Kyocera 6-K 2005
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of December 2005
Commission File Number: 1-07952
6 Takeda Tobadono-cho, Fushimi-ku,
Kyoto 612-8501, Japan
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F X Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Registration S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Registration S-T Rule 101(b)(7):
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b); 82-
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
Date: December 19, 2005
Item 1. Summary of Kyocera Corporation and its Consolidated Subsidiaries
1. Selected Financial Data
The interim consolidated financial statements and the consolidated financial statements are expressed rounding off to millions of yen.
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There is no material change in the business of Kyocera Corporation and its consolidated subsidiaries (Kyocera) for the six months ended September 30, 2005 (the first half).
3. Scope of Consolidation and Application of the Equity Method
The following table sets forth information on subsidiaries that were newly consolidated during the six months ended September 30, 2005.
Kyocera Corporation sold its entire holding of shares of Taito Corporation (36.02% of outstanding shares of Taito Corporation), to Square Enix Co., Ltd. in the first half. As a result of this sale, Kyocera Corporation discontinued to apply equity-method to Taito Corporation.
As of September 30, 2005, Kyocera had 59,347 employees, of whom 2,642 work in the Fine Ceramic Parts Group, 8,956 work in the Semiconductor Parts Group, 4,710 work in the Applied Ceramic Products Group, 21,502 work in the Electronic Device Group, 3,465 work in the Telecommunications Equipment Group, 11,098 work in the Information Equipment Group, 2,101 work in the Optical Equipment Group, 3,681 work in Others and 1,192 work in Corporate. Kyocera Corporation had 12,522 employees.
Kyocera Corporations labor union does not belong to labor unions organized by industry. The labor unions of several subsidiaries belong to labor unions organized by industry. There is no material item to be specifically addressed regarding relationship between labor and management.
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Item 2. Business Results and Financial Condition
1. Summary of Financial Results
(1) Consolidated Financial Results
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Kyocera produces and distributes various kinds of products 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 merger and acquisition activities, as well as by applying its ceramic technologies to the areas of semiconductor parts, electronic components, metal processing, medical and dental implants and the solar energy fields. Kyocera develops, produces and distributes a variety of parts and devices for electronic equipment such as computers, automobiles, printers and copiers as well as consumer electronic products such as mobile phone handsets and digital still cameras. Kyocera earns revenue and income and generates cash from sales of these products.
Kyocera divides its worldwide operations into eight reporting segments for its financial reporting purposes: the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group, the Electronic Device Group, the Telecommunications Equipment Group, the Information Equipment Group, the Optical Equipment Group and Others. The net sales of these segments (including inter-segment net sales) accounted for 6.1%, 11.7%, 10.2%, 23.0%, 16.7%, 21.7%, 1.5% and 10.8%, respectively, of Kyoceras total net sales in the first half. Also, net sales in the first half to Japan, the United States, Asia, Europe and Other accounted for 40.4%, 20.7%, 16.8%, 16.1% and 6.0%, respectively.
Kyocera derives a substantial portion of its revenue from sales of products and services in electronic equipment industries, including IT industries. During the first half, in the electronics industry, which is a key market for Kyocera, despite a moderate rebound in production activities, which had slowed since last summer, the decreasing market price for digital consumer equipment caused component prices to fall in the components business. As a result, the business situation continues to be tough.
Component prices dropped significantly while component demand for electronic equipment did not recovered rapidly. Consequently, overall orders, productions and sales in the components business fell short of levels recorded in the previous first half. Orders, productions and sales in the equipment business also declined compared with the previous first half mainly because Kyocera Wireless Corp. (KWC) was in the process of executing structural reforms, in the Telecommunications Equipment Group.
However, the Applied Ceramic Products Group, which includes solar energy products and cutting tools, posted an increase in sales and profits compared with the previous first half due to burgeoning demand.
Kyoceras sales in overseas markets decreased by 12.8% compared with the previous first half. Overseas sales are predominantly made in U.S. dollars and the Euro. The yen appreciated 1 yen against the U.S. dollar and depreciated 3 yen against the Euro compared with the average exchange rates in the previous half, respectively. In terms of net sales, the effects of the rising yen against the dollar outweighed the positive impact of the weak yen against the Euro. Accordingly, net sales after translation into yen were pushed down by approximately ¥1.9 billion compared with the previous first half.
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1) Fine Ceramic Parts Group
There was a drop in demand in the key product area of ceramic parts for semiconductor fabrication equipment due to delayed recovery of demand. In addition, sapphire products for LCD projectors were negatively impacted by a decline in unit prices caused by intensifying market competition. As a result, sales and operating profit in this reporting segment decreased compared with the previous first half.
2) Semiconductor Parts Group
Slower recovery of demand for components for digital consumer equipment led to lower revenue from the ceramic package business, and consequently, sales and operating profit in this reporting segment decreased compared with the previous first half. Nonetheless, in the organic package business, demand of packages and substrates for servers and digital consumer equipment grew steadily.
3) Applied Ceramic Products Group
Sales and profits in this reporting segment increased compared with the previous first half. Sales of solar energy products increased significantly due to rising demand, particularly in Europe. Meanwhile, sales of cutting tools also grew due to healthy production activity in the automobile industry. In the medical materials business, Japan Medical Materials Corporation, established in the year ended March 31, 2005, has fully contributed to sales in this reporting segment since the start of the year ending March 31, 2006.
4) Electronic Device Group
Despite steady growth in sales of thermal printheads, sales of other core products such as crystal-related components, ceramic capacitors and connectors were severely impacted by falling component prices. As a result, sales and profits in this reporting segment decreased compared with the previous first half, when performance was strong.
5) Telecommunications Equipment Group
Sales and profits in this reporting segment decreased compared with the previous first half. Although sales of mobile phone handsets in the domestic market increased due to the launch of new models, revenues were down overseas as KWC was in the process of executing structural reforms. In the PHS-related business, sales of PHS handsets and base stations for the Chinese market decreased. The introduction of flat rate voice charges in Japan, however, has driven steady growth in subscriber numbers, and as a result, sales of PHS handsets and base stations in the domestic market increased.
6) Information Equipment Group
Sales in this reporting segment increased compared with the previous first half as Kyocera enjoyed steady growth in sales of page printers and digital multifunctional products in Europe and the United States. Operating profit declined, however, due to the impact of a decline in unit prices and increasing development costs for new products, notably color models scheduled for release from the second half of the year ending March 31, 2006 (the second half).
7) Optical Equipment Group
Sales in this reporting segment decreased compared with the previous first half owing to the downsizing of the camera equipment business. With regard to operating profit, loss from the camera equipment business was kept to a minimum owing to the positive effects of structural reforms.
Kyocera Communication Systems Co., Ltd. (KCCS) posted solid growth from its telecommunications engineering business. And sales of one of KCCSs subsidiaries which were newly consolidated into Kyocera Group during the year ended March 31, 2005, were included from the start of the year ending March 31, 2006. Consequently, sales in this reporting segment increased. Operating profit in this reporting segment decreased compared with the previous first half due mainly to the impact of a decline in sales and profits at Kyocera Chemical Corporation.
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Sales in Japan decreased compared with the previous first half, because sales in components business for digital consumer equipment stayed low. In addition, sales of the Optical Equipment Group decreased due to the reduction of camera equipment business. On the other hand, sales of telecommunications engineering business and solar energy business increased.
Although sales of the Information Equipment Group increased, sales of mobile handsets declined. Consequently, the sales decreased compared with the previous first half.
Sales in the components business and the Telecommunications Equipment Group decreased.
Sales increased compared with the previous first half because demand for solar energy products was strong.
Sales decreased compared with the previous first half due mainly to decreased sales of mobile phone handsets in Latin America.
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(2) Cash flow
Cash and cash equivalent at September 30, 2005 decreased by ¥56,707 million to ¥253,885 million compared with at March 31, 2005.
1) Cash flow from operating activities
Net cash provided by operating activities for the first half decreased by ¥17,119 million to ¥71,772 million from the previous first half of ¥88,891 million. This was due mainly to a decrease in net income by ¥18,335 million to ¥24,214 million compared with the previous first half.
2) Cash flow from investing activities
Net cash used in investing activities in the first half decreased by ¥21,086 million to ¥123,091 million from the previous first half of ¥144,177 million. This was due mainly to increases in proceeds from sales of investment securities and an investment in an affiliate, which exceeded increases in payments for purchases of investment securities and property, plant, equipment and intangible assets.
3) Cash flow from financing activities
Net cash used in financing activities for the first half decreased by ¥43,925 million to ¥9,657 million from the previous first half of ¥53,582 million. This was due mainly to a significant decrease in payments of long-term debt.
2. Production, Orders and Distribution
Production, Orders and distribution of Kyocera are disclosed related to each reporting segment in 1. Summary of Financial Results.
3. Management Challenges
Kyocera aims to be a creative company that continues to grow in the 21st century by promoting high-value-added diversification as its core management strategy. To achieve this goal, Kyocera seeks to make its component and equipment businesses highly profitable, and has set the target of a pre-tax profit ratio of over 15% in the medium to long term. In the components business, Kyocera will conduct strategic investments aimed at boosting profitability through a strengthened business basis. Specifically, investments will be aggressively channeled into businesses focused on large ceramic parts for LCD fabrication equipment, ceramic packages, organic packages, solar energy products, cutting tools and organic light emitting diode (OLED).
In the equipment business, Kyocera seeks to swiftly raise profitability in the two business areas of telecommunications equipment and optical equipment. In the Telecommunications Equipment Group, Kyocera completed structural reforms that saw it outsource the manufacture of mobile phone handsets at KWC in the first half in order to considerably transform cost structure and reduce manufacturing costs. In the Optical Equipment Group, Kyocera preceded its structural reforms and began concentrating on the optical components business, in particular, on camera modules for mobile phone handsets. From the second half onward, Kyocera will strive to expand sales and profits by maximizing the positive effects of structural reforms implemented in recent times.
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4. Significant Patents and Licenses
The following table shows new significant license agreements concluded in the first half.
1) Technical assistance agreement
2) Assets purchase agreement
Kyocera Corporation made an agreement with IBM Japan, Ltd. to purchase the land, building and other assets of the Yasu Office (Yasu-City, Shiga Prefecture) owned by IBM Japan, Ltd on June 29, 2005.
Assets acquired are as follows:
(1) Location: Ichimiyake Oaza, Yasu-City, Shiga Prefecture
(2) Assets acquired: Land (approximately 195,464 square meters), building, related facilities and other assets
5. Research and Development Activities
Kyocera aims to continuously increase sales and boost profitability in each component and equipment business by promoting a management strategy of high-value-added diversification. In order to achieve this goal, Kyocera aggressively develops new technologies and new products by pursuing sophisticated and specialized technical expertise through the integration of component and equipment technologies.
(1) Fine Ceramic Parts Group
Kyocera is strengthening the development of large fine ceramic components and inexpensive sapphire substrates with high quality for next-generation semiconductor and LCD fabrication equipment and LEDs by leveraging materials, processing and design technologies for fine ceramics. Moving forward, Kyocera views the automotive market as one area of prospective growth in the coming years. To this end, Kyocera has placed emphasis on the development of products that meet demand for more environmentally-friendly and safer vehicles with advanced electronics. One specific area Kyocera is working on is fuel-injection systems components for diesel engines.
(2) Semiconductor Parts Group
Kyocera is working to develop smaller, thinner ceramic packages with enhanced internal functional elements for semiconductors and electronic components used in digital consumer products in response to the rising demand for more sophisticated equipment. In addition, we are developing organic packages for next-generation MPUs and their peripheral devices.
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(3) Applied Ceramic Products Group
In the environmental protection market, Kyocera is seeking to develop thinner silicon substrates and to boost the conversion efficiency of solar cells, which are increasing in popularity, and to make effective use of resources. In addition, Kyocera is stepping up efforts to enable the practical home-use of Solid Oxide Fuel Cells (SOFCs), expected to be the next-generation distributed power generation system for residential small-scale power sources.
(4) Electronic Device Group
Kyocera promotes the development of various electronic devices for digital consumer products that feature high performance and consume less power. Capacitors are gradually getting smaller, while being able to hold greater capacity. Kyocera is endeavoring to improve both the size and capacity of its capacitors by exploiting the material characteristics of ceramics, tantalum and niobium oxide. Kyocera is also increasing the development of high-value-added products such as low-inductance capacitors. In addition, Kyocera is concentrating efforts into the development of functional components such as high frequency modules for next-generation telecommunications and information terminals. In thin-film devices, Kyocera is developing thermal printheads capable of enhanced resolution for the consumer use color printer market related to enhanced resolution of digital still cameras, as well as eco-friendly LCDs with LED backlight for industrial equipment to expand product lineups.
Furthermore, Kyocera is working to develop the commercial viability of OLED displays as small to mid-size displays for mobile and industrial equipment.
(5) Telecommunications Equipment Group
Kyocera promotes the development of high functional camera or display equipped CDMA mobile phone handsets by making full use of components and devices throughout Kyocera Group. Kyocera is also developing high-performance PHS base stations and handsets in line with the commencement of new high-speed data communication services in Japan. In addition, we aggressively develop the wireless Voice over Internet Protocol (VoIP) related equipment.
(6) Information Equipment Group
Kyocera intends to swiftly enhance its range of color models based on the ECOSYS concept of long life design and economy, by incorporating a photoreceptor amorphous silicon drum with outstanding resistance to wear.
(7) Optical Equipment Group
Kyocera is developing optical modules for mobile phone handsets with high pixel cameras, small size, low profile and zoom capability as well as optical components for projectors and rear-projection TVs, by utilizing its technologies of optical, electronic devices and semiconductor parts throughout Kyocera Group.
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Kyocera Chemical Corporation is working to develop precision molding products using magnesium alloys to enable faster recording speeds in image pickup devices. It also seeks to create synergistic effects with Kyoceras capacitor and solar energy business through the development of materials.
KCCS is focusing on the development of authentication and security technologies suitable for the infrastructure of expanding next-generation networks as well as new services for positioning systems and VoIP.
Research and development expenses for the first half increased by ¥1,896 million, or 6.9%, to ¥29,328 million, compared with the previous first half, which accounted for 5.4% of Kyoceras total net sales. Research and development expenses by reporting segment were as follows; the Fine Ceramic Parts Group: ¥1,538 million (decreased by ¥587 million, or 27.6% compared with the previous first half), the Semiconductor Parts Group: ¥1,797 million (increased by ¥356 million, or 24.7%); the Applied Ceramic Products Group: ¥2,050 million (increased by ¥686 million, or 50.3%); the Electronic Device Group: ¥5,300 million (decreased by ¥515 million, or 8.9%); the Telecommunications Equipment Group: ¥8,097 million (increased by ¥88 million, or 1.1%); the Information Equipment Group; ¥8,499 million (increased by ¥2,421 million, or 39.8%); the Optical Equipment Group: ¥601 million (decreased by ¥949 million, or 61.2%); and Others: ¥1,446 million (increased by ¥396 million, or 37.7%).
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Item 3. Equipment and Facilities
1. Information on Equipment and Facilities
There was no material change in equipment and facilities in the first half.
2. Plan for new additions or disposal
(1) New Additions
Kyocera conducts a diverse range of operations in each of eight reporting segments. Plans to construct or enhance facilities are not determined on a project-by-project basis. Accordingly, planned investment is shown on a reporting segment basis.
As a result of reviewing recent market trends, Kyocera changed its plan of capital expenditures and decreased its amounts from ¥100,000 million, which was originally announced at the beginning of the first half, to ¥96,000 million.
(2) Material Sale and Disposal of Equipment and Facilities
Kyocera does not plan to sell or dispose equipment or facilities that significantly affect its production capability, except for its sale and disposal of ordinary renewal of equipment and facilities.
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Item 4. Information on Kyocera Corporation
1. Authorized Capital and Common Stock
(1) Number of Authorized Capital and Common Stock
Article 5 of the Articles of Incorporation of Kyocera Corporation provides that the total number of shares authorized for issuance by Kyocera Corporation is 600,000,000 shares.
<Number of Shares of Common Stock Issued>
As of September 30, 2005, and December 16, 2005, 191,309,290 shares of common stock were issued, registered on Tokyo Stock Exchange, Osaka Securities Exchange in Japan and New York Stock Exchange in the United States as follows:
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(2) Stock Acquisition Rights
The following table shows stock acquisition rights issued pursuant to Articles 280-20 and 280-21 of the Commercial Code of Japan.
<Stock acquisition rights approved at the stockholders meeting held on June 25, 2003>
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<Stock acquisition rights approved at the stockholders meeting held on June 25, 2004>
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<Stock acquisition rights approved at the stockholders meeting held on June 28, 2005>
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(3) Status of Common Stock and Capital
(4) Major Shareholders
The following table shows the ten largest shareholders of record of Kyocera Corporation as of September 30, 2005.
(Note 1) 3,834 thousand shares of treasury stock without voting rights were excluded from the list of major shareholders above.
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(Note 2) On October 7, 2005, in accordance with the Securities and Exchange Law of Japan, Morgan Stanley Japan Limited informed Kyocera Corporation that Morgan Stanley Japan Limited and its related partners became a holder of over 5% of the total issued voting shares of Kyocera Corporation, and they held shares of Kyocera Corporation as show in the following table as of September 30, 2005. However, they were not included in the above major shareholders as a single major holder because all of certain partners of Morgan Stanley Japan Limited were not the shareholders of record as of September 30, 2005.
(5) Voting Rights
The following table shows voting rights of common stock of Kyocera Corporation as of September 30, 2005.
Kyocera Corporation held treasury stocks of 3,833,900 shares, and its ownership to total number of shares issued was 2.00% as of September 30, 2005.
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2. Price Range of Shares
The following table shows price range of shares of Kyocera Corporation for the six months ended September 30, 2005.
3. Directors and Senior Management
There has been no change in a member of Directors and senior management since Kyocera Corporation filed its Annual Report (Yuukashouken-houkokusho) for the year ended March 31, 2005 with the Director of the Kanto Local Finance Bureau of the Ministry of Finance pursuant to the Securities and Exchange Law of Japan on June 29, 2005.
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Item 5. Accounting Information
1. Interim Consolidated Financial Statements and Interim Non-consolidated Financial Statements
(1) Pursuant to the article 81 of Regulations Concerning the Terminology, Forms and Preparation Methods of Interim Consolidated Financial Statements (Ministry of Finance Ordinance No. 24, 1999), the interim consolidated financial statements are prepared in conformity with the accounting principles generally accepted in the United States of America (U.S. GAAP).
(2) Pursuant to Regulations Concerning the Terminology, Forms and Preparation Methods of Interim Financial Statements (Ministry of Finance Ordinance No. 38, 1977, Regulation for Interim Financial Statements), the interim non-consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Japan (Japanese GAAP).
Pursuant to provision of additional rule 3 of Cabinet order to partly revise Regulations Concerning the Terminology, Forms and Preparation Methods of Financial Statements (Cabinet order No.5, January 30, 2004), the interim non-consolidated financial statements for the six months ended September 30, 2004 are prepared in conformity with pre-amendment of Regulation for Interim Financial Statements.
2. Independent Accountants Report
In accordance with the article 193-2 of the Securities Exchange Law, the interim consolidated financial statements and the interim non-consolidated financial statements for the six months ended September 30, 2004 and 2005 are reviewed by ChuoAoyama PricewaterhouseCoopers.
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1. CONSOLIDATED FINANCIAL STATEMENTS
< CONSOLIDATED BALANCE SHEETS >
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< CONSOLIDATED STATEMENTS OF INCOME >
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< CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY >
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< CONSOLIDATED STATEMENTS OF CASH FLOWS >
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<Notes to the Interim Consolidated Financial Statements>
1. Accounting Principles, Procedures and Financial Statements Presentation
In December 1975, Kyocera Corporation filed a registration statement, Form S-1 and a registration form for American Depositary Receipt (ADR), in accordance with the Securities Exchange Act of 1933, with the United States Securities and Exchange Commission (SEC) and made a registration of its common stock and ADR there. In accordance with the mentioned act, Kyocera Corporation again filed Form S-1 and a registration form for ADR with SEC in February 1980, and listed its ADR on the New York Stock Exchange in May 1980.
Kyocera Corporation has filed Form 20-F as an annual report, which is prepared in accordance with U.S. GAAP with SEC once a year in order to conform to the section 13 of the Securities Exchange Act of 1934. Kyocera Corporation and its consolidated subsidiaries (Kyocera) have also prepared interim consolidated financial statements in accordance with U.S. GAAP. The followings are accounting principles and regulations with which Kyocera is required to comply: Regulations for filing and reporting to SEC (Regulation S-X, Accounting Series Releases, Staff Accounting Bulletins, and etc.), Statements of Financial Accounting Standards Board (SFAS), Accounting Principles Board (APB) Opinions and Accounting Research Bulletin (ARB), and etc.
The following paragraphs describe the major differences between U.S. GAAP and Japanese GAAP, and where the significant differences exist, the amount of effect to income before income taxes pursuant to Japanese GAAP are also disclosed.
(1) Stockholders Equity
Kyocera prepares the interim consolidated statement of stockholders equity.
(2) Revenue Recognition
Kyocera adopts Staff Accounting Bulletin (SAB) No. 104Revenue Recognition in Financial Statements.
(3) Remuneration for Directors
Remuneration for directors is charged to general and administrative expenses.
Certain investments in debt and equity securities are accounted for by SFAS No. 115. Securities classified as available-for-sale are recorded at the fair value, with unrealized gains and losses excluded from income and reported in other comprehensive income, net of tax. Securities classified as held-to-maturity securities are recorded at amortized cost.
(5) Foreign Currency Translation and Forward Exchange Contracts
Assets and liabilities denominated in foreign currencies and financial statements of foreign subsidiaries are translated based on SFAS No. 52. Forward exchange contracts are accounted for by SFAS No. 133, as amended by SFAS No. 138.
(6) Accrued Pension and Severance Costs
Accrued pension and severance costs are computed based on SFAS No. 87. This effect for the six months ended September 30, 2004, 2005 and for the year ended March 31, 2005 amounted to ¥350 million, ¥416 million and ¥700 million, respectively.
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(7) Comprehensive Income
Kyocera applies SFAS No. 130 and discloses comprehensive income in stockholders equity. According to this standard, comprehensive income is defined as the change in equity except for capital transaction and it consists of net income and other comprehensive income. Other comprehensive income includes net unrealized gains (losses) on securities, net unrealized gains (losses) on derivative financial instruments, minimum pension liability adjustments and foreign currency translation adjustments.
(8) Stock Issuance Costs
Stock issuance costs, net of tax are deducted from the additional paid-in capital.
(9) Business Combinations
Kyocera adopts SFAS No. 141.
(10) Goodwill and Other Intangible Assets
Kyocera adopts SFAS No. 142.
(11) Derivative Financial Instruments
Kyocera adopts SFAS No. 133, as amended by SFAS No. 138.
2. Summary of Accounting Policies
The accounts of Kyocera Corporation and its Japanese subsidiaries are generally maintained to conform to Japanese accounting practices. Adjustments, including the applicable income tax effects, which are not recorded in Kyocera Corporations books of account, have been made to the accompanying interim consolidated financial statements in order to present them in conformity with accounting principles generally accepted in the United States of America.
(1) Basis of Consolidation and Accounting for Investments in Affiliated Companies
The interim consolidated financial statements include the accounts of Kyocera Corporation, its majority-owned subsidiaries and a variable interest entity for which Kyocera Corporation is a primarily beneficiary under the Financial Accounting Standard Board Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The consolidated variable interest entity for which Kyocera Corporation is the primary beneficiary does not have a material effect on Kyoceras financial position and result of operations.
All significant inter-company transactions and accounts are eliminated. Investments in 20% to 50% owned companies and insignificant subsidiaries are accounted for by the equity method, whereby Kyocera includes in net income its equity in the earnings or losses of these companies.
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(2) 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 and delivered to the customer 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. 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.
Kyocera records an estimated sales return allowance at the time of sales based on its historical returns experience.
At the time of sale, Kyocera accrues a product warranty liability for claims under warranties relating to the products that have been sold. Kyocera records an estimated based on its historical repair experience.
Revenue from services, rental and others
In addition to the tangible products as discussed above, Kyocera also provides certain services, primarily financial services provided by Kyocera Leasing Co., Ltd., a wholly-owned subsidiary of Kyocera Corporation. Revenue from direct financing leases is recognized over the term of the lease, and amortization of unearned lease income is recognized using the interest method. Interest income on installment loans is recognized on an accrual basis. Interest income is no longer accrued at the time the collection of the interest is past due 1 year or more, or the collection of the principal is past due 6 months or more. The interest received from cash payments on impaired loans is recorded as income, unless the collectibility of the remaining investments is doubtful, in which case the cash receipt is recorded as collection of the principal.
(3) Cash and Cash Equivalents
Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less.
(4) Translation of Foreign Currencies
Assets and liabilities of consolidated foreign subsidiaries and affiliates accounted for by the equity method are translated into Japanese yen at the exchange rates in effect on the respective balance sheet dates. Operating accounts are translated at the average rates of exchange for the respective years. Translation adjustments result from the process of translating foreign currency financial statements into Japanese yen. These translation adjustments, which are not included in the determination of net income, are reported in other comprehensive income.
Assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect at the respective balance sheet dates, and resulting transaction gains or losses are included in the determination of net income.
(5) 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. Kyoceras 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 specific customers 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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Inventories are stated at the lower of cost or market. Cost is determined by the average method for approximately 53% and 55% and 52% of finished goods and work in process at September 30, 2004, 2005 and March 31, 2005, respectively, and by the first-in, first-out method for all other inventories. Kyocera recognizes estimated write-down of inventories for excess, slow-moving and obsolete inventories.
(7) Property, Plant and Equipment and Depreciation
Property, Plant and Equipment are recorded at cost less accumulated depreciation. Kyocera provides for depreciation of buildings, machinery and equipment over their estimated useful lives primarily on the declining balance method. The principal estimated useful lives used for computing depreciation are as follows:
The cost of maintenance, repairs and minor renewals is charged to expense in the year incurred; major renewals and betterments are capitalized.
When assets are sold or otherwise disposed of, the profits or losses thereon, computed on the basis of the difference between depreciated costs and proceeds, are credited or charged to income in the year of disposal, and costs and accumulated depreciation are removed from accounts.
(8) Goodwill and Other Intangible Assets
Kyocera adopted SFAS No. 142. Goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances.
The principal estimated amortization for intangible assets are as follows:
(9) Impairment of long-lived assets
Kyocera has adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This requires Kyocera to review 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.
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(10) Derivative Financial Instruments
Kyocera utilizes derivative financial instruments to manage its exposure resulting from fluctuations of foreign currencies and interest rates. These derivative financial instruments include foreign currency forward contracts and interest rate swaps. Kyocera does not hold or issue such derivative financial instruments for trading purposes.
Kyocera applies SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities- an Amendment of SFAS No. 133. All derivatives are recorded as either assets or liabilities on the balance sheet and measured at fair value.
Changes in the fair value of derivatives are charged in current earnings. However cash flow hedges which meet the criteria of SFAS No. 133 may qualify for hedge accounting treatment. Changes in the fair value of the effective portion of these hedge derivatives are deferred in other comprehensive income and charged to earnings when the underlying transaction being hedged occurs.
Kyocera designated certain interest rate swaps and foreign currency forward contracts as cash flow hedges under SFAS No. 133 to hedge cash inflow or outflow related with existing assets, liabilities or forecasted transactions such as purchase commitments and sales. Most of foreign currency forward contracts are entered into as hedges of existing foreign currency denominated assets and liabilities and as such do not qualify for special hedge accounting. Accordingly, Kyocera records changes in fair value of these foreign currency forward contracts currently in earnings. It is expected that such changes will be offset by corresponding gains or losses on the underlying assets and liabilities.
Kyocera formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes all derivatives designated as cash flow hedge are linked to specific assets and liabilities on the balance sheet or forecasted transactions. Kyocera also formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Kyocera discontinues hedge accounting prospectively. When hedge accounting is discontinued, the derivative will continue to be carried on the balance sheet at its fair value, with deferred unrealized gains or losses charged immediately in current earnings.
(11) Stock Option Plans
In December 2002, the Financial Accounting Standard Board issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No.123, Accounting for Stock-Based Compensation, and provides alternative methods to transition for a voluntary change to the fair value based method of accounting for stock options. As allowed by SFAS 148, Kyocera measures stock-based compensation expense using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employee and its related interpretations.
(12) Earnings and Cash Dividends per Share
Basic earnings per share is computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share assumes the dilution that could occur if all stock options were exercised and resulted in the issuance of common stock.
Cash dividends per share are those declared with respect to the earnings for the respective periods for which dividends are proposed by the Board of Directors. Dividends are charged to retained earnings in the period in which they are paid.
(13) Research and Development Expenses and Advertising Expenses
Research and development expenses and advertising expenses are charged to operations as incurred.
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(14) Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain reclassifications of previously reported amounts have been made to the consolidated statements of income and cash flows for the six months ended September 30, 2004 and for the year ended March 31, 2005 to conform to the current period presentation. Such reclassifications have no effect on Kyoceras stockholders equity, net income and cash flows.
As a result of an increase in an affiliated company accounted for by the equity method in the year ended March 31, 2005, the financial data prior to March 31, 2005 have been adjusted as if the equity method had been applied at inception in accordance with APB Opinion No.18, The Equity Method of Accounting for Investments in Common Stock.
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3. Investment in Debt and Equity Securities
Investments in debt and equity securities as of September 30, 2004, 2005 and March 31, 2005, included in short-term investments (current assets) and in securities and other investments (non-current assets) are summarized as follows:
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4. Assets Pledged as Collateral and Liabilities with Assets Pledged
Kyoceras assets pledged as collateral for long-term debt were ¥65 million of finance receivables and ¥5,013 million of property and equipment, net of accumulated depreciation at September 30, 2004, ¥5,876 million of property and equipment, net of accumulated depreciation at September 30, 2005, and ¥4,920 million of property and equipment, net of accumulated depreciation at March 31, 2005, respectively.
Kyoceras current portion of long-term debt with assets pledged at September 30, 2004, 2005 and at March 31, 2005 amounted to ¥547 million, ¥527 million and ¥701 million, respectively. And Kyoceras long-term debt (excluding current portion) with assets pledged at September 30, 2004, 2005 and at March 31, 2005 amounted to ¥4,248 million, ¥3,783 million and ¥4,149 million, respectively.
Kyoceras investment in WILLCOM, INC., which was ¥4,618 million at September 30, 2005 and ¥5,696 million at March 31, 2005 accounted for by the equity method, is pledged as collateral for loans from financial institutions of WILLCOM, INC.
5. Derivative Financial Instruments and Hedging Activities
Kyoceras activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Approximately 60% of Kyoceras revenues are generated from overseas customers, which exposes to foreign currency exchange rates. These financial exposures are monitored and managed by Kyocera as an integral part of its overall risk management program. Kyoceras risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
Kyocera maintains a foreign currency risk management strategy that uses derivative financial instruments, such as foreign currency forward contracts, to minimize the volatility in its cash flows caused by changes in foreign currency exchange rates. Movements in foreign currency exchange rates pose a risk to Kyoceras operations and competitive position, since exchange rates changes may affect the profitability, cash flows, and business and or pricing strategies of non Japan-based competitors. These movements affect cross-border transactions that involve, but not limited to, direct export sales made in foreign currencies and raw material purchases incurred in foreign currencies.
Kyocera maintains an interest rate risk management strategy that uses derivative financial instruments, such as interest rate swaps, to minimize significant, unanticipated cash flow fluctuations caused by interest rate volatility.
By using derivative financial instruments to hedge exposures to changes in exchange rates and interest rates, Kyocera exposes itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes Kyocera, which creates repayment risk for Kyocera. When the fair value of a derivative contract is negative, Kyocera owes the counterparty and, therefore, it does not possess repayment risk. Kyocera minimizes the credit (or repayment) risk in derivative financial instruments by (1) entering into transactions with creditworthy counterparties, (2) limiting the amount of exposure to each counterparty, and (3) monitoring the financial condition of its counterparties.
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Cash Flow Hedges
Kyocera uses interest rate swaps mainly to convert a portion of its variable rate debt to fixed rates. Kyocera charged deferred net loss of ¥78 million from accumulated other comprehensive income to interest expense in the consolidated statement of income, for the six months ended September 30, 2004 and for the year ended March 31, 2005.
Also, Kyocera uses certain foreign currency forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in its forecasted transactions related to purchase commitments and sales. Kyocera charged deferred net gains (losses) of ¥30 million, ¥(27) million and ¥30 million from accumulated other comprehensive income to foreign currency transaction gains (losses) in the consolidated statement of income, for the six months ended September 30, 2004, 2005 and for the year ended March 31, 2005, respectively.
Kyoceras main direct foreign export sales and some import purchases are denominated in the customers and suppliers local currency, principally the U.S. dollar, Euro and STG. Kyocera purchases foreign currency forward contracts with terms normally lasting less than three months to protect against the adverse effects that exchange-rate fluctuations may have on foreign-currency-denominated trade receivables and payables. Kyocera does not adopt hedge accounting for such derivatives. The gain and losses on both the derivatives and the foreign currency-denominated trade receivable and payables are recorded as foreign currency transaction gains (losses) in the consolidated statements of income.
The aggregate contract amounts of derivative financial instruments to which hedge accounting is not applied are as follows:
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6. Commitments and Contingencies
At September 30, 2005, Kyocera had contractual obligations for the acquisition or construction of property, plant and equipment aggregating ¥20,391 million principally due within one year.
Kyocera is lessee under long-term operating leases primarily for office space and equipment. Future minimum lease commitments under non-cancelable operating leases at September 30, 2005 are as follows:
Kyocera Corporation and AVX Corporation have material supply agreements for a significant portion of their anticipated material used in their operations. Under the agreements, Kyocera Corporation is obligated to purchase ¥4,082 million by the end of December 2015. AVX Corporation is obligated to purchase ¥2,095 million by the end of December 2005.
Kyocera guarantees the debt of employees, customers and an unconsolidated subsidiary. At September 30, 2005, each amount of these guarantees was ¥211 million, ¥396 million and ¥550 million. The financial guarantees are made in the form of commitments and letters of awareness issued to financial institutions and generally obligate Kyocera to make payments in the event of default by the borrowers. Kyocera also guarantees the leasing debts of customers of the Information Equipment Group. At September 30, 2005, the amount of such guarantee was ¥675 million.
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 outcome of these contingencies. Kyocera records liabilities for these contingencies when the likelihood of an adverse outcome is probable and amount is reasonably estimate. However, based on the information available, management believes that damages, if any, resulting from these actions will not have a significant effect on Kyoceras consolidated results of operations and financial position.
7. Reporting Comprehensive Income
Kyoceras accumulated other comprehensive income is as follows:
8. Supplemental Expense Information
Research and development expenses for the six months ended September 30, 2004, 2005 and for the year ended March 31, 2005 amounted to ¥27,432 million, ¥29,328 million and ¥54,398 million, respectively.
Advertising expenses for the six months ended September 30, 2004, 2005 and for the year ended March 31, 2005 amounted to ¥6,090 million, ¥5,010 million and ¥13,915 million, respectively.
Shipping and handling costs for the six months ended September 30, 2004, 2005 and for the year ended March 31, 2005 amounted to ¥6,311 million, ¥6,475 million and ¥12,919 million, respectively, and were included in selling, general and administrative expenses in the consolidated statements of income.
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9. Segment Reporting
Kyocera had previously classified its operations into four reporting segments, namely, Fine Ceramics Group, Electronic Device Group, Equipment Group and Others. However, taking into consideration of changes in the size of operations of each business division of Kyocera and changes in its management structure, the management has changed its reporting segments for the year ended March 31, 2005. Kyocera now has eight reporting segments as follows: Fine Ceramic Parts Group, Semiconductor Parts Group, Applied Ceramic Products Group, Electronic Device Group, Telecommunications Equipment Group, Information Equipment Group, Optical Equipment Group and Others.
Segment information for the six months ended September 30, 2004 has been restated to conform to the current year presentation.
Main products or businesses of each reporting segment are as follows;
(Fine Ceramic Parts Group)
Semiconductor Process Equipment Components
LCD Process Equipment Components
Automotive & ITS related Components
(Semiconductor Parts Group)
Ceramic Packages for Surface Mount Devices (SMD)
Ceramic Multilayer Packages/Multilayer Substrates
(Applied Ceramic Products Group)
Solar Cells & Modules
Dental & Orthopedic Implants
(Electronic Device Group)
Passive Components (Ceramic Chip Capacitors, Tantalum Capacitors)
Timing Devices (Temperature Compensated Crystal Oscillators (TCXO)
Thin-Film Products (Thermal Printheads, Liquid Crystal Displays)
(Telecommunications Equipment Group)
CDMA Mobile Handsets
PDC Mobile Handsets
PHS Related Products
(Information Equipment Group)
ECOSYS Non-cartridge Printers
Digital Network Multifunction Products
(Optical Equipment Group)
Digital Still Cameras
Telecommunications Network Systems Business
Chemical Materials for Electronic Components
Realty Develop Business
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Inter-segment sales, operating revenue and transfers are made with reference to prevailing market prices. Transactions between reportable segments are immaterial and not shown separately. Operating profit for each reporting segment represents net sales, less related costs and operating expenses, excluding corporate revenue and expenses, equity in earnings (losses), income taxes and minority interest.
Kyoceras sales to KDDI Corporation and its consolidated subsidiaries, which is mainly recorded at Telecommunications Equipment group, for the six months ended September 30, 2004 and 2005, and for the year ended March 31, 2005 comprised of 6.5%, 7.2% and 7.6% of consolidated net sales, respectively.
Information by reporting segments for the six months ended September 30, 2004 and 2005 and for the year ended March 31, 2005 is summarized as follows:
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Geographic Segments (Sales by Region)
There are no individual countries of which proportion of sales to Kyoceras consolidated net sales is material in Asia, Europe and Others.
Geographic Segments (Sales and Operating Profit by Geographic area)
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10. Earnings Per Share
A reconciliation of the numerators and the denominators of basic and diluted earnings per share (EPS) computations is as follows:
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11. Supplemental Cash Flow Information
Supplemental information related to the consolidated statements of cash flows is as follows:
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12. Sale of Share of Taito Corporation
On September 28, 2005, Kyocera Corporation sold its entire holding of shares of Taito Corporation (Taito) (133,260 shares, 36.02% of outstanding shares), an equity-method affiliate, engaged in the amusement business, in a tender offer bid for Taito shares by Square Enix Co., Ltd., one of the leading companies in the game software industry. As a result of this sale of Taito shares, Kyocera Corporation recorded a gain of ¥6,931 million.
13. Subsequent Events
Following the merger of Mitsubishi Tokyo Financial Group, Inc. and UFJ Holdings, Inc., on October 1, 2005, Kyoceras shares of UFJ Holdings, Inc. were exchanged for the shares of the new company, Mitsubishi UFJ Financial Group. As a result of this share exchange, Kyocera plans to record a gain of ¥5,284 million in the third quarter of the year ending March 31, 2006.
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Non-Consolidated Results of Kyocera Corporation (parent company)
for the Six Months Ended September 30, 2005
The interim non-consolidated financial statements are in conformity with accounting principles generally accepted in Japan.
Date of the board of directors meeting for the interim results : October 27, 2005
1. Results for the six months ended September 30, 2005 :
(1) Results of operations :
(2) Dividend information :
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(3) Financial Condition :
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