (2.5 )

Europe

     175,850    15.0      184,351    15.7    4.8  

Others

     80,207    6.8      69,731    6.0    (13.1 )
                              
   ¥ 1,173,660    100.0    ¥ 1,173,544    100.0    (0.0 )
                              

Note 9: For the reasons set forth in Note 1 and Note 3, previously reported results of related segments in fiscal 2005 and 2006 were reclassified.

Sales in Japan, which comprised 39.8% of consolidated net sales, increased by ¥1,613 million, or 0.3%, to ¥467,035 million compared with ¥465,422 million in fiscal 2005 due to sales growth in solar energy products, mobile phone handsets and PHS-related products. Overseas sales, which comprised 60.2% of consolidated net sales, decreased by ¥1,729 million, or 0.2%, to ¥706,509 million compared with ¥708,238 million in fiscal 2005 due primarily to decreased sales in the Telecommunications Equipment Group.

Since almost all overseas sales were denominated in the U.S. dollars or Euro, the depreciation of the yen against these currencies during fiscal 2006 increased consolidated net sales by approximately ¥32.2 billion compared with fiscal 2005 after translation into the yen.

An increase in sales in Japan was attributed to the strong growth in solar energy products, mobile phone handsets and PHS-related products, combined with steady sales growth in the telecommunications engineering business of Kyocera Communication Systems Co., Ltd., which is based in Japan.

Sales in the United States increased by ¥5,363 million, or 2.2%, to ¥253,696 million compared with ¥248,333 million in fiscal 2005. Although sales in the Telecommunications Equipment Group in the United States declined due to continued structural reforms at Kyocera Wireless Corp., sales in the Electronic Device Group, the solar energy business and the Information Equipment Group increased.

Sales in Asia decreased by ¥5,117 million, or 2.5%, to ¥198,731 million compared with ¥203,848 million in fiscal 2005. Although sales in solar energy business and cutting tools business in the Applied Ceramic Products Group and sales in the Electronic Group grew, sales in the Telecommunications Equipment Group, especially mobile phone handsets, decreased.

Sales in Europe increased by ¥8,501 million, or 4.8%, to ¥184,351 million compared with ¥175,850 million in fiscal 2005 due mainly to growth in the solar energy business amid continued market expansion.

Sales in Others decreased by ¥10,476 million, or 13.1%, to ¥69,731 million compared with ¥80,207 million in fiscal 2005 due to decreased sales of the Telecommunications Equipment Group in Latin America, particularly mobile phone handsets.

 

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Cost of sales and gross profit

In fiscal 2006, cost of sales decreased by ¥17,485 million, or 2.1%, to ¥835,042 million from ¥852,527 million in fiscal 2005. Raw material costs of ¥345,309 million accounted for 41.4%, and labor costs of ¥156,363 million accounted for 18.7% of this total. The ratio of cost of sales to net sales was 71.2%, a decrease of 1.4 points compared with 72.6% in fiscal 2005. In fiscal 2005, Kyocera recorded ¥5,421 million of one time expenses in line with structural reforms in the Telecommunications Equipment Group and the Optical Equipment Group. Cost of sales in fiscal 2006 decreased due mainly to outsourcing the manufacture of mobile phone handsets at Kyocera Wireless Corp. to Flextronics International Ltd., a leading provider of electronics manufacturing services, in the Telecommunications Equipment Group and to significantly downsizing of the camera business in the Optical Equipment Group.

As a result, gross profit increased by ¥17,369 million, or 5.4%, in fiscal 2006 to ¥338,502 million from ¥321,133 million in fiscal 2005. The gross profit to net sales ratio increased by 1.4 points from 27.4% to 28.8%.

SG&A expenses and profit from operations

Selling, general and administrative (SG&A) expenses in fiscal 2006 increased by ¥15,334 million, or 6.9%, to ¥238,807 million compared with ¥223,473 million in fiscal 2005. Labor cost was ¥114,787 million, or 48.1% of total SG&A expenses, and sales promotion and advertising cost was ¥38,209 million, or 16.0% of total SG&A expenses. The proportion of SG&A expenses to net sales rose by 1.3 points to 20.3% in fiscal 2006 compared with 19.0% in fiscal 2005. The increase in SG&A expenses in fiscal 2006 reflected an increase in costs associated with aggressive R&D activities for new businesses and new products. As a result, profit from operations increased by ¥2,035 million, or 2.1%, to ¥99,695 million compared with ¥97,660 million in fiscal 2005. The operating margin rose by 0.1 point to 8.5% in fiscal 2006 compared with 8.4% in fiscal 2005.

Interest and dividend income

Interest and dividend income in fiscal 2006 increased by ¥2,547 million, or 39.5%, to ¥8,990 million compared with ¥6,443 million in fiscal 2005. This was mainly due to an increase in dividend income from KDDI Corporation and favorable fund management results at AVX Corporation. Kyocera has an investment policy aimed at low risk, stability and liquidity, and does not typically invest in high-risk financial instruments only for pursuing profits.

Interest expense

Interest expense in fiscal 2006 increased by ¥26 million, or 2.0%, to ¥1,301 million compared with ¥1,275 million in fiscal 2005. Though interest rates in the Japanese financial market were on a slight upward trend, there was not material impact on interest expense.

Foreign currency translation

During fiscal 2006, the yen depreciated by ¥5, or 4.6%, against the U.S. dollar and depreciated by ¥3, or 2.2%, against Euro compared with fiscal 2005, respectively. At March 31, 2006, the yen depreciated by ¥10, or 9.3%, against the U.S. dollar and depreciated by ¥4, or 2.9%, against Euro compared with at March 31, 2005, respectively. Kyocera recorded foreign currency transaction losses of ¥316 million in fiscal 2006.

Kyocera typically enters into forward exchange contracts to minimize currency exchange risks on foreign currency denominated receivables and payables. Kyocera confines its use of derivative financial instruments to the hedging of its foreign exchange exposures, and does not utilize derivative transactions for trading purposes.

 

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Gains and losses from investments

In fiscal 2006, Kyocera’s earnings or losses on equity method investments resulted in losses of ¥1,216 million, a decrease of ¥462 million compared with losses of ¥1,678 million in fiscal 2005.

Kyocera’s equity in earnings or losses of affiliates and unconsolidated subsidiaries in fiscal 2006 was derived mainly from interests in WILLCOM, Inc. Kyocera Corporation owns a 30% interest in WILLCOM, Inc., which operates a PHS service. Kyocera Corporation accounted for this investment using the equity method. Net losses at WILLCOM, Inc. decreased compared with fiscal 2005 due to one time expenses related to the business acquisition in fiscal 2005. As a result, Kyocera’s loss on its equity method investment decreased.

Kyocera Corporation owned a 36.02% interest in Taito Corporation, a major affiliate which operates in the electric amusement business and accounted for by the equity method. On September 28, 2005, Kyocera Corporation sold its entire holding of shares of Taito Corporation in a tender offer bid for the shares of Taito Corporation by Square Enix Co., Ltd., a Japanese game software developer. As a result of this sale of the shares of Taito Corporation, Kyocera recorded a gain on sales of investment in an affiliate of ¥6,931 million.

Kyocera Mita Corporation owns a 30% interest in Triumph-Adler AG Group, a distributor of an office equipment and accounted for its investment by the equity method. Kyocera recognized loss on impairment of investment in affiliate of ¥3,492 million due to an extended decline in its market value in fiscal 2006.

Following the merger of Mitsubishi Tokyo Financial Group, Inc. and UFJ Holdings, Inc., on October 1, 2005, Kyocera’s shares of UFJ Holdings, Inc. were exchanged for the shares of the new company, Mitsubishi UFJ Financial Group, Inc. As a result of this share exchange, Kyocera recorded a gain of ¥5,281 million in the third quarter of fiscal 2006.

Income from continuing operations before income taxes

The Applied Ceramic Products Group, especially the solar energy business, recorded higher sales, although sales in the Electronics Device Group significantly declined in the first half. As a result, operating profit in the components business decreased compared with fiscal 2005. In contrast, operating profit in the equipment business increased compared with fiscal 2005. The increase in operating profit reflected benefits of structural reforms in the Optical Equipment Group and the Telecommunication Equipment Group in fiscal 2005. Consequently, income from continuing operations before income taxes increased by ¥13,224 million, or 12.7%, to ¥117,237 million compared with ¥104,013 million in fiscal 2005.

 

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Operating profit by reporting segment

The following table shows a breakdown of Kyocera’s consolidated income before income taxes, and operating profit for fiscal 2005 and fiscal 2006 by the eight reporting segments:

 

     (Yen in millions)  
     Years ended March 31,        
     2005     2006    

Increase

(Decrease)

 
     Amount     Amount     %  

Fine Ceramic Parts Group

   ¥ 11,535     ¥ 11,014     (4.5 )

Semiconductor Parts Group

     17,550       17,742     1.1  

Applied Ceramic Products Group

     17,129       21,876     27.7  

Electronic Device Group

     35,406       27,170     (23.3 )

Telecommunications Equipment Group

     (14,918 )     (1,706 )   —    

Information Equipment Group

     36,186       26,412     (27.0 )

Optical Equipment Group

     (15,387 )     (5,774 )   —    

Others

     9,705       8,983     (7.4 )
                      
     97,206       105,717     8.8  

Corporate

     8,480       12,785     50.8  

Equity in earnings (losses) of affiliates and unconsolidated subsidiaries

     (1,678 )     (1,216 )   —    

Adjustments and eliminations

     5       (49 )   —    
                      

Income before income taxes

   ¥ 104,013     ¥ 117,237     12.7  
                      

Note 10: For the reasons set forth in Note 1 and Note 3, previously reported results of related segments in fiscal 2005 and 2006 were reclassified.

(1) Fine Ceramic Parts Group

Operating profit in this reporting segment decreased by ¥521 million, or 4.5%, to ¥11,014 million compared with ¥11,535 million in fiscal 2005. This was primarily due to the decrease in sales of parts for semiconductor fabrication equipment and sapphire products for LCD projectors, the core products in this reporting segment.

(2) Semiconductor Parts Group

Operating profit in this reporting segment increased by ¥192 million, or 1.1%, to ¥17,742 million compared with ¥17,550 million in fiscal 2005. Operating profit was impacted by an increase in depreciation costs combined with capital expenditures of ¥24,136 million geared towards business expansion, including the construction of a new plant for organic packages. Profit from increased sales of ceramic packages, however, led to a slight increase in overall operating profit in this reporting segment.

(3) Applied Ceramic Products Group

Operating profit in this reporting segment increased by ¥4,747 million, or 27.7%, to ¥21,876 million compared with ¥17,129 million in fiscal 2005. Increased sales and enhanced productivity of solar energy business and cutting tools business, core areas in this reporting segment, led to an increase in operating profit. In particular, effective utilization of four production bases located globally enhanced productivity and led to a significant increase in profit in the solar energy business, despite a trend of increases in raw material costs.

 

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(4) Electronic Device Group

Operating profit in this reporting segment decreased by ¥8,236 million, or 23.3%, to ¥27,170 million compared with ¥35,406 million in fiscal 2005. Component demand for digital consumer products began to recover last summer, which contributed to a marked improvement in operating profit in the second half. Nonetheless, a decline in demand for thin-film devices combined with stagnant demand and declining unit prices, especially in components for mobile phone handsets in the first half which contributed to the decrease in operating profit.

(5) Telecommunications Equipment Group

Operating loss in this reporting segment improved significantly by ¥13,212 million to ¥1,706 million compared with ¥14,918 million in fiscal 2005. Despite a one time expense of approximately ¥3.1 billion recorded in fiscal 2006 in line with structural reforms at Kyocera Wireless Corp. that included the transfer of mobile phone handsets manufacturing operations to Flextronics International Ltd., operating profits from sales of mobile phone handsets and PHS handsets in the domestic market increased.

(6) Information Equipment Group

Operating profit in this reporting segment decreased by ¥9,774 million, or 27.0%, to ¥26,412 million compared with ¥36,186 million in fiscal 2005. This was due mainly to a decline in product prices amid intensified global market competition and increased development costs for color printers and digital multifunction products equipped with solutions for business expansion. R&D expenses in this reporting segment increased by ¥3,146 million compared with fiscal 2005.

(7) Optical Equipment Group

Operating loss in this reporting segment improved by ¥9,613 million to ¥5,774 million compared with ¥15,387 million in fiscal 2005. The downsizing of the camera business, which included the withdrawal of the digital camera business, led to the reduction in operating loss.

(8) Others

Operating profit in this reporting segment decreased by ¥722 million, or 7.4%, to ¥8,983 million compared with ¥9,705 million in fiscal 2005. This was due mainly to a decline in sales at Kyocera Chemical Corporation.

(9) Corporate

Corporate income and losses constitute income and expenses related to the provision of management-related services by Kyocera’s head office to each reporting segment, together with any profit-and-loss items that management judges not to belong within the above reporting segments, such as gains or losses on valuation of investment securities. Corporate income increased by ¥4,305 million, or 50.8%, to ¥12,785 million compared with ¥8,480 million in fiscal 2005. Interest and dividends were the main contributors. In addition, income in fiscal 2006 included a gain of ¥6,931 million through the sale of all of Kyocera’s shares of Taito Corporation, a gain of ¥5,281 million on shares of UFJ Holdings, Inc. in connection with the exchange of shares for the shares of Mitsubishi UFJ Financial Group, Inc. and a loss of ¥3,492 million on impairment of the investment in Triumph-Adler AG Group, an affiliate of Kyocera Mita Corporation. As a result, corporate gain increased compared with fiscal 2005.

 

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Taxes

Current and deferred income taxes in fiscal 2006 decreased by ¥11,454 million, or 19.7%, to ¥46,760 million compared with ¥58,214 million in fiscal 2005. The effective tax rate of 39.9% in fiscal 2006 was 16.1 points lower than 56.0% in fiscal 2005. The amount of income taxes in fiscal 2005 included the additional income taxes of ¥12,748 million by receiving a notice of tax assessment based on transfer pricing adjustments from the Osaka Regional Tax Bureau stating that, in the Bureau’s judgment, allocation of profit earned from transfers of products between Kyocera Corporation and its overseas subsidiaries was not appropriate from fiscal 1999 to fiscal 2003.

Minority interests

Kyocera’s minority interests are principally related to AVX Corporation, which accounted for approximately 30% of all minority ownership interests. Minority interests increased by ¥1,247 million to ¥4,389 million in fiscal 2006 compared with ¥3,142 million in fiscal 2005. This was mainly due to a large increase in net income at AVX Corporation.

Structural reforms

In the Telecommunications Equipment Group, Kyocera transferred production location of Kyocera Wireless Corp. to Mexico in fiscal 2005. The purpose of this move is to reduce costs in response to cost competition from rival companies. Kyocera recorded ¥503 million as headcount reduction costs related to this transfer of production.

In fiscal 2006, Kyocera outsourced the manufacture of mobile phone handsets of Kyocera Wireless Corp., and sold its manufacturing equipment and inventories to Flextronics International Ltd, a leading provider of electronics manufacturing services. Kyocera Wireless Corp. reduced its manufacturing costs significantly and improved its profitability by taking cost-down activities upon its procurements of parts and materials through a strong promotion of the outsourcing to Flextronics International Ltd., and by making fixed costs related to the manufacturing of mobile phone handsets into variable costs. Kyocera Wireless Corp. also focused its business operation on specializing in the research, development, sales and marketing of mobile phone handsets.

In the Optical Equipment Group, structural reform was focused on downsizing the camera business. Since the acquisition of Yashica Co., Ltd. in 1983, Kyocera advanced its optical equipment business centered on the camera business under the CONTAX, KYOCERA and YASHICA brands. With the shift from still to digital cameras in the camera market in 2004, Kyocera pushed ahead with the production and sale of digital cameras best suited to consumer needs. The digital camera market has expanded considerably on a global scale, however, and because the optical equipment business was unable to achieve sufficient cost reductions to counter the ensuing intense cost competition with competitors, it was forced into a difficult business situation. As a result of extensive investigation into how to effectively utilize management resources under the policies of “business selection and concentration” and “high-value-added diversification,” Kyocera started to downsize the Optical Equipment Group in fiscal 2005. As part of the program to scale back this business, Kyocera closed two overseas sales companies, Yashica Kyocera GmbH Group and Kyocera Optics Inc., during fiscal 2005. Costs associated with the closure of two overseas sales companies amounted to ¥3,285 million, including expenses mainly related to headcount reductions. In addition to the closure of overseas sales companies, a further ¥3,581 million of one time charge in fiscal 2005 was spent to downsize the domestic camera business. This included the implementation of sales promotions to reduce inventory. During fiscal 2006, Kyocera completed its downsizing of the camera business.

Receipt of a notice of tax assessment based on transfer pricing adjustments and filing complaint against it

On March 28, 2005, Kyocera Corporation received a notice of tax assessment based on transfer pricing adjustments from the Osaka Regional Tax Bureau stating that, in the Bureau’s judgment, allocation of profit earned from the transfer of products between Kyocera Corporation and its overseas subsidiaries was not appropriate for the five years from fiscal 1999 through fiscal 2003. The notice indicated that income should be adjusted upwards by ¥24,394 million and that resultant additional tax, including local taxes, etc., amounted to ¥12,748 million.

 

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Investment in WILLCOM, Inc. in fiscal 2005

On June 21, 2004, the Carlyle Group, Kyocera, KDDI Corporation and DDI Pocket Inc. reached an agreement that a consortium of the Carlyle Group, Kyocera and KDDI Corporation would acquire the business of DDI Pocket Inc., a subsidiary of KDDI Corporation. Under the agreement, the company that succeeds DDI Pocket’s business, the name of which was changed to WILLCOM, Inc. in February 2005, was invested 30% by Kyocera. In cooperation with WILLCOM, Inc., Kyocera will endeavor to expand sales in its PHS-related business by carving out new markets in Japan as well as overseas.

Establishment of Japan Medical Materials Corporation in fiscal 2005

On May 21, 2004, Kyocera reached an agreement with Kobe Steel, Ltd. to merge the medical material operations of both companies into a successor company, Japan Medical Materials Corporation, which was established on September 1, 2004. As a dedicated manufacturer of medical materials, the successor company is expected to benefit from the integration of the specialized expertise of Kyocera and Kobe Steel, Ltd in material processing technologies, while maximizing synergies by integrating development, production and marketing divisions. It also seeks to expand its business worldwide.

Critical Accounting Policies and Estimates

Kyocera’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates, judgments and assumptions.

An accounting estimate in Kyocera’s consolidated financial statements is a critical accounting estimate if it requires Kyocera to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and either different estimates that Kyocera reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of Kyocera’s financial condition, changes in financial condition or results of operations. Kyocera has identified the following critical accounting policies with respect to its financial presentation.

Allowances for doubtful accounts

Kyocera maintains allowances for doubtful accounts related to both trade and finance receivables for estimated losses resulting from customers’ inability to make timely payments, including interest on finance receivables. Kyocera’s estimates are based on various factors including the length of past due payments, historical experience and current business environments. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations, a specific allowance against these amounts is provided considering the fair value of assets pledged by the customer as collateral.

 

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Inventory valuation

Kyocera estimates the amount of write-downs required to properly value inventory. Write-downs are provided for excess, slow-moving and obsolete inventory as well as valuation losses required to adjust recorded cost to its market value. Kyocera generally considers all inventory aged over certain holding periods to be slow-moving or obsolete. Kyocera also records inventory write-downs based on its projections of future demand, market conditions and related management-led initiatives even though the age of corresponding inventory is shorter than certain holding periods.

As a result of continuous strict controls and adjustments on inventories, Kyocera recognized inventory write-downs of ¥8,446 million and ¥11,328 million ($96 million) in fiscal 2006 and 2007, respectively. The amounts of these inventory write-downs by reporting segments appear in Note 18 to the Consolidated Financial Statements included in this annual report. A large portion of these inventory write-downs arose from inventories of telecommunications equipment and semiconductor parts. These products were subject to a decrease in demand and a decline in price, or turned to be obsolete because of their short product lives.

The majority of Kyocera’s inventories are produced for the IT industry. Each of these products generally has a short product life, and is susceptible to market demand and price fluctuations. In light of the impacts by segments, inventory write-downs primarily affect all segments except Others. If market conditions and demand in the information technology industry are less favorable than Kyocera’s projections, additional write-downs may be required.

Impairment of securities and investments

Kyocera records impairment charges for debt and equity securities and investments in affiliates and unconsolidated subsidiaries accounted for under the equity method when it believes that the decline of fair value is considered to be other-than-temporary. Kyocera regularly reviews each security and investment for impairment based on the extent to which the fair value is less than cost, the duration of the decline, the anticipated recoverability of fair value in the future and the financial conditions of the issuer. Poor operating results of the issuers of these securities or adverse changes in the market may cause impairment losses in future periods. The impairment losses are recorded as Corporate losses.

Kyocera recognized losses on impairment of securities (current asset) and investment securities (non-current) of ¥385 million and ¥955 million ($8 million) in fiscal 2006 and 2007, respectively. Losses on impairment in fiscal 2007 were attributable mainly to management’s estimation that certain debt securities were under fair value over one year and certain non-public companies in which Kyocera invested would need considerable periods to gain profitability in their operating activities.

Kyocera Corporation is currently a major shareholder of KDDI. The price fluctuation of the KDDI shares may affect Kyocera’s financial conditions. At March 31, 2007, the unrealized gain of ¥289,853 million ($2,456 million) on KDDI shares held by Kyocera Corporation increased compared with that of ¥111,178 million at March 31, 2006 reflecting a fluctuation of the market price of the KDDI shares during fiscal 2007. As the operating results of KDDI recently grew steadily, the performance of KDDI shares is considered to be stable. For detailed information on the gross unrealized gain or loss, see Note 4 to the Consolidated Financial Statements in this annual report.

Impairment of long-lived assets

Kyocera reviews its long-lived assets and intangible assets with definite useful lives for impairment periodically. Long-lived assets and intangible assets with definite useful lives are considered to be impaired when the expected undiscounted cash flow from the asset is less than its carrying value. A loss on impairment is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets and intangible assets with definite useful lives. In fiscal 2007, Kyocera recognized losses on impairment of long-lived assets in some subsidiaries. However these losses on impairment did not have a material impact on Kyocera’s consolidated results of operations and financial position.

 

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Goodwill and other intangible assets

Kyocera has adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” This requires that, rather than being amortized, goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, and also following any events or changes in circumstances that might lead to impairment. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

Kyocera performed the annual impairment test of goodwill and other intangible assets and recorded an impairment loss of ¥1,478 million ($13 million) in a reporting unit in the “Others” segment in fiscal 2007. The impairment charge reflected the overall decline in the fair value of a domestic subsidiary, which caused by stagnant sales and profit results. The fair value of the subsidiary was estimated principally using the expected present value of future cash flow.

Deferred tax assets

Kyocera records deferred tax assets with valuation allowances to adjust their carrying amounts when it believes that it is more likely than not that the assets will not be realized. The valuation of deferred tax assets principally depends on the estimation of future taxable income and feasible tax planning strategies. If future taxable income is lower than expected due to future market conditions or poor operating results, significant adjustments to deferred tax assets may be required. At March 31, 2007, deferred tax assets amounted to ¥87,155 million ($739 million), which Kyocera considers will reasonably be realized in the future compared with the amounts of income from continuing operations before income taxes and income taxes in fiscal 2007.

Benefit plans

Projected benefit obligations and net periodic costs are determined on an actuarial basis and are significantly affected by the assumptions used in their calculation, such as the discount rates, the expected long-term rate of return on plan assets, the rate of increase in compensation levels and other assumptions. Kyocera determines the discount rate by referencing the yield on high quality fixed income securities such as Japanese Government Bonds. The expected return on plan assets is determined based on the rate of historical earnings and Kyocera’s expectation of future performance of the funds in which plan assets are invested. The rate of increase in compensation levels is determined based mainly on results of operations and inflation. Kyocera annually reviews the assumptions underlying its actuarial calculations, making adjustments based on current market conditions, if necessary. If Japanese and global financial markets stagnate, Kyocera may be required to decrease its assumptions of the discount rate and the expected long-term rate of return on plan assets, and a decrease in such assumptions will lead to an increase in projected benefit obligations and net periodic pension costs.

Particularly, an increase in projected benefit obligations may negatively affect Kyocera’s accrued pension and severance liabilities in the consolidated balance sheet and labor costs included in cost of sales and selling, general and administrative expenses in the consolidated statement of income.

As of March 31, 2007, Kyocera adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires an employer to recognize the over funded or under funded status of its defined benefit postretirement plans as an asset or liability in its consolidated balance sheets and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Accordingly, in case that changes in the assumptions lead to increases of projected benefit obligations or decrease in the value of plan assets, the amounts of comprehensive income will decrease.

 

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Sensitivity analysis of benefit plans

The following table illustrates the effect of assumed changes in discount rates and the expected rate of return on plan assets, with assuming all other assumptions consistent, for the benefit plan at Kyocera Corporation and its major domestic subsidiaries which accounts for a significant portion of Kyocera’s projected benefit obligations and net periodic pension costs.

 

     (Yen in millions)  
     Effect on projected benefit obligation
as of March 31, 2007
 

Discount rates:

  

0.25% decrease

   ¥          3,411  

0.25% increase

   (3,280 )
        
     Effect on income before income taxes
for the year ending March 31, 2008
 

Discount rates:

  

0.25% decrease

   ¥            (86 )

0.25% increase

   89  

Expected rate of return on plan assets:

  

0.25% decrease

   (285 )

0.25% increase

   285  

Contingencies

Kyocera is subject to various lawsuits and claims which arise in the ordinary course of business. Kyocera consults with legal counsel and assesses the likelihood of adverse outcomes of these contingencies. Kyocera records liabilities for these contingencies when the likelihood of an adverse outcome is probable and the amount is reasonably estimable. In making these estimates, Kyocera considers the progress of the lawsuits, the situations of other companies that are subject to similar lawsuits and other relevant factors. The amounts of liabilities accrued are based on estimates and may be significantly affected by further developments or the resolution of these contingencies in the future.

On March 28, 2005, Kyocera Corporation received a notice of tax assessment based on transfer pricing adjustments from the Osaka Regional Tax Bureau stating that, in the Bureau’s judgment, allocation of profit earned from transfers of products between Kyocera Corporation and its overseas subsidiaries was not appropriate for the five years from the year ended March 31, 1999 through the year ended March 31, 2003. The notice indicated that income should be adjusted upwards ¥24,394 million and that resultant additional tax, including local taxes, etc., amounted to ¥12,748 million, which Kyocera had recognized as current income taxes in its consolidated statement of income for the year ended March 31, 2005. On May 24, 2005, Kyocera Corporation filed a complaint against tax assessment based on transfer pricing adjustments with the Osaka Regional Tax Bureau.

On September 25, 2006, Kyocera Corporation received decision letter from the Bureau that voided a portion of the original assessment. In accordance with this decision, ¥4,305 million ($36 million) of tax refunds, including local taxes, was recognized in current income taxes in fiscal 2007. Kyocera Corporation remains in disagreement with the decision concerning the portion of the original assessment that was not voided, and therefore, on October 23, 2006, Kyocera submitted a written claim for examination with the Osaka Board of Tax Appeals. Furthermore, with the objective of avoiding duplicate taxation within Kyocera Group, a notice stating mutual agreement with the United States was submitted to the National Tax Agency on December 26, 2006.

 

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Revenue recognition

Kyocera sells various types of products, including fine ceramic parts, semiconductor parts, and telecommunications equipment. Kyocera recognizes revenue upon completion of the earnings process, which occurs when products are shipped or delivered to customers in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred, and collectibility is reasonably assured. Most of these conditions are satisfied at the time of delivery to customers in domestic sales (FOB destination) and at the time of shipment (FOB shipping) for export sales.

Sales returns

Kyocera records an estimated sales return allowance at the time of sales based on its historical returns experience.

Products warranty

For after-service costs to be paid during warranty periods, Kyocera accrues a product warranty liability for claims under warranties relating to the products that have been sold. Kyocera records an estimate based on its historical repair experience.

Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also provides guidance on derecognition, classification, interest and penalties, disclosure and transitional measures. FIN 48 shall be effective for fiscal years beginning after December 15, 2006. Kyocera is currently evaluating the impact of adoption of FIN 48 in its consolidated results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. The measurement and disclosure requirements are effective beginning after November 15, 2007. Kyocera is currently evaluating the impact of adoption of SFAS No. 157 in its consolidated results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings. SFAS No.159 is effective for fiscal years beginning after November 15, 2007 and Kyocera will adopt SFAS No. 159 effective April 1, 2008. Kyocera is currently evaluating the impact of adoption of SFAS No. 159 in its consolidated results of operations and financial position.

B. Liquidity and Capital Resources

Capital resources

In the short term, Kyocera expects cash demands for working capital and funds for capital expenditures required for the expansion of operations, purchases of Kyocera Corporation’s common stock, and payments of dividends to stockholders. Kyocera’s primary source of short-term liquidity is cash generated by operations. Certain subsidiaries also generate capital in the form of loans from financial institutions. At March 31, 2007, Kyocera’s short-term borrowings and long-term debt including current portion totaled ¥28,386 million ($241 million). The ratio to total assets of 1.3% still reflected at a low level of dependence. Most borrowings were denominated in the yen, the U.S. dollar and the Euro but certain borrowings were denominated in other foreign currencies. Details of these borrowings are described in “Tabular Disclosure of Contractual obligations,” which also includes the information regarding obligations for the acquisition or construction of property, plant and equipment.

 

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Capital expenditures in fiscal 2007 decreased by ¥18,964 million ($161 million), or 21.3%, to ¥69,896 million ($592 million) from ¥88,860 million in fiscal 2006. In fiscal 2007, Kyocera made capital expenditures particularly to increase production capacity in the Electronic Device Group with business expansion. However, overall capital expenditures in fiscal 2007 decreased compared with fiscal 2006, which included large-scale capital expenditures in the organic package business and the solar energy business. R&D expenditures increased by ¥3,664 million ($31 million), or 6.4%, to ¥61,100 million ($518 million) from ¥57,436 million in fiscal 2006. Nearly all capital and R&D expenditures were funded using cash in hand or cash generated by operations.

During fiscal 2008, Kyocera expects total capital expenditures to be approximately ¥86,000 million ($729 million), and total R&D expenditures to be approximately ¥67,000 million ($568 million). Kyocera believes that Kyocera needs to invest its resources continuously in the development of new business areas and improved technology in order to create new products, commercialize advanced technologies and thereby secure future earnings streams.

At March 31, 2007, Kyocera’s working capital totaled ¥740,303 million ($6,274 million), an increase of ¥198,258 million ($1,680 million), or 36.6%, from ¥542,045 million at March 31, 2006. This was due to the effect of an increase in short-term investments including negotiable certificate of deposits and a decrease of debt by the sale of KLC in fiscal 2007. Kyocera plans to continue to improve capital efficiency by shortening manufacturing lead-time and reducing inventory level. Cash from operations has generally been sufficient for Kyocera to fund its working capital requirements and to fulfill its future capital expenditures, debt repayments and other obligations. Kyocera’s net cash provided by operating activities in fiscal 2007 was ¥149,644 million ($1,268 million) and cash and cash equivalents at March 31, 2007 were ¥282,208 million ($2,392 million). Kyocera believes that its working capital is sufficient for present and predictable future requirements.

Kyocera Corporation holds its treasury stock to facilitate the implementation of flexible capital policies and to develop its business in a dynamic manner in response to changes in the operating environment.

In fiscal 2007, Kyocera Corporation paid cash dividends totaling ¥18,787 million ($159 million), at ¥100 ($0.8) per share. Kyocera Corporation received approval at the general meeting of shareholders held on June 27, 2007 for the payment of year-end dividends totaling ¥11,319 million ($96 million), ¥60 ($0.5) per share, on June 28, 2007 to all stockholders of record on March 31, 2007.

Kyocera believes cash on hand and cash from operations will be sufficient to fund all cash requirements outlined above, at least through fiscal 2008. Consequently, Kyocera does not currently intend to use any other external financing sources that might affect its credit agency ratings. If cash generated by operations are insufficient for funding purposes, Kyocera retains other financing options, including external sources, such as short-term or long-term borrowings, as well as financing directly in the capital markets through issuances of debt or equity securities. As evidenced by an equity to assets ratio of 71.1% at March 31, 2007, Kyocera maintains a strong financial position, which leads Kyocera to believe that any capital requirements could be secured from external sources at a relatively low cost. Kyocera also maintains good business relationships with several major financial institutions.

Any future significant deterioration in market demand for Kyocera’s products, or a slump in product prices to levels substantially below those projected by Kyocera, could adversely affect Kyocera’s operating results and financial position, possibly resulting in reduced liquidity.

 

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Cash flows

Fiscal 2007 compared with Fiscal 2006

The following table shows a summary of Kyocera’s cash flows for fiscal 2006 and fiscal 2007:

 

    

(Yen in millions and U.S. dollars in thousands)

 
     Years ended March 31,  
     2006     2007     2007     Increase
(Decrease)
 
     Amount     Amount     Amount     %  

Cash flows from operating activities

   ¥ 171,077     ¥ 149,644     $ 1,268,169     (12.5 )

Cash flows from investing activities

     (165,467 )     (151,703 )     (1,285,619 )   (8.3 )

Cash flows from financing activities

     (23,289 )     (20,645 )     (174,958 )   (11.4 )

Cash and cash equivalents at end of year

     300,809       282,208       2,391,593     (6.2 )

Net cash provided by operating activities in fiscal 2007 decreased by ¥21,433 million ($182 million), or 12.5%, to ¥149,644 million ($1,268 million) from ¥171,077 million in fiscal 2006. This was due mainly to decreases in cash inflow related to inventories and receivables, although net income increased by ¥36,808 million ($312 million), or 52.8%, to ¥106,504 million ($903 million) from ¥69,696 million in fiscal 2006. As a result, net cash provided by operating activities in fiscal 2007 decreased compared with fiscal 2006.

Net cash used in investing activities in fiscal 2007 decreased by ¥13,764 million ($117 million), or 8.3%, to ¥151,703 million ($1,286 million) from of ¥165,467 million in fiscal 2006.

There was ¥24,553 million ($208 million) of cash inflow proceeded from sale of shares of KLC in fiscal 2007 whereas there was ¥24,133 million of cash flow proceeded from sale of shares of Taito Corporation in fiscal 2006. In addition, although acquisition of time deposits significantly increased, there were decreases in payments for purchases of property, plant and equipment, and purchases of available-for-sales securities as well as increases in sales or redemptions of available-for-sales securities and withdrawals of time deposits. As a result, net cash used in investing activities in fiscal 2007 decreased compared with fiscal 2006.

Net cash used in financing activities in fiscal 2007 decreased by ¥2,644 million ($22 million), or 11.4%, to ¥20,645 million ($175 million) from ¥23,289 million in fiscal 2006. This was due to an increase by ¥5,327 million ($45 million) in sale of treasury stock by exercises of stock options and a decrease in payments of long-term debt, which exceeded decreases in proceeds from short-term borrowings and long-term debt.

On August 1, 2006, Kyocera sold its shares in KLC, a subsidiary engaged in financing services. As a result, both the amounts of proceed from insurance of short-tem and long-term debts, and the amounts of payments of short-term and long-term debt, which are included in financial activities, will decrease in fiscal 2008 and afterwards, however, such decreases will not have significant effects on Kyocera’s cash flows in total. See Note 3 to the Consolidated Financial Statements in this annual report.

The yen’s depreciation against the U.S. dollar and Euro between March 31, 2006 and 2007 resulted in increases in cash and cash equivalents of ¥4,103 million ($35 million).

At March 31, 2007, cash and cash equivalents totaled ¥282,208 million ($2,392 million). This represented a decrease of ¥18,601 million ($158 million), or 6.2%, from ¥300,809 million at March 31, 2006. Most of Kyocera’s cash and cash equivalents were denominated in yen but certain cash and cash equivalents, mainly in overseas subsidiaries, were denominated in foreign currencies, such as the U.S. dollar.

 

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Fiscal 2006 compared with Fiscal 2005

 

     (Yen in millions)  
     Years ended March 31,        
     2005     2006     Increase
(Decrease)
 
     Amount     Amount     %  

Cash flows from operating activities

   ¥ 145,523     ¥ 171,077     17.6  

Cash flows from investing activities

     (132,494 )     (165,467 )   24.9  

Cash flows from financing activities

     (67,344 )     (23,289 )   (65.4 )

Cash and cash equivalents at end of year

     310,592       300,809     (3.1 )

Net cash provided by operating activities in fiscal 2006 increased by ¥25,554 million, or 17.6%, to ¥171,077 million from ¥145,523 million in fiscal 2005. This was due to an increase in net income by ¥23,788 million, or 51.8%, to ¥69,696 million from ¥45,908 million in fiscal 2005, coupled with a decrease in inventory as a result of inventory normalization and an increase in notes and account payable in line with an increase in orders and production.

Net cash used in investing activities in fiscal 2006 increased by ¥32,973 million, or 24.9%, to ¥165,467 million from net cash used in investing activities of ¥132,494 million in fiscal 2005. In fiscal 2006, proceeds from sales of Taito Corporation shares and a decrease in payment for purchase of investments and advances compared with fiscal 2005 provided cash inflow in investing activities. Nonetheless, payment for purchases of property, plant and equipment increased owing to aggressive capital expenditure, payment for purchase of securities increased in line with fund management, and deposits of negotiable certificates of deposits and time deposits increased compared with fiscal 2005. As a result, net cash used in investing activities in fiscal 2006 increased compared with fiscal 2005.

Net cash used in financing activities in fiscal 2006 decreased by ¥44,055 million, or 65.4%, to ¥23,289 million from ¥67,344 million in fiscal 2005. Although dividend payments increased in fiscal 2006 compared with fiscal 2005, an increase in short-term debt caused net cash used in financing activities to decrease compared with fiscal 2005.

The yen’s depreciation against the U.S. dollar and Euro between March 31, 2005 and 2006 resulted in an increase in cash and cash equivalents of ¥7,896 million.

At March 31, 2006, cash and cash equivalents totaled ¥300,809 million. This represented a decrease of ¥9,783 million, or 3.1%, from ¥310,592 million at March 31, 2005. Most of Kyocera’s cash and cash equivalents were denominated in the yen but certain cash and cash equivalents, mainly in overseas subsidiaries, were denominated in foreign currencies, such as the U.S. dollar.

 

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Assets, liabilities and stockholders’ equity

Kyocera’s total assets at March 31, 2007 increased by ¥198,942 million ($1,686 million), or 10.3%, to ¥2,130,464 million ($18,055 million), compared with ¥1,931,522 million at March 31, 2006.

Cash and cash equivalents decreased by ¥18,601 million ($158 million), or 6.2%, to ¥282,208 million ($2,392 million). This was due mainly to the effect of net cash used to cover dividend payments and deposit of negotiable certificates of deposits aiming for higher interest, exceeding net cash gained by operating activities as well as the sale of all of Kyocera’s shares of KLC.

Short-term investments increased by ¥125,553 million ($1,064 million), or 142.8%, to ¥213,495 million ($1,809 million), due mainly to increases in negotiable certificates of deposits and bonds maturing within one year, which were reclassified from securities and other investments.

Short-term and long-term finance receivables that were recognized as loan assets by KLC., were eliminated. This is because KLC ceased being a consolidated subsidiary of Kyocera as a result of the sale of all of Kyocera’s shares of KLC in August 2006.

Accounts receivables increased by ¥25,987 million ($220 million), or 12.4%, to ¥236,380 million ($2,003 million), due mainly to an increase in sales in the Telecommunications Equipment Group at Kyocera Corporation and at KMC.

Inventories increased by ¥18,624 million ($158 million), or 9.8%, to ¥209,188 million ($1,773 million). This was due mainly to increases in finished goods held by KMC and Kyocera International Inc. (KII) as well as work-in-progress items of Kyocera Corporation and AVX, in line with increased sales and more new product lines.

Securities and other investments increased by ¥137,191 million ($1,163 million), or 24.8%, to ¥690,568 million ($5,852 million), due mainly to increased market value at March 31, 2007 of KDDI stock and other equity securities compared with March 31, 2006.

Total property, plant and equipment at cost, net of accumulated depreciation, decreased by ¥4,440 million ($38 million), or 1.6%, to ¥280,906 million ($2,381 million). Capital expenditure in fiscal 2007 was ¥69,896 million ($592 million), and depreciation was ¥70,155 million ($595 million).

Other assets increased by ¥23,627 million ($200 million), or 111.3%, to ¥44,855 million ($380 million). This increase was due mainly to an increase of ¥23,614 million ($200 million) prepaid benefit costs upon Kyocera’s adoption of SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Post-retirement Plans.”

Kyocera’s total liabilities at March 31, 2007 decreased by ¥28,522 million ($242 million), or 4.9%, to ¥548,981 million ($4,652 million), compared with ¥577,503 million at March 31, 2006.

Total debt, composed of short-term borrowings and long-term debt including debt due within one year, decreased by ¥112,186 million ($951 million), or 79.8%, to ¥28,386 million ($241 million), due mainly to the sale of KLC.

Deferred income taxes-non-current liabilities increased by ¥81,172 million ($688 million), or 64.6%, to ¥206,858 million ($1,753 million), due mainly to an increase in market value at March 31, 2007 of KDDI stock and other equity securities compared with March 31, 2006.

 

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Minority interests in subsidiaries, principally AVX, increased by ¥1,981 million ($17 million), or 3.1%, to ¥66,923 million ($567 million), compared with ¥64,942 million at March 31, 2006, due mainly to strong performance at AVX.

Total stockholders’ equity at March 31, 2007 increased by ¥225,483 million ($1,911 million), or 17.5%, to ¥1,514,560 million ($12,835 million), compared with ¥1,289,077 million at March 31, 2006.

Retained earnings at March 31, 2007 increased by ¥87,717 million ($743 million), or 9.1%, due to net income for fiscal 2007 of ¥106,504 million ($903 million), less cash dividend payments of ¥18,787 million ($159 million).

Accumulated other comprehensive income increased by ¥130,109 million ($1,103 million), or 178.4%, to ¥203,056 million ($1,721 million). Net unrealized gains on securities increased by ¥102,021 million ($865 million), or 123.4%, due mainly to increased market value at March 31, 2007 of KDDI stock and other equity securities compared with March 31, 2006. Pension adjustments, which were reported for the first time upon Kyocera’s adoption of the SFAS No. 158, were ¥15,419 million ($131 million), at March 31, 2007. Foreign currency translation adjustments increased by ¥10,474 million ($89 million), to ¥2,904 million ($25 million), due mainly to the depreciation of the yen against Euro.

The stockholders’ equity ratio at March 31, 2007 was 71.1%, up 4.4 percentage points from 66.7% at March 31, 2006.

C. Research and development activities

Kyocera continuously aims at expanding sales and boosting profitability in its Components and Equipment Businesses. To achieve these objectives, Kyocera seeks to create new technologies, products and businesses by integrating group-wide management resources while advancing and focusing technological capabilities. Kyocera will channel its energies into two high-growth-potential areas; namely, the markets for telecommunications and information processing and for environmental preservation. R&D activities are conducted in all of these markets in the realms of materials, components, devices and equipment. Specific initiatives in each reporting segment are as follows.

(1) Fine Ceramic Parts Group

By making effective use of fine ceramic materials technology, processing technology and design technology, Kyocera is seeking to strengthen the development of fine ceramic components for next-generation semiconductor processing equipment and large-sized LCD manufacturing equipment and of high-quality, cost-competitive sapphire substrates for LEDs, whose applicability is expected to increase. In the growing automotive market, efforts are being undertaken to develop products that meet the need for advanced electronics and safety and growing concerns with the environment. Specific endeavors include the development of glow plugs by fully utilizing the high temperature durability of ceramics and piezo stacks that enable precision control for the fuel injection of diesel engine cars, which are becoming more widespread in Europe.

(2) Semiconductor Parts Group

Kyocera is advancing the development of new ceramic packages and organic packages for digital consumer equipment, where demand is expected to expand. In the ceramic package business, efforts are being made to develop smaller, thinner and more highly sophisticated ceramic packages with a variety of built-in functions in order to meet rapid advancements in mobile phone handsets. Kyocera is also developing ceramic packages for various types of sensors for use in the automotive market. In the organic package business, Kyocera is developing new flip chip packages for next-generation high-performance semiconductors and narrow pitch flip-chip system in a package (SiP) substrates to realize even thinner.

 

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(3) Applied Ceramic Products Group

While striving to further increase the conversion efficiency of solar cells for the environmental preservation market, Kyocera is developing a variety of next-generation solar cells. Kyocera is also working toward the practical application of solid oxide fuel cells (SOFCs) for residential use, which are expected to be the next-generation distributed power generation system for small-scale power sources.

(4) Electronic Device Group

Kyocera develops various electronic components for digital consumer equipment market and the high-growth-potential sensor related market. Particular areas of our development include small and high-capacitance capacitors, low-pass filters for mobile phone handsets with One-Seg terrestrial digital broadcasting capability, small crystal units and timing devices for the sensors.

In thin-film devices, Kyocera is developing thermal printheads for high-resolution digital photo printers, and industrial LCDs equipped with an LED backlight to meet needs from an environmental perspective. Work is also being done towards the mass-producing of organic light emitting diode (OLED) displays that realize low power consumption and that have moving image quality seen as outstanding for mobile devices.

(5) Telecommunications Equipment Group

By making effective use of component, device and software technologies within the group, Kyocera is seeking to develop high-value-added products for the mobile telecommunications equipment market, in which functions are becoming increasingly advanced. In the domestic PHS market, Kyocera is developing handsets compatible with high-performance PHS base stations to ensure faster data transmission rates and the provision of diverse services. Kyocera is also strengthening the development of equipment for wireless broadband systems such as *iBurst™ and VoIP (Voice over Internet Protocol) that enable stable, high-speed and high-data rate communication.

 


* iBurst™ is a trademark of ArrayComm, Inc.

(6) Information Equipment Group

Kyocera is promoting the development of more color-based and solutions-oriented products based on the “ECOSYS” concept, which is realized through the incorporation of a long-lasting amorphous silicon photoreceptor drum. Apart from bolstering the lineup for both black and white and color ECOSYS printers, copying machines and multifunctional systems, Kyocera is advancing the development of document solutions products that can handle the integrated management of documents and digital information. Efforts are also being made to strengthen security functions.

(7) Optical Equipment Group

Leveraging optical and image processing technologies amassed within the group, Kyocera is strengthening the development of optical components for the barcode reader market. Kyocera is also continuing the development of lenses and image processing technology for the automotive market.

(8) Others

Kyocera Chemical Corporation is currently strengthening the development of semiconductor and crystal-related materials. Focused efforts include the development of photo-sensitive, heat-resistant resin as a protective coating for the surface of semiconductors and of photo spacers for LCDs.

KCCS is promoting development in the area of fixed mobile convergence (FMC) and optimization by anticipating the needs for next-generation mobile phone handsets and other mobile communication equipment. In addition, KCCS continues to develop authentication and security technologies, which seek to meet needs for fast changing next-generation networks.

 

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R&D expenses by reporting segment are as follows.

 

     Years ended March 31,  
     2005     2006     2007   

Increase (Decrease)

Fiscal 2007
compared with

Fiscal 2006

 
     Amount     Amount     Amount    %  

Fine Ceramic Parts Group

   ¥ 4,252     ¥ 3,107     ¥ 3,769     $ 31,941    21.3  

Semiconductor Parts Group

     2,890       3,549       3,757       31,839    5.9  

Applied Ceramic Products Group

     2,747       3,923       4,138       35,068    5.5  

Electronic Device Group

     11,416       10,940       12,123       102,737    10.8  
                                     

Total Components Business

     21,305       21,519       23,787       201,585    10.5  

Telecommunications Equipment Group

     14,972       15,313       15,123       128,161    (1.2 )

Information Equipment Group

     13,270       16,416       17,983       152,398    9.5  

Optical Equipment Group

     2,636       1,079       585       4,958    (45.8 )
                                     

Total Equipment Business

     30,878       32,808       33,691       285,517    2.7  

Others

     2,215       3,109       3,622       30,695    16.5  
                                     

R&D expenses

   ¥ 54,398     ¥ 57,436     ¥ 61,100     $ 517,797    6.4  
                                     

% to net sales

     4.6 %     4.9 %     4.8 %     —      —    

We have a variety of patents in Japan and other countries, and hold licenses for the use of patents from others. Details are set forth in Item 4 B “Patents and Licenses” in this Form 20-F.

D. Trend Information

The following statements contain forward-looking statements. They are based on estimates and assumptions of our management about the future and are subject to significant uncertainty. You should read these statement in conjunction with the Item 3.D “Risk Factors” in this Form 20-F, which describe factors that may contribute to actual events or our results of operations differing from that stated in the forward looking statements below, including changes in the Japanese or world economies and demand for our products.

The information below should be read in conjunction with other sections within Item 5 “Operating and Financial Review and Prospects” of this Form 20-F, which contains some of the trend information required by this item.

Market Trends

In the telecommunications and information processing market, a key area for Kyocera, demand for mobile handsets in the emerging markets is expected to expand coupled with the commencement of new services in developed countries. More specifically the rising popularity of advanced mobile handsets featuring high-pixel color LCDs, built-in cameras and other functions including GPS (global positioning system), and terrestrial TV broadcasting, is expected to propel demand for mobile phone handsets. In addition, stable growth is predicted to continue in PC-related and digital still cameras, while strong growth in demands for new game consoles and flat panel digital TVs is anticipated. Kyocera expects these areas of growth will produce a positive impact on both the components and equipment businesses.

In the information equipment industry, demand for high-speed multifunctional products equipped with printers, copiers and facsimile, is expected to grow. To seize this opportunity by meeting with such needs, we aim at expanding our product lines ranging from black and white models to color models.

In the environmental preservation market, which is another key area for Kyocera, solar energy market is growing rapidly on a global basis as an alternative energy due to rising environmental awareness. Demand for solar energy products are expanding, especially in Japan and Europe supported by governmental subsidy systems. As such subsidy systems are being introduced in the United States and other Asian countries, the solar energy market is expected to expand in the future. In addition, ceramic components for automobiles, which comply with current environmental regulations, are also expected to grow in the future.

 

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E. Off-Balance Sheet Arrangements

Refer to Note 14 in The Consolidated Financial Statements included in this Form 20-F.

As a part of its ongoing business, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.

 

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F. Tabular Disclosure of Contractual Obligations

The following tables provide information about Kyocera’s contractual obligations and other commercial commitments that will affect Kyocera’s liquidity for the next several years, as of March 31, 2007. Kyocera anticipates that funds to be required to fulfill these debt obligations and commitments will be generated internally from operations.

 

Contractual obligations

   (Yen in millions)
     Less than
1 year
   2-3 years    4-5 years    Thereafter    Total

Short-term borrowings*

   ¥ 15,250    ¥ —      ¥ —      ¥ —      ¥ 15,250

Interest payments for short-term borrowings*

     788      —        —        —        788

Long-term debt (including due within one year)*

     5,853      3,387      2,390      1,506      13,136

Interest payments for long-term debt*

     270      268      110      47      695

Supply agreement material used in operation

     3,310      16,856      22,584      64,188      106,938

Operating Leases

     6,346      7,123      4,141      5,270      22,880

Obligations for the acquisition or construction of property, plant and equipment

     12,542      3,351      —        —        15,893
                                  

Total Contractual Obligations

   ¥ 44,359    ¥ 30,985    ¥ 29,225    ¥ 71,011    ¥ 175,580
                                  

Contractual obligations

   (U.S. dollars in thousands)
     Less than
1 year
   2-3 years    4-5 years    Thereafter    Total

Short-term borrowings*

   $ 129,237    $ —      $ —      $ —      $ 129,237

Interest payments for short-term borrowings*

     6,678      —        —        —        6,678

Long-term debt (including due within one year)*

     49,602      28,703      20,254      12,763      111,322

Interest payments for long-term debt*

     2,288      2,273      932      398      5,891

Supply agreement material used in operation

     28,051      142,847      191,390      543,966      906, 254

Operating Leases

     53,780      60,364      35,093      44,661      193,898

Obligations for the acquisition or construction of property, plant and equipment

     106,288      28,398      —        —        134,686
                                  

Total Contractual Obligations

   $ 375,924    $ 262,585    $ 247,669    $ 601,788    $ 1,487,966
                                  

 

* For Kyocera’s variable interest rate of borrowings and debt, Kyocera utilized the rates in effect as of March 31, 2007 when estimating schedule of interest payments.

In addition to contractual obligations shown in the above tables, Kyocera forecasts to contribute ¥9,684 million ($82 million) to its defined benefit pension plans in fiscal 2008.

 

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Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

Since April 1, 2006, Kyocera implemented a new management system. In June 2005, Kyocera initiated a management system with the roles of the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Chief Operating Officer (COO). Subsequently, however, Kyocera decided that its traditional management system, which had been in place for many years, enables faster decision-making across-the-board through the use of a top management system comprising the chairman, the deputy chairman and the president. With this setup, the chairman takes on the position as the head of the board of directors, providing guidance to the president, while the president has total responsibility for daily business execution. It is also believed that more accurate management decisions can be made with the traditional system as the chairman, the deputy chairman and the president can provide diverse perspectives on critical issues.

The following table shows Kyocera’s Directors and Corporate Auditors as of June 28, 2007.

 

Name

  

Date of Birth

  

Position

  

Since

Kensuke Itoh

   December 17, 1937    Director and Advisor    1975

Noboru Nakamura

   October 6, 1944   

Representative Director and Chairman

(Representative Director and Chairman of JAPAN MEDICAL MATERIALS CORPORATION and Representative Director and Chairman of KYOCERA CHEMICAL CORPORATION)

  

1991

(Chairman

2006)

Masahiro Umemura

   August 8, 1943    Representative Director and Vice Chairman    1991

Yuzo Yamamura

   December 4, 1941   

Representative Director and Vice Chairman

(Representative Director and President of KYOCERA ELCO CORPORATION and General Manager of Corporate Communication Equipment Group)

   2003

Naoyuki Morita

   April 8, 1942   

Representative Director and Vice Chairman

(Representative Director and Chairman and President of KYOCERA COMMUNICATION

SYSTEMS CO., LTD.)

   2003

Makoto Kawamura

   August 13, 1949    Representative Director and President   

2005

(President

2005)

 

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Name

  

Date of Birth

  

Position

  

Since

Koji Seki

   December 8, 1937    Director (Representative Director and Chairman of KYOCERA MITA CORPORATION)    2003

Michihisa Yamamoto

   November 13, 1942   

Director (Representative Director and Chairman of

KYOCERA OPTEC CO., LTD., and Deputy General Manager of Corporate Communication Equipment Group)

   1987

Isao Kishimoto

   November 30, 1943    Director (Representative Director and President of KYOCERA KINSEKI CORPORATION)    1993

Hisao Hisaki

   July 2, 1946    Director (General Manager of KYOCERA (TIANJIN) SALES AND TRADING CORPORATION)    1991

Rodney N. Lanthorne

   February 5, 1945   

Director

(Director and President of KYOCERA INTERNATIONAL, INC.)

   1989

John S. Gilbertson

   December 4, 1943   

Director

(Director, President and Chief Executive Officer of AVX CORPORATION)

   1995

Yoshihiko Nishikawa

   September 11, 1945    Full-time Corporate Auditor    2005

Yasuo Akashi

   May 29, 1944    Full-time Corporate Auditor    2003

Osamu Nishieda

   January 10, 1943    Corporate Auditor (Lawyer)    1993

Shinji Kurihara

   July 19, 1932    Corporate Auditor (General Manager of TAKEDA Hospital Research Institute)    2003

Shigekazu Tamura

   February 18, 1950   

Corporate Auditor

(Certified Public Accountant)

   2005

Kensuke Itoh has served as a Director and the Advisor of Kyocera Corporation since 2005. He became a Director in 1975, a Managing Director in 1979, and a Senior Managing Director in 1981 and the Chairman of the Board and Representative Director in 1999. He joined Kyocera Corporation in 1959 and has served as Representative Director and Chairman of Kyoto Purple Sanga Ltd.

 

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Noboru Nakamura has served as a Representative Director and Chairman of Kyocera Corporation since 2006. He became a Director in 1991, a Managing Director in 1995, a Senior Managing and Representative Director in 1997 and an Executive Vice President and Representative Director in 1999. He joined Kyocera Corporation in 1967 and has served as the Representative Director and Chairman of Kyocera Chemical Corporation, Representative Director and Chairman of Japan Medical Materials Corporation, Representative Director and Chairman of Kyocera Solar Corporation, Representative Director and Chairman of Kyocera SLC Technologies Corporation, and Representative Director and Chairman of Kyocera Display Institute Co., Ltd., Representative Director and Chairman of Kyocera International Co., Ltd., and Representative Director and President of Kyoto Fashion Center Ltd.

Masahiro Umemura has served as a Representative Director and Vice Chairman since 2005. He became a Director in 1991, a Managing Director in 1993 and a Senior Managing and Representative Director in 1997 and an Executive Vice President and Representative Director in 1999. He joined Kyocera Corporation in 1966 and is in charge of Finance and Corporate Development Group and has served as the Chairman of the Board of Directors of Kyocera Management Consulting Service (Shanghai) Co., Ltd.

Yuzo Yamamura has served as a Representative Director and Vice Chairman since 2006. He rejoined Kyocera Corporation as a Director in 2003. He first became a Director in 1987, and retired in 1993. He rejoined Kyocera Corporation as a Senior Managing and Representative Director in 1995 and retired again in 1999. He originally joined Kyocera Corporation in 1965 and has served as the President and Representative Director of Kyocera ELCO Corporation.

Naoyuki Morita has served as a Representative Director and Vice Chairman since 2006. He rejoined Kyocera Corporation as a Director in 2003. He first became a Director in 1987, a Managing Director in 1989 and a Senior Managing and Representative Director in 1995, and retired in 1999. He originally joined Kyocera Corporation in 1967 and has served as the Representative Director and Chairman and President of Kyocera Communication Systems Co., Ltd.

Makoto Kawamura has served as a Representative Director and President of Kyocera Corporation since 2005. He became a Director in 2001 and retired in 2003. He rejoined as a Representative Director and President in 2005. He joined Kyocera Corporation in 1973 and has served as the Representative Director and Chairman and President in Kyocera Korea Co., Ltd., Chairman of the Board of Directors of Shanghai Kyocera Electronics Co., Ltd. and Chairman of the Board of Directors of Donggaun Shilong Kyocera Optics Co., Ltd.

Koji Seki rejoined Kyocera Corporation as a Director in 2003. He first became a Director in 1989 and a Managing Director in 1999, and he retired in 2001. He originally joined Kyocera Corporation in 1982 and has served as the Representative Director and Chairman of Kyocera Mita Corporation.

Michihisa Yamamoto has served as a Director of Kyocera Corporation since 1987. He became a Director in 1987, and a Managing Director in 1989 and a Senior Managing and Representative Director in 1992 and an Executive Vice President and a Representative Director in 1999. He joined Kyocera Corporation in 1970 and has served as the Representative Director and Chairman of Kyocera Optec Co., Ltd.

Isao Kishimoto has served as a Director of Kyocera Corporation since 1993. He became a Director in 1993, a Managing Director in 1997 and a Senior Managing Director in 2001. He joined Kyocera Corporation in 1967 and has served as the Representative Director and President of Kyocera Kinseki Corporation.

Hisao Hisaki has served as a Director of Kyocera Corporation since 1991. He joined Kyocera Corporation in 1969 and has served as the representative Director and Chairman of the Board of Directors of Kyocera Tianjin Sales and Trading Corporation.

 

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Rodney N. Lanthorne has served as a Director of Kyocera Corporation since 1989. He became a Director in 1989, a Managing Director in 1990 and a Senior Managing and Representative Director in 1999. He joined Kyocera International, Inc. in 1979 and has served as Director and President of Kyocera International, Inc.

John S. Gilbertson has served as a Director of Kyocera Corporation since 1995. He became a Director in 1995 and a Managing Director in 1999. He joined AVX Corporation in 1981 and has served as Director, President and Chief Executive Officer of AVX Corporation.

Yoshihiko Nishikawa has served as a Full-time Corporate Auditor of Kyocera Corporation since 2005. He became a Director in 1995 and retired in 2003. He joined Kyocera Corporation in 1970.

Yasuo Akashi has served as a Full-time Corporate Auditor of Kyocera Corporation since 2003. He became a Director in 1991, a Managing Director in 1993 and a Senior Managing and Representative Director in 1997. He joined Kyocera Corporation in 1967.

Osamu Nishieda has served as a Corporate Auditor of Kyocera Corporation since 1993. He has served as an In-House Council of Kyocera Corporation.

Shinji Kurihara has served as a Corporate Auditor of Kyocera Corporation since 2003. He has served as the General Manager of Takeda Hospital Research Institute.

Shigekazu Tamura has served as a Corporate Auditor of Kyocera Corporation since 2005. He is registered as the Certified Public Accountant defined by the Certified Public Accountant Law of Japan.

Kyocera adopts an “executive officer system,” of which objectives are to establish corporate governance appropriate for a global corporation, together with a decision making system responsive to the business environment, and to train the next generation of senior executives.

The following table shows Kyocera’s Executive Officers as of June 28, 2007.

 

Name

  

Position

Makoto Kawamura

   Executive Officer and President

Tetsuo Kuba

  

Senior Managing Executive Officer

(General Manager of Corporate Fine Ceramics Group and Corporate Semiconductor Components Group)

Tatsumi Maeda

  

Senior Managing Executive Officer

(General Manager of Corporate Solar Energy Group)

Hisashi Sakumi

  

Managing Executive Officer

(General Manager of Corporate Environment and Education Group)

Tsutomu Yamori

  

Managing Executive Officer

(General Manager of Corporate General Affairs Human Resources Group)

Takashi Itoh

  

Managing Executive Officer

(General Manager of Corporate Purchasing Group)

Osamu Nomoto

  

Managing Executive Officer

(General Manager of Corporate Electronic Components Group)

Akiyoshi Okamoto

  

Managing Executive Officer

(General Manager of SHANGHAI KYOCERA ELECTRONICS CO., LTD.)

Eiichi Toriyama

  

Managing Executive Officer

(Deputy General Manager of Corporate Communication Equipment Group (In charge of Sales) )

 

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Name

  

Position

Keijiro Minami

  

Senior Executive Officer

(General Manager of Corporate Legal & Intellectual Property Group)

Goro Yamaguchi

  

Senior Executive Officer

(Deputy General Manager of Corporate Semiconductor Components Group and General Manager of Corporate Semiconductor Components Sales Division)

Yoshihito Ota

  

Senior Executive Officer

(General Manager of Corporate Office of the Chief Executives)

Yasushi Matsumura

  

Executive Officer

(General Manager of Corporate Display Group)

Yukihiro Takarabe

  

Executive Officer

(General Manager of Corporate Cutting Tool Group)

Yasuyuki Yamamoto

  

Executive Officer

(General Manager of Corporate Mobile Communication Equipment Division and Corporate Communication Systems Equipment Division, Corporate Communication Equipment Group)

Junichi Jinno

  

Executive Officer

(General Manager of Corporate R&D Group for Equipment and Systems)

Gen Takayasu

  

Executive Officer

(General Manager of Corporate Communication Devices Division, Corporate Semiconductor Components Group)

Nobuhiro Ochiai

  

Executive Officer

(General Manager of Corporate Capacitor Division, Corporate Electronic Components Group)

Junzo Katsuki

  

Executive Officer

(General Manager of Corporate Electronic Components Sales Division, Corporate Electronic Components Group)

Masakazu Mitsuda

  

Executive Officer

(General Manager of Corporate Business Systems Administration Group)

Toshimi Gejima

  

Executive Officer

(General Manager of Corporate Automotive Components Group)

Michiaki Furuhashi

  

Executive Officer

(General Manager of General Affairs Division, Corporate General Affairs Human Resources Group)

Mitsuru Imanaka

  

Executive Officer

(Director and President of Kyocera Fine Ceramics GmbH)

Shoichi Aoki

  

Executive Officer

(General Manager of Corporate Financial & Accounting Group)

Hiroshi Togi

  

Executive Officer

(General Manager of Corporate Ceramic Packages Division, Corporate Semiconductor Components Group)

Yoshihiro Kano

  

Executive Officer

(General Manager of Corporate Development Group)

 

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Name

  

Position

Yoichi Yamashita

  

Executive Officer

(General Manager of Corporate Production Technology and Development Group)

Robert E. Whisler

  

Executive Officer

(Director and President of Kyocera America Inc.)

John S. Rigby

  

Executive Officer

(Director and President of Kyocera Industrial Ceramics Corporation)

Masaki Kouzu

  

Executive Officer

(General Manager of Education and Planning Division, Corporate Environment and Education Group)

Hitoshi Takao

  

Executive Officer

(General Manager of Corporate Thin Film Components Group)

Yoshiharu Nakamura

  

Executive Officer

(Deputy General Manager of Corporate Fine Ceramics Group)

Kazumasa Umemura

  

Executive Officer

(General Manager of International Division, Corporate Office of the Chief Executives)

B. Compensation

The aggregate amount of compensation, including bonuses, paid by Kyocera Corporation and its certain subsidiaries in the fiscal year ended March 31, 2007 to all Directors, Executive Officers and Corporate Auditors of Kyocera Corporation and its certain subsidiaries was ¥1,320 million ($11 million).

In accordance with customary Japanese business practice, when a Director or Corporate Auditor retires, a proposal to pay a lump sum retirement allowance is submitted to the ordinary general meeting of shareholders for approval. After such approval, the amount to be paid to each Director or Corporate Auditor is consulted with and fixed by the Board of Directors in accordance with Kyocera Corporation’s internal regulations. Annual provisions are made in the accounts of Kyocera Corporation for the estimated cost of the retirement allowance for Directors and Corporate Auditors.

The annual provisions and costs charged to income for such retirement allowance for fiscal 2007 were ¥64 million ($1 million).

We have neither disclosed to our shareholders nor otherwise made public any of the information specified in this item for individually named Directors, Officers or Corporate Auditors.

C. Board Practices

In accordance with the requirements of the Company Law of Japan which came into effect on May 1, 2006 (the “Company Law”), our Articles of Incorporation provide for not more than five Corporate Auditors. Corporate Auditors are elected at a general meeting of shareholders, and their normal term of office is four years. However, Corporate Auditors may serve any number of consecutive terms. At least half of the Corporate Auditors must be persons who have not been Directors or employees of Kyocera Corporation or its subsidiaries (“Outside Corporate Auditors”). Corporate Auditors form the Board of Corporate Auditors. Corporate Auditors are under a statutory duty to oversee the administration of our affairs by the Directors, to examine our financial statements and business reports to be submitted by the Board of Directors to the general meetings of shareholders and to report their opinions thereon to the shareholders. They are obliged to attend meetings of the Board of Directors and to express their opinions, but they are not entitled to vote. Corporate Auditors also have a statutory duty to provide their report on the audit report prepared by our independent certified public accountants to the Board of Corporate Auditors, which must submit its audit report to the Board of Directors. The Board of Corporate Auditors will also determine matters relating to the duties of the Corporate Auditors, such as audit policy and methods of investigation of our affairs.

 

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Under the Company Law, the Directors and Corporate Auditors are liable for any damages suffered by us as a result of their violation of laws or regulations or any failure to perform their duties. Under our Articles of Incorporation, any such liabilities incurred by the Outside Corporate Auditors may, except in the case of willful misconduct or gross negligence or in certain other cases, be limited by a liability limitation agreement entered into between the Outside Corporate Auditors and us, up to an amount to be calculated in accordance with the relevant provisions of the Company Law with reference to annual remuneration, retirement allowance and profits received upon exercise or transfer of stock options, if any.

Kyocera Corporation has no remuneration committee. Matters of remuneration are decided by top management as a group. None of our Directors have contracts with us providing for benefits upon termination. It is customary to provide lump-sum severance benefits to Directors and Corporate Auditors upon retirement and we provide such benefits in accordance with our internal regulations.

There is no arrangement or understanding between any Director or Corporate Auditor and any other person pursuant to which he was elected as a Director or a Corporate Auditor.

There is no family relationship between any Director or Corporate Auditor and any other Director or Corporate Auditor.

The rights of ADR holders, including their rights relating to corporate governance practice, are provided in the Amended and Restated Deposit Agreement and an amendment thereto which are included in an exhibit to this Form 20-F. See also Item 10.B “Memorandum and Articles of Association” of this Form 20-F.

D. Employees

At March 31, 2007, Kyocera had 63,477 employees, of whom 2,951 worked in the Fine Ceramic Parts Group, 10,111 worked in the Semiconductor Parts Group, 5,852 worked in the Applied Ceramic Products Group, 22,490 worked in the Electronic Device Group, 3,073 worked in the Telecommunications Equipment Group, 12,194 worked in the Information Equipment Group, 1,080 worked in the Optical Equipment Group, 4,126 worked for Others and 1,600 worked in Corporate. Kyocera’s number of employees at March 31, 2007 increased by 2,009 compared with the number of employees of 61,468 at March 31, 2006.

Kyocera Corporation had 12,613 employees, and their average age and average service years were 38.6 and 15.8, respectively.

Most regular employees of Kyocera Corporation, other than management, are members of the Kyocera Union. Over 90% of Kyocera Corporation’s regular employees are members of this union. The Kyocera Union is only open to Kyocera Corporation employees, not to our Japanese or overseas subsidiaries. The employees at three of our subsidiaries in Japan are unionized. Employees at our Japanese subsidiaries are not otherwise unionized. In the United States, our employees are generally unionized, subsidiaries in other countries are unionized on a case-by-case basis. Employees of our overseas subsidiaries belong to labor unions organized by industry, as opposed to a company specific union like the Kyocera Union. There is no material item to be specifically addressed regarding relationships between labor and management.

 

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E. Share Ownership

As of March 31, 2007, Kyocera’s Directors, Corporate Auditors and Executive Officers owned 1,708,094 shares of Kyocera Corporation in total (1,684,501 shares of common stock of Kyocera Corporation and 23,593 ADRs of Kyocera Corporation), or 1.0% of the outstanding shares of Kyocera Corporation. The numbers of shares owned by each Directors, Corporate Auditors and Executive Officers are shown in the following table.

 

Name

  

Title

  

Number of Shares

Kensuke Itoh

   Director and Advisor    527,072

Noboru Nakamura

   Representative Director and Chairman    4,100

Masahiro Umemura

   Representative Director and Vice Chairman    5,100

Yuzo Yamamura

   Representative Director and Vice Chairman    82,000

Naoyuki Morita

   Representative Director and Vice Chairman    5,600

Makoto Kawamura

   Representative Director and President    3,000

Koji Seki

   Director    2,318

Michihisa Yamamoto

   Director    9,232

Isao Kishimoto

   Director    4,100

Hisao Hisaki

   Director    3,171

Rodney N. Lanthorne

   Director    3,562 (ADR)

John S. Gilbertson

   Director    17,418 (ADR)

Yoshihiko Nishikawa

   Corporate Auditor    2,102

Yasuo Akashi

   Corporate Auditor    6,323

Osamu Nishieda

   Corporate Auditor    980,037

Shinji Kurihara

   Corporate Auditor    500

Shigekazu Tamura

   Corporate Auditor    —  

Tetsuo Kuba

   Senior Managing Executive Officer    2,000

Tatsumi Maeda

   Senior Managing Executive Officer    1,100

Hisashi Sakumi

   Managing Executive Officer    9,000

 

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Name

  

Title

  

Number of Shares

Tsutomu Yamori

   Managing Executive Officer    1,100

Takashi Itoh

   Managing Executive Officer    9,000

Osamu Nomoto

   Managing Executive Officer    1,315

Akiyoshi Okamoto

   Managing Executive Officer    4,864

Eiichi Toriyama

   Managing Executive Officer    1,100

Keijiro Minami

   Senior Executive Officer    700

Goro Yamaguchi

   Senior Executive Officer    3,800

Yoshihito Ota

   Senior Executive Officer    900

Yasushi Matsumura

   Executive Officer    200

Yukihiro Takarabe

   Executive Officer    300

Yasuyuki Yamamoto

   Executive Officer    —  

Junichi Jinno

   Executive Officer    —  

Gen Takayasu

   Executive Officer    500

Nobuhiro Ochiai

   Executive Officer    1,000

Junzo Katsuki

   Executive Officer    900

Masakazu Mitsuda

   Executive Officer    500

Toshimi Gejima

   Executive Officer    1,400

Michiaki Furuhashi

   Executive Officer    7,867

Mitsuru Imanaka

   Executive Officer    1,100

Shoichi Aoki

   Executive Officer    200

Hiroshi Togi

   Executive Officer    200

Yoshihiro Kano

   Executive Officer    —  

Yoichi Yamashita

   Executive Officer    —  

 

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Name

  

Title

  

Number of Shares

Robert E. Whisler

   Executive Officer    1,504(ADR)

John S. Rigby

   Executive Officer    1,109(ADR)

Masaki Kouzu

   Executive Officer    —  

Hitoshi Takao

   Executive Officer    —  

Yoshiharu Nakamura

   Executive Officer    800

Kazumasa Umemura

   Executive Officer    —  

Stock Option Plans

On June 25, 2003, the stockholders approved Kyocera Corporation’s Board of Directors resolution for approval of the issuance of stock acquisition rights (Plan 2003) to directors, corporate auditors, corporate executive officers and certain key employees of Kyocera. Plan 2003 were granted on September 1, 2003 and fully vested on October 1, 2003 to 1,390 persons to acquire amounts ranging from 600 to 8,000 shares of common stock each, or to acquire 1,070,100 shares of common stock in the aggregate. The exercise price and the exercisable period of Plan 2003 have been set at ¥7,900 per share, and from October 1, 2003 to September 30, 2008.

On June 25, 2004, the stockholders approved Kyocera Corporation’s Board of Directors resolution for approval of the issuance of stock acquisition rights (Plan 2004) to directors, corporate auditors, corporate executive officers and certain key employees of Kyocera. Plan 2004 were granted on September 1, 2004 and fully vested on October 1, 2004 to 1,644 persons to acquire amounts ranging from 600 to 8,000 shares of common stock each, or to acquire 1,243,300 shares of common stock in the aggregate. The exercise price and the exercisable period of Plan 2004 have been set at ¥8,725 per share, and from October 1, 2004 to September 30, 2008.

On June 28, 2005, the stockholders approved Kyocera Corporation’s Board of Directors resolution for approval of the issuance of stock acquisition rights (Plan 2005) to directors, corporate auditors, corporate executive officers and certain key employees of Kyocera. Plan 2005 were granted on September 1, 2005 and fully vested on October 1, 2005 to 1,715 persons to acquire common stock ranging from 600 to 8,000 shares or to acquire 1,301,900 shares of common stock in the aggregate. The exercise price and the exercisable period of Plan 2005 have been set at ¥8,619 per share, and from October 1, 2005 to September 30, 2008.

Kyocera Corporation did not grant any stock options for the year ended March 31, 2007.

Kyocera Corporation covers Plan 2003, Plan 2004 and Plan 2005 by utilizing common stock held by Kyocera Corporation (treasury stock).

 

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As of May 31, 2007, the amount of common stock to be issued upon the exercise of all outstanding options issued to Directors, Corporate Auditors and Executive Officers is set forth in further detail in the following table. Note, however, that there can be no assurances that the options described above will be exercised in whole or in part.

 

Option Holder

  

Title

  

Total Options

Outstanding

  

Exercise Price per Share

Kensuke Itoh    Director and Advisor   

8,000 (Plan 2004)

8,000 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Noboru Nakamura    Representative Director and Chairman    —      —  
Masahiro Umemura    Representative Director and Vice Chairman   

6,000 (Plan 2004)

8,000 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Yuzo Yamamura    Representative Director and Vice Chairman   

6,000 (Plan 2003)

6,000 (Plan 2004)

6,000 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Naoyuki Morita    Representative Director and Vice Chairman    —      —  
Makoto Kawamura    Representative Director and President   

2,000 (Plan 2003)

4,000 (Plan 2004)

8,000 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Koji Seki    Director    —      —  
Michihisa Yamamoto    Director   

4,500 (Plan 2003)

6,000 (Plan 2004)

6,000 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Isao Kishimoto    Director    6,000 (Plan 2005)    8,619 YEN (Plan 2005)
Hisao Hisaki    Director    2,000 (Plan 2004)    8,725 YEN (Plan 2004)
Rodney N. Lanthorne    Director   

4,500 (Plan 2003)

4,500 (Plan 2004)

4,500 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

John S. Gilbertson    Director   

4,500 (Plan 2003)

4,500 (Plan 2004)

4,500 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Yoshihiko Nishikawa    Corporate Auditor   

3,000 (Plan 2004)

3,000 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Yasuo Akashi    Corporate Auditor    3,000 (Plan 2003)    7,900 YEN (Plan 2003)
Osamu Nishieda    Corporate Auditor    —      —  
Shinji Kurihara    Corporate Auditor    —      —  
Shigekazu Tamura    Corporate Auditor    —      —  
Tetsuo Kuba    Senior Managing Executive Officer    2,100 (Plan 2004)    8,725 YEN (Plan 2004)
Tatsumi Maeda    Senior Managing Executive Office    4,000 (Plan 2004)    8,725 YEN (Plan 2004)
Hisashi Sakumi    Managing Executive Officer   

4,000 (Plan 2004)

4,000 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Tsutomu Yamori    Managing Executive Officer   

2,500 (Plan 2003)

4,000 (Plan 2004)

4,000 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Takashi Itoh    Managing Executive Officer    —      —  
Osamu Nomoto    Managing Executive Officer    4,000 (Plan 2005)    8,619 YEN (Plan 2005)

 

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Option Holder

  

Title

  

Total Options

Outstanding

  

Exercise Price per Share

Akiyoshi Okamoto    Managing Executive Officer    3,000 (Plan 2004)    8,725 YEN (Plan 2004)
Eiichi Toriyama    Managing Executive Officer   

2,700 (Plan 2004)

4,000 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Keijiro Minami    Senior Executive Officer   

1,300 (Plan 2004)

700 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Goro Yamaguchi    Senior Executive Officer   

1,200 (Plan 2004)

3,000 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Yoshihito Ota    Senior Executive Officer   

2,500 (Plan 2004)

2,500 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Yasushi Matsumura    Executive Officer   

400 (Plan 2003)

2,500 (Plan 2004)

3,000 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Yukihiro Takarabe    Executive Officer   

2,100 (Plan 2004)

2,500 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Yasuyuki Yamamoto    Executive Officer   

2,500 (Plan 2003)

2,500 (Plan 2004)

2,500 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Junichi Jinno    Executive Officer   

1,200 (Plan 2004)

2,500 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Gen Takayasu    Executive Officer    2,500 (Plan 2005)    8,619 YEN (Plan 2005)
Nobuhiro Ochiai    Executive Officer   

1,000 (Plan 2003)

2,500 (Plan 2004)

2,500 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Junzo Katsuki    Executive Officer   

1,000 (Plan 2003)

2,500 (Plan 2004)

2,500 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Masakazu Mitsuda    Executive Officer   

2,100 (Plan 2004)

2,500 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Toshimi Gejima    Executive Officer   

2,500 (Plan 2004)

2,500 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Michiaki Furuhashi    Executive Officer   

1,700 (Plan 2004)

2,500 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Mitsuru Imanaka    Executive Officer   

1,200 (Plan 2003)

1,200 (Plan 2004)

2,500 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Shoichi Aoki    Executive Officer    2,500 (Plan 2005)    8,619 YEN (Plan 2005)
Hiroshi Togi    Executive Officer    2,500 (Plan 2005)    8,619 YEN (Plan 2005)
Yoshihiro Kano    Executive Officer    2,500 (Plan 2005)    8,619 YEN (Plan 2005)
Yoichi Yamashita    Executive Officer   

600 (Plan 2004)

2,500 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Robert E. Whisler    Executive Officer   

2,500 (Plan 2003)

2,500 (Plan 2004)

3,000 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

 

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Option Holder

  

Title

  

Total Options

Outstanding

  

Exercise Price per Share

John S. Rigby    Executive Officer   

2,500 (Plan 2004)

3,000 (Plan 2005)

  

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Masaki Kouzu    Executive Officer   

600 (Plan 2003)

600 (Plan 2004)

600 (Plan 2005)

  

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

8,619 YEN (Plan 2005)

Hitoshi Takao    Executive Officer    600 (Plan 2005)    8,619 YEN (Plan 2005)
Yoshiharu Nakamura    Executive Officer    600 (Plan 2005)    8,619 YEN (Plan 2005)
Kazumasa Umemura    Executive Officer    600 (Plan 2005)    8,619 YEN (Plan 2005)
          

Total

     

36,200 (Plan 2003)

95,800 (Plan 2004)

122,600 (Plan 2005)

  
          

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

As far as is known to us, Kyocera is not, directly or indirectly, owned or controlled by any other corporation or by the Japanese or any foreign government, and there is no arrangement which may at a subsequent date result in a change in control of Kyocera.

The following table shows the ten largest stockholders of record of Kyocera Corporation at March 31, 2007.

 

Name

   Shares owned
(in thousands)
   Ownership (%)

Japan Trustee Services Bank, Ltd. (Trust Account)

   11,074    5.79

The Master Trust Bank of Japan, Ltd. (Trust Account)

   10,900    5.70

State Street Bank and Trust Company

   7,932    4.15

The Bank of Kyoto, Ltd.

   7,218    3.77

Kazuo Inamori

   6,806    3.56

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

   5,076    2.65

The Inamori Foundation

   4,680    2.45

BNP Paribas Securities (Japan) Limited

   3,639    1.90

KI Enterprise Co., Ltd.

   3,550    1.86

Japan Trustee Services Bank, Ltd. (Trust Account 4)

   3,121    1.63

Total

   63,996    33.45

None of the above shareholders has voting rights that are different from those of other shareholders.

Under the Securities and Exchange Law of Japan, any person that becomes a holder (together with its related persons) of 5% of the total issued voting shares of a company listed on any Japanese stock exchange (including ADSs representing such shares) must file a report with the Director of the relevant Local Finance Bureau and send a copy of such report to the company. A similar report must also be filed if the percentage holding of a holder of more than 5% of the total issued voting shares of a company increases or decreases by 1% or more.

 

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In accordance with the Securities and Exchange Law of Japan, the financial institutions below informed us that they and their related partners became a holder of over 5% of the total issued voting shares of Kyocera Corporation. However, they were not included in the above major shareholders as a single major holder because not all partners of them were shareholders of record as of March 31, 2007.

 

Filing Date

  

Name

  

Shares owned

(in thousands)

   Ownership (%)

November 15, 2006

   Mitsubishi UFJ Financial Group, Inc. and its related partners    Holding 10,570 thousand shares as of October 31, 2006    5.53

None of the above shareholders has voting rights that are different from those of other shareholders.

According to Citibank N.A., depositary for Kyocera’s ADSs, as of March 31, 2007, 3,826,821 shares of Kyocera’s common stock were held in the form of ADSs and there were 833 ADS holders of record in the United States. According to Kyocera’s register of shareholders, as of March 31, 2007, there were 65,741 holders of Kyocera’s common stock of record worldwide. As of March 31, 2007, there were 117 record holders of Kyocera’s common stock with addresses in the United States, holding 24,860,697 shares of the outstanding common stock on that date. Because some of these shares were held by brokers or other nominees, the number of record holders with addresses in the United States might not fully show the number of beneficial owners in the United States.

B. Related Party Transactions

Significant customer

In fiscal 2007, Kyocera’s sales to KDDI amounted to ¥123,163 million ($1,044 million), or 9.6% of consolidated net sales.

KDDI provides telecommunication services, and Kyocera sells mainly telecommunication equipments to KDDI. Kyocera Corporation made an equity investment in KDDI when it was founded and currently, a director of Kyocera Corporation is a member of the board of directors of KDDI. At March 31, 2007, Kyocera Corporation’s equity interest in KDDI was 12.76%. Kyocera serves KDDI as an independent vendor in terms of price determination, remittance condition and product distribution. All of the agreements and ongoing contractual commitments between Kyocera and KDDI have been made on an arm’s -length basis. Kyocera expects that KDDI will remain a significant customer in the future.

C. Interests of Experts and Counsel

Not Applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

Financial Statements

The information required by this item is set forth beginning on page F-2 of this Form 20-F.

 

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Dividend Policy

Kyocera considers that the best way to respond to shareholders’ expectations is to improve consolidated performance, thus enhancing the corporate value, of Kyocera into the future.

Kyocera strongly takes into consideration the linkage between dividend amounts and the consolidated performance of Kyocera and has implemented a dividend policy aiming for a consolidated dividend ratio of approximately 20% to 25%. In addition, Kyocera determines dividend amounts based on an overall assessment, taking into consideration various factors including the amount of capital expenditures necessary for the medium to long term growth of Kyocera.

Pursuant to this policy and based on its performance through fiscal 2007, Kyocera proposed a year-end dividend for fiscal 2007 of 60 yen per share, a 10 yen increase as compared with fiscal 2006 in the ordinary general meeting of shareholders on June 27, 2007. When aggregated with the interim dividend in the amount of 50 yen, the total annual dividend amount was 110 yen per share.

Kyocera also proposed that other general reserve shall be set aside, in order to take into account the necessary reserve amounts for creation of new businesses, development of new markets and new technologies and acquisition of outside management resources needed to achieve sustainable corporate growth of Kyocera.

We held a board of directors meeting for the interim dividend on October 30, 2006.

B. Significant Changes

Except as disclosed in this Form 20-F, there have been no significant changes since March 31, 2007.

Item 9. The Offer and Listing

A. Offering and Listing Details

Price Range of Shares

The principal non-United States market on which the shares of Common Stock of Kyocera Corporation are traded is the Tokyo Stock Exchange, the largest stock exchange in Japan. The American Depositary Shares of Kyocera Corporation, each representing one share of Common Stock of Kyocera Corporation, are traded on the New York Stock Exchange. Citibank, N.A. acts as the Depositary in respect of the American Depositary Shares. Common Stock of Kyocera Corporation is also listed on the Osaka Securities Exchange in Japan.

 

     Tokyo Stock Exchange    New York Stock Exchange
     Price per Share of
Common Stock (yen)
  

Price per American

Depositary Share

(U.S. dollars)*

Years ended March 31

   High    Low    High    Low

2003

   10,070    5,630    80.27    47.96

2004

   8,970    5,570    84.66    47.25

2005

   9,630    7,080    90.90    67.81

2006

   10,830    7,090    91.59    62.58

2007

   11,590    8,180    98.01    71.73
     Tokyo Stock Exchange    New York Stock Exchange
     Price per Share of
Common Stock (yen)
  

Price per American

Depositary Share

(U.S. dollars)*

Most Recent 6 months

   High    Low    High    Low

January, 2007

   11,480    10,800    95.56    90.37

February, 2007

   11,200    10,580    92.80    88.46

March, 2007

   11,270    10,040    95.65    86.43

April, 2007

   11,860    10,970    99.66    94.07

May, 2007

   11,980    11,470    99.75    95.70

June, 2007

   13,180    11,850    108.00    98.01

* The prices of American Depositary Shares are based upon reports by the New York Stock Exchange, with all fractional figures rounded up to the nearest two decimal points.

 

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The following table shows the information about high and low sales prices for each quarterly period in fiscal 2006 and 2007 in respect of the shares of Common Stock of Kyocera Corporation on the Tokyo Stock Exchange, and the American Depositary Shares on the New York Stock Exchange.

For Voting Securities by Fiscal Quarter

 

          2006
          1st    2nd    3rd    4th

Common Stock:

              

Market price per share (A)

   —High    ¥ 8,500    ¥ 8,670    ¥ 8,860    ¥ 10,830
   —Low      7,090      7,640      7,220      8,510

Cash dividends paid per share

        50.00      —