Kyocera 6-K 2005 Documents found in this filing:Table of Contents
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the month of July 2005
Commission File Number: 1-07952
KYOCERA CORPORATION 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-
Table of ContentsSIGNATURE
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: July 8, 2005
Table of ContentsInformation furnished on this form:
EXHIBITS
Table of Contents
Table of ContentsContents
Kyocera had previously classified its operations into four reporting segments: “Fine Ceramics Group,” “Electronic Device Group,” “Equipment Group” and “Others.” However, in consideration of changes both in Kyocera’s management structure and in each business division’s size, management has changed its reporting segments for the year ended March 31, 2005. Kyocera now has the following eight reporting segments: “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.” Financial results for fiscal years 2003 and 2004 have been reclassified accordingly.
The new “Applied Ceramic Products Group” was previously known as “Consumer-Related Products,” operating as a division of the former “Fine Ceramics Group.” The new “Optical Equipment Group” was previously known as “Optical Instruments,” operating as a division of the former “Equipment Group.” These changes have been made to clarify the essence and results of each business.
Company Profile
“To be a creative company that continues to grow”—this has been the Kyocera (“Kyocera” as a consolidated group) mission since Kyocera Corporation was founded in 1959, reflecting our unswerving commitment to shareholders. As we plan our future by “always seeking better ways,” continuous growth will remain a top priority.
By continuously pursuing excellence while adhering to universal principles, we in the Kyocera Group will capitalize on our unique value system and technologies. Kyocera will lead the way to the value that rapidly changing markets demand. Not only will we create new technologies and new products, but entirely new markets. In so doing, every Kyocera Group company worldwide will create new value for society.
Kyocera is concentrating its efforts on the telecommunications and information processing, environmental preservation, and quality-of-life markets. It goes without saying that the fields of telecommunications and information processing will play a major role in the “Ubiquitous Network Age.” Due to our early awareness of this trend, we have already acquired leading technologies and expertise in this area. Kyocera’s revenue is mainly derived from products and services within the IT (Information Technology) industries. We offer a wide variety of tools to support continued development in this area—ranging from fine ceramic components to electronic devices, equipment, services and networks.
From a mid- to long-term perspective, Kyocera believes that robust markets will also develop for environmental preservation technologies—which focus on promoting conservation and reducing environmental burdens through such products as solar cells, photovoltaic generating systems and cartridge-free document solutions equipment. We anticipate further growth for quality-of-life applications as well, which enrich the human experience through better health, safety, convenience and enjoyment. Kyocera will cultivate these fields and serve them through business operations that consistently create new value.
In this manner, Kyocera will strive for mid- to long-term growth—meeting shareholders’ expectations and earning society’s trust as “The Company” that creates new value on a global scale.
Forward-Looking Statements
Certain of the statements made in this annual report are forward-looking statements (within the meaning of Section 21E of the U.S. Securities and Exchange Act of 1934), which are based on our current assumptions and beliefs in light of the information currently available to us. These forward-looking statements involve known and unknown risks, uncertainties and other factors. Such risks, uncertainties and other factors include, but are not limited to: general economic conditions in our markets, which are primarily Japan, North America, Europe, and Asia, including in particular China; changes in exchange rates, particularly between the yen and the U.S. dollar and euro, respectively, in which we make significant sales; our ability to launch innovative products and otherwise meet the advancing technical requirements of our customers, particularly in the highly competitive markets for ceramics, semiconductor parts and electronic components; and the extent and pace of future growth or contraction in information technology-related markets around the world, including those for communications and personal computers; events that may impact negatively on our markets or supply chain, including terrorist acts and outbreaks of diseases; and the occurrence of natural disasters, such as earthquakes, in locations where our manufacturing and other key business facilities are located. Such risks, uncertainties and other factors may cause our actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements included in this annual report.
Table of Contents
Financial Highlights
Kyocera Corporation and Consolidated Subsidiaries
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Table of Contents
Traversing the path to growth
Review of Fiscal 2005
In reflection of our aim to be a creative company that continues to grow in the 21st century, the year ended March 31, 2005 (fiscal 2005) was significant for the Kyocera Group. Continued implementation of our core management strategy of “high-value-added diversification” generated two key results: the development of new business structures to facilitate future expansion; and continued preparations to enter new business sectors with strong growth potential.
New business structures for future expansion
Over the past few years, we have implemented a series of radical reforms within our production systems in Japan to create highly profitable, value-added operations. Systemic reforms have focused on boosting productivity, cutting lead times and enhancing quality. In addition to rationalizing and constructing integrated in-house production operations, we have begun manufacturing some items at Kyocera facilities in China that we previously procured from Japanese subcontractors. Together, these measures have significantly improved our production processes and capabilities, effectively rebuilding many of Kyocera’s manufacturing systems. The results were apparent in the solid year-on-year gains in profit posted by the components segments, which include the Fine Ceramic Parts, Semiconductor Parts and Electronic Device Groups. Elsewhere, the internally reformed Applied Ceramic Products Group (formerly “Consumer-Related Products”) took advantage of expanding markets for solar energy systems and cutting tools to post significantly improved earnings.
The overriding aim in both the Telecommunications Equipment Group and the Optical Equipment Group (formerly “Optical Instruments”) is to restore profits rapidly. We undertook decisive structural reforms in both segments.
The restructuring of the Telecommunications Equipment Group concentrated on U.S. subsidiary Kyocera Wireless Corp. (KWC), which develops, manufactures and sells CDMA mobile phone handsets. In the first phase of planned structural reforms, we transferred production from the U.S. (San Diego) to Mexico to boost KWC’s price competitiveness and improve profitability during fiscal 2005.
In the Optical Equipment Group, we significantly down-sized our development, manufacturing and sales operations for consumer-market cameras, concentrating resources instead on optical modules. This strategic specialization was meant to overcome sluggish profits and was implemented in consideration of our competition and market position. By leveraging the Kyocera Group’s extensive technologies in lenses and optical components, we hope to seize new opportunities in this sector and improve the profitability of the Optical Equipment Group.
Although one-time charges associated with fiscal 2005 reforms in the Telecommunications Equipment and Optical Equipment Groups totaled approximately ¥11.7 billion ($109 million), Kyocera is confident that these initiatives will restore profits and set both segments on a firm foundation for growth in fiscal 2006 and beyond. In this sense, we believe these moves represented real progress.
Investment in new businesses with strong growth potential
Elsewhere, we continued to prepare for a new core business that is expected to contribute strongly to Kyocera Group earnings in the future. In fiscal 2005, we invested in a new mass-production facility at Kyocera SLC Technologies Corporation to produce organic packages, which have important applications in next-generation MPUs for digital consumer products. This business is set for commercialization in fiscal 2006. We also continued to develop other products with strong growth potential, such as organic electroluminescent (EL) displays and solid oxide fuel cells (SOFCs).
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Table of Contents
Fiscal 2005 results
Consolidated net sales rose in fiscal 2005 due to solid contributions from the Fine Ceramic Parts, Semiconductor Parts and Applied Ceramic Product Groups. Net sales increased by 3.5% compared with fiscal 2004 to ¥1,180,655 million ($11,034 million). Profit from operations slipped 7.3% to ¥100,968 million ($944 million), mainly as a result of restructuring charges. Income before income taxes fell 6.5% to ¥107,530 million ($1,005 million). As Kyocera recognized additional income taxes of approximately ¥18.8 billion ($176 million), principally in relation to the receipt of a notice of tax assessment based on transfer pricing adjustments and a reduction in the deferred tax assets of a U.S. subsidiary, net income fell 32.6% to ¥45,908 million ($429 million). As a result, diluted earnings per share amounted to ¥244.81 ($2.29).
For a more detailed analysis of business performance, please refer to pages 17-33 (Operating and Financial Review and Prospects).
New dividend policy
Kyocera has traditionally sought to maintain stable dividends to shareholders. We recently revised this policy to place a greater emphasis on maximizing shareholder returns. Henceforth, the level of dividends will be more closely linked to consolidated performance.
Under the new dividend policy, Kyocera will aim for a consolidated payout ratio of 20-25%. In addition, management will determine dividend amounts based on an overall assessment that takes into consideration capital expenditures necessary for Kyocera’s mid- to long-term development. Based on the revised policy, Kyocera Corporation plans to pay a year-end dividend for fiscal 2005 of ¥50.00 ($0.47) per share, compared with ¥30.00 in fiscal 2004. This will result in annual dividends for fiscal 2005 increasing to ¥80.00 ($0.75) per share.
Fiscal 2006 Actions
The Kyocera Group aims to generate consistent earnings growth by making both the components and equipment operations “valuable businesses” with high profits. Initiatives planned for fiscal 2006 include the following:
Establish new Kyocera Group management structure
Kyocera continues to strengthen consolidated management structures to create growth and raise enterprise value. Key changes in the roles of several senior executive officers took effect on June 1, 2005. The appointments affect the roles of Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Operating Officer (COO). As a result, the CEO will take responsibility for mid- and long-term management strategy formulation and execution, while the COO will be in charge of day-to-day management issues and corporate planning. The CFO will be responsible for constructing and executing a financial strategy for the Group to ensure that Kyocera maximizes cash flow.
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Table of ContentsAt the same time, Kyocera also introduced a new structure for its corporate business groups, headed by newly appointed executive officers. These business group leaders will be responsible for each respective product line on a global basis, promoting the growth of Kyocera’s various businesses.
Further fundamental structural reforms at KWC
Following the first phase of structural reforms at KWC, Kyocera decided to implement further fundamental reforms to make extensive use of external resources. These plans call for outsourcing the production of KWC mobile phone handsets to Flextronics International Ltd., a leading provider of electronics manufacturing services. We hope to generate swift improvements in profitability at KWC, which will now effectively focus on specialized research and development, design, sales, and marketing of mobile phone handsets.
Aggressive capital investment program
The Kyocera Group’s planned capital expenditures total ¥100 billion ($935 million) for fiscal 2006, reflecting our aggressive commitment to seize opportunities, expand our business and raise productivity. These investments are all aimed firmly at increasing future earnings.
(1) Establishing new businesses with growth potential
In June 2005, Kyocera commenced production at a new plant in Ayabe (Kyoto Prefecture), that will focus on organic packages for next-generation MPUs and peripheral devices used in digital consumer products. Elsewhere, we have established a firm footing for commercial operations in organic EL displays, an area where we have invested aggressively in product development for many years. We plan to establish a pilot plant in Shiga Prefecture in fiscal 2006 and prepare for mass production in fiscal 2007.
(2) Expanding production with new manufacturing systems
Large-scale rationalization efforts in recent years have resulted in substantial improvements to our production systems and processes in Japan, creating a fully integrated structure. These reforms should allow us to more swiftly develop operations outside our core businesses and thereby raise Kyocera Group earnings. Specific areas where we plan to increase capacity and construct new, super-rationalized plants include photovoltaic cells and solar modules, where demand is rising consistently; LCDs for industrial equipment; ceramic parts for LCD fabrication equipment used to produce new and larger displays; and ceramic cutting tools for the automotive industry.
We are confident that these initiatives will help to create pillars to support future earnings within the Kyocera Group, thereby contributing to consistent growth in earnings over the medium and long term.
We kindly ask all Kyocera stockholders and other stakeholders for their continued support and understanding as we move forward.
June 2005
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Table of Contents
Kyocera’s corporate governance is designed to ensure extremely sound, transparent and effective management and thereby best protect the interests of stockholders. No discussion of corporate governance at Kyocera would be complete without first looking at the “Kyocera Philosophy,” which provides both the moral and intellectual backbone for Kyocera’s management style.
The “Kyocera Philosophy” was created by Dr. Kazuo Inamori, Kyocera’s founder, as he codified his views on the subject of business management. He was convinced that one of the most important points for the management of the company was that the “Kyocera Philosophy” should apply to the actions of all who work for the enterprise – directors, managers and employees alike. The “Kyocera Philosophy” embodies many principles, covering subjects ranging from the fundamentals of business management to the specifics of day-to-day operations. Its principles demand impartial, fair and totally transparent management, while emphasizing the importance of maximizing profits by eliminating waste, minimizing expenses and maximizing revenues. The “Kyocera Philosophy” demands particularly high standards of ethical behavior from all leaders within the company. From the beginning, Kyocera has been guided by principles that have naturally worked toward achieving the corporate governance goals mentioned above.
Kyocera’s management believes that the standards and criteria applied by all members of the enterprise hold the key to achieving the aims of corporate governance. At its core, the “Kyocera Philosophy” exhorts workers to use the criterion of what they judge “the right thing to do as a human being” as the basis for guiding all actions and decisions. Because of their universal nature, the principles of the “Kyocera Philosophy” are as applicable to Kyocera’s worldwide operations as they are to any other business.
During fiscal 2005, Kyocera managers and employees in Japan attended an aggregated total of 49,998 training and education sessions designed to promote deeper understanding of the “Kyocera Philosophy.” The “Kyocera Philosophy” also formed an important part of our orientation efforts for new recruits and on-the-job training programs. Outside Japan, a total of 1,011 managers at Kyocera subsidiaries received training along these lines in fiscal 2005.
Kyocera emphasizes a so-called “amoeba” management system in which operations are managed at the level of small groups. This system is believed to reflect the “Kyocera Philosophy” best, and is regarded as the source of Kyocera’s strength in creating highly motivated management by getting all employees involved in the daily operation of the company. Explicit delegation of responsibilities to small groups has the added advantage of promoting transparency in all details of management, while creating a system that promotes efficiency. In Kyocera’s experience, these processes maintain sound business management practices, which in turn translate into greater benefits for all stakeholders.
To make these principles work in practice, a system of checks and balances is also crucial. Kyocera has adopted the corporate governance model outlined in the Commercial Code of Japan that is based on the use of corporate auditors. In this system, the board of corporate auditors oversees the management decisions of the board of directors and policy execution by executive officers. In addition, to ensure a systematic and sustained approach to compliance management throughout Kyocera, Kyocera established a Risk Management Department. The table on page 6 provides details of Kyocera’s corporate governance structure.
The “Kyocera Philosophy” provides the foundation for Kyocera’s corporate culture and governance framework. It is supported by a system designed to provide unbiased, independent checks. Kyocera plans to maintain and improve its system of corporate governance to ensure that it always fulfills the expectations of stockholders.
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Table of ContentsNYSE Corporate Governance Standards
Companies listed on the NYSE must comply with certain standards regarding corporate governance under Section 303A of the NYSE Listed Company Manual.
However, listed companies that are foreign private issuers, such as Kyocera Corporation, are permitted to follow home country practice in lieu of certain provisions of Section 303A.
The following table shows the significant differences between the corporate governance practices followed by U.S. listed companies under Section 303A of the NYSE Listed Company Manual and those followed by Kyocera Corporation.
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Table of Contents
Fine Ceramic Parts Group
Fiscal 2005 Consolidated Results
Major products
Information & telecommunication components
Single-crystal sapphire products
Semiconductor and LCD fabrication equipment components
Automotive & ITS-related components
General industrial ceramics
Fiscal 2005 Results
Sales and profits both increased compared with fiscal 2004. Demand grew across all major product categories, with notable increases in fine ceramic components for semiconductor and LCD fabrication equipment and sapphire substrates used in light-emitting diodes (LEDs).
Business Outlook and Strategy
Aggressive business development activities to meet emerging market needs
In fiscal 2006, Kyocera expects higher demand in the digital consumer products and automotive markets. Kyocera aims to increase its market share and maintain high profitability in these markets through aggressive business development activities.
The increasing popularity of larger LCDs is creating demand for larger fine ceramic parts used in LCD fabrication equipment. Kyocera will strive to benefit by supplying next-generation components in the larger dimensions necessary to support this trend. Plans call for constructing a new production facility for these components to satisfy growing demand and expand the business. Separately, efforts are also underway to increase profitability by creating a fully-integrated and consistent process that covers the full spectrum of production, from processing and assembly through final preparation for shipping.
Regarding sapphire substrates used in LEDs, Kyocera will continue to enhance its core technical expertise in materials, manufacturing processes and testing methods to supply products of even higher reliability. This improvement of core technology will enable us to raise our global market share for these products by meeting a wider range of quality and cost requirements.
Rapidly establishing a strong position in the automotive components market
Automakers worldwide are increasingly adopting electronic technologies to enhance the performance of their vehicles in the areas of safety, fuel efficiency, emissions and comfort. This trend is creating new demand for engine control units (ECUs), sensors, and camera modules used in automotive applications. Kyocera has invested aggressively in developing electronic components used in engine powertrain systems, as well as view-sensing cameras, and aims to establish itself rapidly as a leading supplier to these markets.
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Table of ContentsSemiconductor Parts Group
Fiscal 2005 Consolidated Results
Major products
Ceramic packages for surface-mount devices (SMD)
Ceramic multilayer packages and multilayer substrates
Metallized products
Optical communication device packages and components
Organic packages and substrates
Fiscal 2005 Results
Demand for ceramic packages used in mobile phone handsets and digital consumer products increased, especially in the first half of fiscal 2005. In addition, revenue from organic packages and substrates was enhanced by Kyocera SLC Technology Corporation, which made its first full-year contribution to sales.
Business Outlook and Strategy
Kyocera aims to be a “total packaging supplier” by expanding its ceramic and organic materials businesses.
Ceramic package business: Cultivating new markets
Kyocera continues to expand its ceramic package business with applications in digital consumer products, including mobile phone handsets, while cultivating new applications in the automotive and medical equipment markets. To further expand applications, we will enhance our ceramic package technology to provide greater reliability and functionality though miniaturization, thinner layers and higher precision. Kyocera will also pursue production process reforms and profitability enhancement by utilizing manufacturing resources in China.
Organic package business: Developing future growth drivers
Kyocera SLC Technology Corporation, a consolidated subsidiary, is targeting a number of sectors that offer significant potential demand for organic material components. These products include flip-chip packages for ASICs used in server and router equipment; “system in a package” (SIP) applications in mobile phones; and organic substrates for the smaller hard-disk drives widely used in portable music players and digital cameras. Kyocera is investing aggressively in production capacity expansion to transform the organic material components business into a key earnings driver for the future. A new plant located in Ayabe (in Japan’s Kyoto Prefecture) is due to commence production in the first half of fiscal 2006. Besides the existing product lineup, this new plant will also be capable of full-scale production of organic packages for next-generation MPUs used in digital consumer products. The Ayabe plant will feature highly rationalized production lines that ensure world-class quality with superior yields and increased productivity.
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Table of ContentsApplied Ceramic Products Group
“Consumer-Related Products,” a division of the former “Fine Ceramics Group,” has become a reporting segment under the name “Applied Ceramic Products Group” to promote visibility of this segment’s operations and results.
Fiscal 2005 Consolidated Results
Major products
Residential and industrial photovoltaic generating systems, solar cells and modules
Cutting tools, micro drills
Dental and orthopedic implants Jewelry, applied fine ceramic products
Fiscal 2005 Results
This segment’s revenue and profit surged amid higher sales of solar modules, solar power generating systems, cutting tools for the automotive industry, and the second-half revenue contribution from Japan Medical Materials Corporation (JMM), which commenced operations in September 2004.
Business Outlook and Strategy
Solar energy business: Global expansion
Demand for solar energy products is expected to remain strong due to factors ranging from the Kyoto Protocol and increased interest in renewable energy to government subsidies for solar power in major markets such as Japan and Europe. In view of the excellent demand prospects, Kyocera has invested in higher production capacity in Japan and is constructing a new module plant in the Czech Republic. Combined with existing production bases in Japan, China and Mexico, this new plant will complete Kyocera’s quadripartite global production framework for solar energy products. Kyocera aims to expand sales of solar energy products by leveraging these operating bases to meet demand on a purely regional basis, which will allow products to be tailored more accurately to the needs of local markets. Increased regional production capacity will also help to reduce assembly and distribution expenses, thereby boosting profitability.
Separately, Kyocera continues to conduct R&D into new materials, thinner substrates, more efficient solar cells and higher production yields, endeavoring to build a solid base for the solar energy business.
Cutting tools: Aiming for increased global sales and market share
Kyocera expects demand for cutting tools to remain buoyant in fiscal 2006 amid higher levels of industrial production. Kyocera aims to increase revenue by upgrading our sales capabilities, global production network, and technical service centers. Additionally, Kyocera intends to boost its global share through aggressive investment in Asia, with sales offices planned in China, Thailand, India and Vietnam, and a new technical center planned in Singapore.
In Japan, Kyocera plans to complete major improvements to raise productivity at its plant in Okaya (Nagano Prefecture). This will involve introducing completely redesigned material processes and building an in-house integrated production line with material processing, forming and sintering processes to ensure 100% yields. These moves promise to strengthen our business base for cutting tools significantly.
Medical materials: New JMM joint venture brings global potential
In the medical materials sector, Kyocera and Kobe Steel, Ltd. established JMM in September 2004 through the merger of the medical materials operations of both companies. JMM aims to attain global leadership in the medical materials market through integrated development, manufacturing and marketing functions. In Japan, JMM will also benefit from the integration of Kyocera’s ceramic technology with Kobe Steel’s specialized expertise in medical-grade metals to create new products that will help increase our market share in both the orthopedic and dental sectors. Outside Japan, JMM plans to enhance its sales of finished products such as artificial joints by starting clinical evaluations in China and increasing sales of materials and components that utilize ceramic technologies.
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Table of ContentsElectronic Device Group
Fiscal 2005 Consolidated Results
Major products
Ceramic capacitors, tantalum capacitors
Timing devices including temperature-compensated crystal oscillators (TCXOs)
High-frequency modules
Ceramic resonators and filters
Connectors
Thin-film devices including thermal printheads, LCDs, amorphous silicon drums, LED printheads
Fiscal 2005 Results
Sales and profits both expanded compared with fiscal 2004. Notable increases were achieved in sales of thin-film devices, including thermal printheads for digital photo printers, and LCDs for mobile phone handsets and industrial machinery. Sales of timing devices increased as well, along with optical low-pass filters used in digital consumer products. Operating profit surged as a result of recent productivity improvements. U.S. subsidiary AVX Corporation (AVX) also recorded significantly improved results after posting a restructuring charge in fiscal 2004.
Business Outlook and Strategy
Expanding into new applications and market segments
The “digitalization” of equipment and the emergence of “ubiquitous communication” are driving the evolution of electronic components toward more advanced and diverse functions. As this trend continues, the differences between components used in certain varying applications are expected to erode. Kyocera is responding to these changing market requirements by expanding the applications for its existing products and actively developing new components. The overall aim is to create a product lineup that can meet a broader spectrum of market needs, thereby generating higher revenues and profits.
Specific development projects include creating ultra-high-capacitance capacitors; entering established markets, such as the segment for capacitors employing aluminum or polymer electrolytes; and expanding device applications from mobile phone handsets and digital consumer products into new areas, such as power supplies. Kyocera is applying advanced wireless technology to create customized and modulated SAW (surface acoustic wave) devices for specific segments of the medical, automotive and security-related markets. Kyocera’s objective is to create business structures that will be much less susceptible to changes in the conditions of individual markets.
Besides expanding into new product applications, Kyocera is also focusing on developing new geographic markets alongside its established presence in Japan, the U.S. and Europe. Asia is positioned as the strategic expansion target, with China offering particular potential. Kyocera Electronic Devices LLC (KED), a subsidiary of AVX, and Kyocera (Tianjin) Sales & Trading Corporation continue to make inroads into the Chinese market, selling a wide range of Kyocera Group products including capacitors, timing devices, connectors, modules, piezoelectric components, thin-film devices and components from AVX. Kyocera will continue to secure new orders by offering customers a reliable and timely supply of products.
Aggressive capital investment in thin-film devices
Kyocera is investing heavily in thin-film devices to expand this business. A new plant is being constructed to produce large LCDs used in industrial equipment. This facility will bring film-fabrication processes in-house, thereby creating a more integrated internal production line as well as greater capacity. Kyocera hopes to increase margins in its LCD operations as a result.
In the field of organic EL displays, Kyocera continues to make preparations for the full-scale launch of this business. Key external technical resources were secured in fiscal 2004, and R&D efforts remain ongoing with the aim of developing long-life displays of this type.
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Table of ContentsTelecommunications Equipment Group
Fiscal 2005 Consolidated Results
Major products
Mobile phone handsets for use on CDMA (Code Division Multiple Access) and PDC (Personal Digital Cellular) networks
PHS (Personal Handyphone System) -related products, including handsets, base stations and wireless local loop (WLL) systems, high-speed wireless data communications systems
Fiscal 2005 Results
Sales of mobile phone handsets and PHS-related products fell amid fierce price competition in Japan and other markets, leading to a steep decline in profit. An inventory correction for PHS-related products within the Chinese market was another significant factor in this segment’s results.
Business Outlook and Strategy
Restructuring of KWC operations
Kyocera is undertaking full-scale restructuring at KWC in an effort to strengthen the mobile phone handset operations. These efforts include the sale of KWC production assets and inventories to Flextronics International Ltd., as part of an outsourcing agreement for handset production and distribution to KWC customers. Kyocera also plans to outsource mobile phone handset maintenance and repair operations as part of these streamlining efforts.
The structural reforms at KWC will result in substantial savings – both in terms of the fixed capital equipment and labor costs associated with mobile phone handset manufacturing, and the inventory-related costs stemming from the entire mobile phone handset production and distribution chain, from material procurement to sale. Once fully implemented, these measures are expected to restore profitability at KWC quickly. Management resources will be refocused on R&D, engineering, design, sales and marketing, enabling KWC to become more competitive by developing products that match market requirements faster and more effectively.
Greater synergy in mobile phone handset operations
Other efforts to boost profits aim at building greater synergy between Kyocera Group companies in the development of mobile phone handsets. To shorten lead times and offer mobile phone handset models with more advanced functions, Kyocera plans to maximize returns from models already developed in Japan. This will be accomplished in part through more effective marketing and stronger ties between various R&D operations, including India-based software developer, Kyocera Wireless (India) Pvt. Ltd. and U.S.-based Kyocera Telecommunications Research Corporation. We will aim to develop cost-effective products with advanced functions and high added value utilizing Kyocera Group device technology.
Expansion of PHS-related business
More advanced PHS technology is now available through upgraded networks that allow packet-switched data communications. Kyocera will strive to develop new products based on this technology to stimulate higher demand in the Chinese market. The novel technical possibilities also open new prospects for further expansion in markets such as Vietnam, Thailand, India and Russia.
In Japan, a consortium of Kyocera and the Carlyle Group acquired the PHS operations of DDI Pocket, Inc., a subsidiary of KDDI Corporation that was renamed WILLCOM, Inc. in February 2005. Kyocera plans to develop new products to expand its PHS operations in Japan through WILLCOM, Inc. including next-generation base stations and handsets designed to surf the web while providing cost-efficient voice communications. By grasping these new business opportunities, Kyocera aims to generate fresh growth in its PHS operations.
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Table of ContentsInformation Equipment Group
Fiscal 2005 Consolidated Results
Major products
Page printers (ECOSYS)
Copiers
Multi-functional products for digital networks
Fiscal 2005 Results
Sales of mid- and high-speed digital multi-functional products were brisk, particularly in Europe. Newly introduced low- and mid-speed models expanded the product range and made an additional contribution to revenues.
Business Outlook and Strategy
Promoting document solutions based on the ECOSYS concept
Kyocera’s edge in the information equipment market lies in the ECOSYS concept, which we created.
This concept is based on the amorphous silicon imaging drum, with a surface so hard and durable it has enabled us to create a new kind of printing system that offers superior performance.
ECOSYS technology has since been expanded from our printers to our copiers and multi-functional products, establishing the long-life and low-running-cost benefits of the ECOSYS concept throughout this segment’s product line. This unique concept, applied to both monochrome and color models, differentiates Kyocera’s products from competitors while providing compelling benefits to users.
Kyocera aims to increase sales from this segment by launching a series of new color models based on the ECOSYS concept in the second half of fiscal 2006. In addition to the established markets of Japan, the U.S. and Europe, Kyocera is targeting monochrome models for major emerging growth markets such as Brazil, Russia, India and China, to spread the ECOSYS concept worldwide. Kyocera plans to expand its document solutions business globally with additional technical development resources and software that can provide a broad range of solutions for IT-enabled office environments.
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Table of ContentsOptical Equipment Group
“Optical Instruments,” a division of the former “Equipment Group,” has become a reporting segment under the name “Optical Equipment Group” to promote visibility of this segment’s operations and results.
Fiscal 2005 Consolidated Results
Major products
Optical modules
Camera lenses
Digital still cameras
Single-lens reflex (SLR) cameras
Fiscal 2005 Results
Sales from consumer camera operations declined significantly following Kyocera’s decision to downsize this business. This involved a write-down of camera inventories and charges stemming from reductions in operations at sales subsidiaries outside Japan. Nonetheless, sales from this segment increased on a year-on-year basis due to the revenue contribution from newly launched optical modules for mobile phone handsets.
Business Outlook and Strategy
New emphasis on optical components to improve profitability rapidly
Kyocera’s main challenge in this segment is to improve profitability as quickly as possible by concentrating on areas in which we can best generate value. In line with this goal, Kyocera has decided to shift this segment’s business resources away from consumer products. In effectively exiting the consumer camera market, Kyocera will concentrate its accumulated optical technologies to expand its business as a supplier of optical components.
During fiscal 2005, Kyocera combined its lens, surface-mount-device and module assembly technologies to begin producing and supplying a 2-megapixel optical module with a 2x optical zoom lens for mobile phone handsets.
In fiscal 2006, Kyocera plans to enhance its lineup of high-megapixel optical modules for mobile phone handsets and develop new optical components for digital projectors and rear-projection televisions. Production of optical modules is also being shifted to China to yield more cost-competitive products that can help improve profitability rapidly.
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Table of ContentsOthers
Fiscal 2005 Consolidated Results
Major subsidiaries and businesses
Kyocera Communication Systems Co., Ltd. (KCCS)
Telecommunications network systems
Computer network systems
IT solutions services
Consulting services
Kyocera Chemical Corporation (KCC)
Chemical materials for electronic components
Insulators
Resin products
Other subsidiaries
Leasing services
Real estate development
Fiscal 2005 Results
KCCS, which accounts for about 60% of this segment’s revenues, posted solid growth from telecommunications engineering and data center businesses. KCC, which generates about 20% of segment revenues, recorded higher sales of flexible printed circuit boards, molding dies for the automotive industry and epoxy casting resins for ignition coils.
Business Outlook and Strategy
Targeting expansion at major subsidiaries
KCCS: Security and telecommunications services
The enactment of the Personal Information Protection Act in Japan is expected to foster higher demand for data security services. KCCS aims to boost sales and profits by developing new products and services targeting the statutory requirement to prevent the leak of confidential data within companies. KCCS will provide unification-control systems and fingerprint verification systems to help customers meet the new requirements. KCCS also plans to expand its telecommunications services by offering other security and authentication technologies to secure mobile communications using Internet infrastructure.
KCC: Increased group synergy
With electronic equipment becoming ever lighter, thinner and more compact, KCC continues to develop products that cater to diverse market requirements such as higher-density circuitry, higher operating frequencies and more stringent environmental compliance. KCC also develops and evaluates manufacturing and material technologies. Enhanced casting technologies and high-strength materials help meet market needs for compactness and weight reduction in products like digital still cameras and personal computers. Developing new non-hazardous halogen-free materials will promote environmental protection in the electronic components market.
In pursuit of synergies with other Kyocera Group companies, KCC is also undertaking joint development projects in areas such as organic substrate materials for high-density printed circuit boards and binding materials to facilitate the design of thinner electronic components. This R&D into new materials is also contributing to higher product quality, and boosting the overall materials expertise of the Kyocera Group.
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Table of ContentsFinancial section
Contents
15
Table of ContentsSelected Financial Data Kyocera Corporation and Consolidated Subsidiaries
(Yen in millions, U.S. dollars and shares in thousands, except per share amounts and exchange rates) (A)
Market Price and Dividend Data For Voting Securities by Fiscal Quarter
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Table of Contents
Operating and Financial Review and Prospects Kyocera Corporation and Consolidated Subsidiaries For the three years ended March 31, 2005
Results of Operations:
Segment Operations:
17
Table of ContentsOverview
Kyocera Corporation and its consolidated subsidiaries (Kyocera) produce and distribute various kinds of products for the telecommunications and information processing, environmental protection and quality of life 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 applying its ceramic technologies to the areas of semiconductor parts, electronic components, 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 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: Fine Ceramic Parts Group, Semiconductor Parts Group, Applied Ceramic Products Group (formerly “Consumer-Related Products”), Electronic Device Group, Telecommunications Equipment Group, Information Equipment Group, Optical Equipment Group (formerly “Optical Instruments”) and Others. The net sales of these segments (including inter-segment net sales) accounted for 6.2%, 10.8%, 8.0%, 22.3%, 21.3%, 20.4%, 3.0% and 10.0%, respectively, of Kyocera’s total net sales for the fiscal year ended March 31, 2005 (fiscal 2005). Also, in fiscal 2005, net sales to Japan, the United States, Asia, Europe and Other accounted for 40.0%, 21.0%, 17.3%, 14.9% and 6.8%, respectively.
Kyocera derives a substantial portion of its revenue from sales of products and services in electronic equipment industries, including IT industries. In fiscal 2005, the business environment surrounding the components business, which includes Fine Ceramic Parts Group, Semiconductor Parts Group and Electronic Device Group, changed considerably from the first half of fiscal 2005 to the second half of fiscal 2005. Components demand for mobile phone handsets, computer equipment and digital consumer products, which showed strong growth in the first half of fiscal 2005, slowed down in the second half of fiscal 2005 as companies engaged in the manufacture of electronic equipment were forced to make production adjustments in order to reduce their inventories. Price declines of key components also accelerated in the second half of fiscal 2005 in accord with these factors. Similar product sales price declines were also seen in Kyocera’s finished products, particularly CDMA mobile phone handsets, Personal Handyphone System (PHS)-related products, information equipment such as printers and copiers, and digital still cameras.
Kyocera’s electronic equipment-related businesses were therefore faced with extreme difficult business environment in the second half of fiscal 2005. Nevertheless, businesses in non-electronic equipment-related industries made positive contributions to Kyocera’s consolidated results in fiscal 2005, in particular Applied Ceramic Products Group. Such areas included solar power generation systems spurred by rising environmental concerns and cutting tools for which demand increased considerably due to robust production activities at automobile manufacturers.
As a result of favorable market conditions in the first half of fiscal 2005, Kyocera enjoyed year-on-year increases in sales in Fine Ceramic Parts Group, Semiconductor Parts Group and in Electronic Device Group.
Sales in Applied Ceramic Products Group increased significantly compared with fiscal 2004. Meanwhile, sales in Information Equipment Group also increased due to steady growth in sales of monochrome copiers, printers and digital multifunction products (MFPs) in Europe.
Conversely, in Telecommunications Equipment Group, which develops, manufactures and sells products such as CDMA mobile phone handsets for Japan and the United States and PHS-related products for China, sales decreased compared with fiscal 2004. The main reasons for this decrease were intense price competition in these two product areas in Japan and overseas, and inventory reduction of PHS-related products in China.
In Optical Equipment Group, which includes digital still cameras and optical modules for camera-equipped mobile phone handsets as its key products, Kyocera decided to considerably downsize the digital still camera and conventional still camera businesses in fiscal 2005, which led to a marked decline in sales in the camera business. However, Kyocera also commenced the manufacture and sale of optical modules in fiscal 2005. Consequently, sales in Optical Equipment Group increased compared with fiscal 2004.
Net sales
In fiscal 2005, Kyocera’s net sales increased by ¥39,841 million ($372 million), or 3.5%, to ¥1,180,655 million ($11,034 million) compared with ¥1,140,814 million in fiscal 2004.
The increase in net sales was due mainly to growth in demand for major components used in mobile phone handsets, computer-related equipment and digital consumer products, which boosted revenues from sales in Fine Ceramic Parts Group, Semiconductor Parts Group and Electronic Device Group in the first half of fiscal 2005. The business environment in the second half of fiscal 2005 changed considerably from the first half of fiscal 2005. Components demand for mobile phone handsets and digital consumer products slowed down, due to stagnant demand after Olympic Game and production adjustment for reducing inventories by set manufacturers in the second half of fiscal 2005. Total sales from Fine Ceramic Parts Group, Semiconductor Parts Group and Electronic Device Group amounted to ¥217,810 million ($2,036 million) in the second half of fiscal 2005, a decrease of ¥29,048 million ($271 million) or 11.8%, compared with ¥246,858 million ($2,307 million) in the first half of fiscal 2005. Full-year sales of these reporting segments increased by ¥30,220 million ($282 million), or 7.0%, to ¥464,668 million ($4,343 million) compared with ¥434,448 million in fiscal 2004.
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Table of ContentsSales in Applied Ceramic Products Group and Information Equipment Group rose by boosting sales in new products through the year. Sales in Applied Ceramic Products Group increased by ¥15,592 million ($146 million), or 19.9% and sales in Information Equipment Group increase by ¥26,953 million ($252 million), or 12.6%, respectively.
Conversely, revenue from Telecommunications Equipment Group in fiscal 2005 decreased by ¥51,869 million ($485 million), or 17.1% compared with fiscal 2004, due to a delayed release of new CDMA mobile phone handsets to the North American market and stagnant demand for PHS-related products caused by inventory reduction in China.
Sales in Japan, which accounted for 40.0% of total net sales, increased by ¥15,610 million ($146 million), or 3.4%, to ¥472,417 million ($4,415 million) compared with ¥456,807 million in fiscal 2004. Kyocera’s sales in overseas markets, which accounted for 60.0% of total net sales, increased by ¥24,231 million ($226 million), or 3.5%, to ¥708,238 million ($6,619 million) compared with ¥684,007 million in fiscal 2004.
Sales in overseas markets are denominated primarily in U.S. dollars and the Euro. Compared with fiscal 2004, the yen appreciated against the U.S. dollar and depreciated against the Euro. In terms of net sales, the negative effects of the rising yen against the U.S. dollar outweighed the positive impact of the weak yen against the Euro. Accordingly, consolidated net sales after translation into yen were pushed down by approximately ¥21,200 million ($198 million) compared with fiscal 2004.
Sales in Japan increased due mainly to a full year contribution from Kyocera Kinseki Corporation and Kyocera SLC Technologies Corporation, which were joined into consolidated subsidiaries in fiscal 2004 as well as boosted sales of semiconductor and LCD fabrication components, and solar modules and solar power generation systems. In addition, sales of optical modules for camera-equipped mobile phone handsets contributed for the first time in fiscal 2005, and resulted in a sales increase of Optical Equipment Group.
The weak yen against the Euro produced a positive impact on sales in Europe, and sales growth in Europe was stronger than in other overseas markets. Sales in Europe expanded by ¥18,921 million ($177 million), or 12.1%, to ¥175,850 million ($1,643 million) compared with ¥156,929 million in fiscal 2004, due to increased sales in Information Equipment Group and solar energy products supported by expansion of demand, particularly in Germany.
Sales in Asia rose by ¥9,546 million ($89 million), or 4.9%, to ¥203,848 million ($1,905 million) compared with ¥194,302 million in fiscal 2004. In fiscal 2004, Kyocera Corporation acquired 100% of the shares of Kyocera Kinseki Corporation and its consolidated subsidiaries (Kyocera Kinseki) and established new sales subsidiaries of AVX Corporation to pursue group synergies within Electronic Device Group and to expand this business. Synergy effects through these measures were evident in fiscal 2005, as sales of mobile phone handsets increased in India through active marketing by Kyocera Wireless Corp. and its consolidated subsidiaries (KWC).
Sales in the United States decreased by ¥2,993 million ($28 million), or 1.2%, to ¥248,333 million ($2,321 million) compared with ¥251,326 million in fiscal 2004, due mainly to downturn sales in Telecommunications Equipment Group.
Net sales by reporting segment
Fine Ceramic Parts Group
Sales in this segment increased by ¥4,953 million ($46 million), or 7.2%, to ¥73,711 million ($689 million) compared with ¥68,758 million in fiscal 2004. Particularly, components demand for semiconductor and LCD fabrication equipment and sapphire substrates for LEDs grew favorably.
Semiconductor Parts Group
Sales in this segment increased by ¥19,176 million ($179 million), or 17.6%, to ¥127,960 million ($1,196 million) compared with ¥108,784 million in fiscal 2004. Sales of ceramic packages and organic packages used in mobile phone handsets and digital consumer products rose.
Applied Ceramic Products Group
Sales in this segment increased by ¥15,592 million ($146 million), or 19.9%, to ¥93,879 million ($877 million) compared with ¥78,287 million in fiscal 2004.
Sales of solar modules and solar power generation systems expanded in Europe and Japan. Sales of cutting tools for automotive industry also grew.
Electronic Device Group
Sales in this segment increased by ¥6,091 million ($57 million), or 2.4%, to ¥262,997 million ($2,458 million) compared with ¥256,906 million in fiscal 2004.
A full year sales contribution from Kyocera Kinseki resulted in an increase in sales in this segment. Sales of thin-film devices also expanded considerably, as sales grew for LCDs both in Japan and overseas and for thermal printheads for digital photo printers.
In addition, sales at AVX Corporation and its consolidated subsidiaries (AVX), which account for approximately 53% of the net sales in this segment, and at Kyocera Kinseki grew steadily, supported by strong demand for digital consumer products through more active market environment for the electronic industry in the first half of fiscal 2005.
Telecommunications Equipment Group
Sales in this segment decreased by ¥51,869 million ($485 million), or 17.1%, to ¥250,918 million ($2,345 million) compared with ¥302,787 million in fiscal 2004.
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Table of ContentsSales of mobile phone handsets decreased both in Japan and overseas. Sales at KWC declined due to a delayed launch of new CDMA handsets in the U.S. and intensified price competition of mobile phone handsets. Sales of mobile phone handsets in Japan also decreased, due to the delayed introduction of new models and negative impact of inventory reduction by a PDC carrier.
Sales of PHS-related products dropped due to inventory reduction in China.
Information Equipment Group
Sales in this segment increased by ¥26,953 million ($252 million), or 12.6%, to ¥241,145 million ($2,254 million) compared with ¥214,192 million in fiscal 2004.
This increase was due to expanded sales of mid- and high-speed digital MFPs and the sales contribution of new models, such as low- and mid- speed models in Europe.
Optical Equipment Group
Sales in this segment increased by ¥6,479 million ($61 million), or 22.1%, to ¥35,776 million ($334 million) compared with ¥29,297 million in fiscal 2004.
In this segment, Kyocera decided to downsize the camera business and focus on optical components business. As a result, sales of digital still cameras dropped. However, sales of optical modules used in mobile phone handsets contributed to sales for the first time, which resulted in year-on-year growth in this segment. Optical modules sales accounted for approximately 40% of sales in this segment.
Others
Sales in this segment increased by ¥17,535 million ($164 million), or 17.4%, to ¥118,040 million ($1,103 million) compared with ¥100,505 million in fiscal 2004.
Sales in Kyocera Communication Systems Co., Ltd and its consolidated subsidiaries (KCCS), which accounts for approximately 61% of this segment net sales, increased due to a growth in sales of telecommunications engineering and data center businesses.
Kyocera Chemical Corporation and its consolidated subsidiaries (KCC) increased sales due to the steady growth of flexible printed circuit boards, molding dies of components for automobiles and casting resin.
Cost of sales and gross profit
In fiscal 2005, cost of sales decreased by ¥5,157 million ($48 million), or 0.6%, to ¥855,067 million ($7,991 million) from ¥860,224 million in fiscal 2004. Raw material costs of ¥386,262 million ($3,610 million) accounted for 45.2%, and labor costs of ¥158,427 million ($1,481 million) accounted for 18.5%. The ratio of cost of sales to net sales was 72.4%, a decrease of 3.0 points compared with 75.4% in fiscal 2004. In fiscal 2004, cost of sales contained a write-down amounting to ¥10,351 million of current inventories of tantalum materials and purchase commitments based on long-term contracts at AVX, labor costs totaling ¥13,735 million related to the transfer of the substitutional portion of Employee Pension Funds (EPF) of Kyocera Corporation and Kyocera Mita Corporation and its consolidated subsidiaries (KMC) to the Japanese government, and a reduction of labor costs of ¥2,821 million by the withdrawal from EPF at KCC.
Aside from the special factors stated above, cost of sales in fiscal 2005 substantially increased due to increases of sales in Fine Ceramic Parts Group, Semiconductor Parts Group, Applied Ceramic Products Group, Electronic Device Group, Information Equipment Group, and Optical Equipment Group.
In fiscal 2005, Kyocera recorded ¥5,421 million ($51 million) as restructuring costs in Telecommunications Equipment Group and Optical Equipment Group. In Optical Equipment Group, losses of ¥4,918 million ($46 million) related to reduction of inventories, were recorded to downsize the camera business. In Telecommunications Equipment Group, restructuring charges of ¥503 million ($5 million) were recorded at KWC with the transfer of production to Mexico, where more cost-effective labor is possible.
As a result, gross profit increased by ¥44,998 million ($421 million), or 16.0%, in fiscal 2005 to ¥325,588 million ($3,043 million) from ¥280,590 million in fiscal 2004. The gross profit ratio increased by 3.0 point from 24.6% to 27.6%.
SG&A expenses and profit from operations
Selling, general and administrative (SG&A) expenses in fiscal 2005 increased by ¥52,992 million ($495 million), or 30.9%, to ¥224,620 million ($2,099 million) compared with ¥171,628 million in fiscal 2004. Labor cost was ¥111,461 million ($1,042 million), or 49.6% of total SG&A, sales promotion and advertising cost was ¥39,175 million ($366 million), or 17.4% of total SG&A. The proportion of SG&A expenses to net sales rose by 4.0 points to 19.0% in fiscal 2005 compared with 15.0% in fiscal 2004. The transfer of the substitutional portion of EPF of Kyocera Corporation and KMC resulted in the deduction of SG&A expenses of ¥32,652 million, while the withdrawal from EPF at KCC resulted in a deduction of ¥3,132 million in fiscal 2004.
Excluding the special items above, the increase in SG&A expenses in fiscal 2005 reflected an increase in costs associated with aggressive R&D activities and an increase in advertising expenses, mainly at KMC.
As a result, profit from operations decreased by ¥7,994 million ($75 million), or 7.3%, to ¥100,968 million ($944 million) compared with ¥108,962 million in fiscal 2004. The gross margin fell by 1.0 point to 8.6% in fiscal 2005 compared with 9.6% in fiscal 2004.
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Table of ContentsInterest and dividend income
Interest and dividend income in fiscal 2005 increased by ¥1,513 million ($14 million), or 31.0%, to ¥6,396 million ($60 million) compared with ¥4,883 million in fiscal 2004. This was mainly because KDDI Corporation (KDDI) increased its corporate dividend per share thanks to favorable business performance, thus increasing dividend income on Kyocera’s investments in KDDI. Kyocera has an investment policy ensuring low risk, stability and liquidity, and does not typically invest in high-risk financial instruments only for pursuing profitability.
Interest expense
Interest expense in fiscal 2005 decreased by ¥11 million ($0 million), or 0.9%, to ¥1,275 million ($12 million) compared with ¥1,286 million in fiscal 2004. The Japanese financial market was still in a low-interest climate, therefore there was no material fluctuation in interest expense.
Foreign currency translation
During fiscal 2005, the yen appreciated by ¥5, or 4.4%, against the U.S. dollar and depreciated by ¥2, or 1.5%, against Euro compared with fiscal 2004, respectively. At March 31, 2005, the yen depreciated by ¥1, or 0.9%, against the U.S. dollar and depreciated by ¥10, or 7.8%, against Euro compared with at March 31, 2004, respectively. The net effect of foreign currency fluctuations was a gain of ¥2,618 million ($24 million).
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 2005, Kyocera’s earnings or losses on equity method investments resulted in losses of ¥1,678 million ($16 million), a fall of ¥4,253 million ($40 million), compared with earnings of ¥2,575 million in fiscal 2004. Kyocera’s equity in earnings or losses of affiliates and unconsolidated subsidiaries in fiscal 2005 was derived mainly from interests in WILLCOM, INC. (WILLCOM) and Taito Corporation (Taito).
Kyocera Corporation owned a 13.33% interest in WILLCOM, formerly DDI Pocket, Inc. (DDI Pocket) and changed its name in February 2005. WILLCOM operates a PHS business. In October 2004, Kyocera purchased an additional 16.67% ownership interest for ¥9,993 million ($93 million) to expand sales in its PHS-related business. Due to its cumulative ownership interest of 30%, Kyocera Corporation accounts for its investment by the equity method. As WILLCOM recorded a net loss due to an increase in operating costs related to its business expansion in fiscal 2005, Kyocera recorded a loss on its equity method investment in WILLCOM.
Kyocera Corporation owns a 36.02% interest in Taito, a major affiliate which operates in the electronic amusement business. In fiscal 2005, Taito’s net income decreased compared with fiscal 2004 due to a sluggish sales of home-use game machines, an additional investment in production facilities for game machines and costs of opening new game arcades, in spite of an increase in sales of commercial-use game machines. As a result, Kyocera’s earning on its equity method investment in Taito decreased.
In fiscal 2005, losses on impairment of investment securities amounted to ¥132 million ($1 million), a decrease of ¥898 million ($8 million), compared with ¥1,030 million in fiscal 2004. Losses recorded in fiscal 2005 and fiscal 2004 were due mainly to management’s estimation that certain non-public companies in which Kyocera invested would still need considerable time to recover profitability in their operating activities.
Income before income taxes
In fiscal 2005, Kyocera recorded an increase in operating profit due to higher sales, especially in the components business, and to various cost-reduction activities. In contrast, however, a significant decrease in profits was recorded in the equipment business. Despite higher revenues from sales of Information Equipment Group, such as digital MFPs, Telecommunications Equipment Group slumped due to repair costs for defective products, and restructuring charges were recorded in line with the policy to downsize the camera business. Consequently, income before income taxes decreased by ¥7,510 million ($70 million), or 6.5%, to ¥107,530 million ($1,005 million) compared with ¥115,040 million in fiscal 2004. In fiscal 2004 Kyocera also recorded a settlement gain of ¥18,917 million for a substitutional portion of EPF and ¥5,953 million of a withdrawal gain of EPF at a subsidiary.
Operating profit by reporting segment
Fine Ceramic Parts Group
Operating profit in this segment increased by ¥1,296 million ($12 million) or 12.7%, to ¥11,535 million ($108 million) compared with ¥10,239 million in fiscal 2004. This was due primarily to improvement of manufacturing efficiency by higher sales of fine ceramic components used in semiconductor and LCD fabrication equipment and sapphire substrates.
Semiconductor Parts Group
Operating profit in this segment increased by ¥6,947 million ($65 million) or 65.5%, to ¥17,550 million ($164 million) compared with ¥10,603 million in fiscal 2004. This was due primarily to improved capacity utilization by higher sales of ceramic packages used in mobile phone handsets, and due to reduced costs through the utilization of China-based production facilities.
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Table of ContentsApplied Ceramic Products Group
Operating profit in this segment increased by ¥6,832 million ($64 million) or 66.3%, to ¥17,129 million ($160 million) compared with ¥10,297 million in fiscal 2004. Sales in the solar energy business increased steadily supported by a rising global orientation towards clean energy. Meanwhile, profit in this business also grew as Kyocera reduced costs through the utilization of China-based production facilities established in fiscal 2004. Brisk markets led to increases in both sales and profits of cutting tools and dental and orthopedic implants.
Electronic Device Group
Operating profit in this segment increased by ¥30,359 million ($284 million) or 601.5%, to ¥35,406 million ($331 million) compared with ¥5,047 million in fiscal 2004.
In fiscal 2004, AVX wrote down ¥10,351 million of inventories of tantalum materials and purchase commitments based on long-term contracts, and also booked a restructuring charge of ¥2,975 million associated with the closure of its overseas ferrite manufacturing facilities and headcount reductions.
In fiscal 2005, despite deterioration in the markets for capacitors and connectors in the second half, the absence of large-scale write-downs and restructuring charges that were evident in fiscal 2004, together with improved productivity culminated in the considerable increase in profit.
Telecommunications Equipment Group
Operating profit in this segment substantially decreased by ¥20,000 million ($187 million) to a loss of ¥14,918 million ($139 million) compared with income of ¥5,082 million in fiscal 2004. This decrease was due to significant operating losses recorded at KWC.
KWC recorded significant losses due to decline in market prices, some defective products, and relocation cost of production sites.
Furthermore, repair cost for defective software and delay of market introduction of new products in Japan also led to losses.
Information Equipment Group
Operating profit in this segment increased by ¥4,200 million ($39 million) or 13.1%, to ¥36,186 million ($338 million) compared with ¥31,986 million in fiscal 2004. This increase was due primarily to steady sales growth of digital MFPs and an increase in sales of high-value-added products. Lower costs achieved through a China-based production facility also contributed to the increase in operating profit.
Optical Equipment Group
Operating loss in this segment increased by ¥9,561 million ($89 million) to ¥15,387 million ($144 million) compared with a loss of ¥5,826 million in fiscal 2004. This reflected higher costs associated with the launch of the optical module business in fiscal 2005 than expected, and restructuring charges related to the downsizing of the camera business in fiscal 2005.
Others
Operating profit in this segment increased by ¥3,336 million ($31 million) or 34.5%, to ¥13,019 million ($122 million) compared with ¥9,683 million in fiscal 2004. This was due primarily to increased earnings in KCCS, arising from improved development efficiency and lower cost, as well as increased sales in KCC, especially in the businesses related to flexible printed circuit boards.
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 litigation expenses or losses on impairment of investment securities.
In fiscal 2005, Kyocera recorded Corporate income of ¥8,683 million ($81 million). This represented a decrease of ¥26,188 million ($245 million), or 75.1%, compared with Corporate income of ¥34,871 million in fiscal 2004. The main contributors in fiscal 2005 were interest and dividends. The income in fiscal 2004 included ¥18,917 million of a settlement gain for a substitutional portion of EPF, ¥5,953 million of a withdrawal gain of EPF at a subsidiary, and ¥2,284 million of a gain on reversal of excess accruals resulting from a settlement of litigation in the LaPine Case. As a result, Corporate gain decreased markedly compared with fiscal 2004.
Taxes
Current and deferred income taxes in fiscal 2005 increased by ¥8,170 million ($76 million), or 16.2%, to ¥58,480 million ($547 million) compared with ¥50,310 million in fiscal 2004. The effective tax rate of 54.4% in fiscal 2005 was 10.7 point higher than 43.7% in fiscal 2004. 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 five years from the year ended March 31, 1999 through the year ended March 31, 2003, and this resulted in additional current income taxes of ¥12,748 million ($119 million). Although the final resolution of the proposed tax assessment is not certain, management believes the ultimate disposition of this matter will not have a material impact on the results of operations.
Minority interests
Minority interests are principally related to AVX, which accounted for an approximately 30% minority ownership interest in fiscal 2005. Minority interests decreased by ¥6,498 million ($61 million) to a loss in minority interests of ¥3,142 million ($29 million), compared with a gain in minority interests of ¥3,356 million in fiscal 2004. This was mainly due to an increase in AVX’s net income because AVX recorded onetime charges related to a write-down of inventories and restructuring activities in fiscal 2004, and there were no such costs in fiscal 2005.
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Table of ContentsLiquidity and Capital Resources:
Assets, liabilities and stockholders’ equity
Kyocera’s total assets at March 31, 2005 decreased by ¥49,239 million ($460 million), or 2.7%, to ¥1,745,519 million ($16,313 million), compared with ¥1,794,758 million at March 31, 2004. Cash and cash equivalents decreased by ¥50,540 million ($472 million), or 14.0%, to ¥310,592 million ($2,903 million), due mainly to purchases of government bonds and deposits with over 3 months original maturities.
Short-term investments increased by ¥31,083 million ($290 million), or 806.3%, to ¥34,938 million ($327 million), due mainly to increases in deposits with over 3 months original maturities and bonds matured within one year which were reclassified from securities and other investments.
Short-term and long-term finance receivables decreased by ¥51,837 million ($484 million), or 32.6%, to ¥107,228 million ($1,002 million), due mainly to collection of large-lot loans by Kyocera Leasing Co., Ltd. (KLC). Short-term and long-term finance receivables also included finance lease receivables.
Inventories increased by ¥16,217 million ($152 million), or 8.2%, to ¥213,411 million ($1,994 million). This was due mainly to increases in inventories held at March 31, 2005 by KMC associated with large orders, mainly in Europe, and by AVX associated with increased sales.
Securities and other investments increased by ¥341 million ($3 million). An increase by purchases of government bonds was offset by a decrease in market value at March 31, 2005 of KDDI stock and other equity securities compared with March 31, 2004.
Total property, plant and equipment at cost, net of accumulated depreciation, increased by ¥4,477 million ($42 million), or 1.8%, to ¥258,997 million ($2,421 million). Capital expenditures in fiscal 2005 were ¥63,176 million ($590 million) and depreciation in fiscal 2005 was ¥58,790 million ($549 million).
Kyocera’s total liabilities at March 31, 2005 decreased by ¥80,881 million ($756 million), or 13.7%, to ¥510,186 million ($4,768 million), compared with ¥591,067 million at March 31, 2004.
Total debt, comprised of short-term borrowings and long-term debt including due within one year, decreased by ¥55,781 million ($521 million), or 27.9%, to ¥144,164 million ($1,347 million), due mainly to debt repayments by KLC and KMC.
Trade notes and accounts payable decreased by ¥23,887 million ($223 million), or 21.6%, to ¥86,872 million ($812 million), due mainly to decreases of orders and production in Telecommunications Equipment Group in Kyocera Corporation and KWC.
Minority interests in subsidiaries, principally AVX, increased by ¥7,244 million ($68 million), or 13.6%, to ¥60,482 million ($565 million), compared with ¥53,238 million at March 31, 2004. This was due mainly to an establishment of Japan Medical Materials Corporation on September 1, 2004 by Kyocera Corporation and Kobe Steel, Ltd. and the profit recorded by AVX in fiscal 2005, in contrast to losses recorded in fiscal 2004.
Total stockholders’ equity at March 31, 2005 increased by ¥24,398 million ($228 million), or 2.1%, to ¥1,174,851 million ($10,980 million), compared with ¥1,150,453 million at March 31, 2004. Retained earnings at March 31, 2005 increased by ¥34,659 million ($324 million), or 3.9%, due to net income for fiscal 2005 of ¥45,908 million ($429 million) offset by cash dividend payments of ¥11,249 million ($105 million).
Accumulated other comprehensive income decreased by ¥10,207 million ($95 million), or 46.3%, to ¥11,839 million ($111 million). Net unrealized gains on securities decreased by ¥16,780 million ($157 million), or 28.3%, due mainly to a decrease in market value at March 31, 2005 of KDDI stock and other equity securities compared with March 31, 2004. Foreign currency translation adjustments increased by ¥6,704 million ($63 million), or 18.8% due to the depreciation of the yen against Euro.
The stockholders’ equity ratio at March 31, 2005 was 67.3%, an increase of 3.2 points compared with 64.1% at March 31, 2004.
Cash flow
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Table of ContentsNet cash provided by operating activities in fiscal 2005 increased by ¥82,948 million ($775 million), or 132.6%, to ¥145,523 million ($1,360 million) from ¥62,575 million in fiscal 2004. This was due to a significant decrease in receivables by collection, including short-term finance receivables, although net income decreased by ¥22,178 million ($207 million), or 32.6%, to ¥45,908 million ($429 million) compared with fiscal 2004. KLC which provides financial services collected large-lot loans, and these collections resulted in the decrease in receivables. In addition, due to the settlement regarding LaPine Case of ¥35,454 million in fiscal 2004, net cash provided by operating activities in fiscal 2005 increased compared with fiscal 2004. A decrease in notes and accounts payable due to decreases of production in Telecommunications Equipment Group offset an increase of net cash provided by operating activities.
Net cash used in investing activities in fiscal 2005 increased by ¥162,075 million ($1,515 million) to ¥132,494 million ($1,238 million) from net cash provided by investing activities of ¥29,581 million in fiscal 2004. This was due mainly to increases in purchases of government bonds and deposits of negotiable certificate of deposits in consideration of market trends and current and future financial position according to our investment policy. In addition, in fiscal 2005, there was no cash inflow from withdrawal of restricted cash for settlement regarding LaPine Case.
Net cash used in financing activities in fiscal 2005 increased by ¥46,922 million ($439 million), or 229.8%, to ¥67,344 million ($629 million) from ¥20,422 million in fiscal 2004. This was due mainly to a decrease in proceeds from issuance of long-term debt and an increase in repayments of long-term debt.
The yen’s depreciation against the U.S. dollar and Euro in a comparison of translation rate at March 31, 2004 and 2005 resulted in increases in cash and cash equivalents of ¥3,775 million ($35 million).
At March 31, 2005, cash and cash equivalents totaled ¥310,592 million ($2,903 million). This represented a decrease of ¥50,540 million ($472 million), or 14.0%, from ¥361,132 million at March 31, 2004. 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 U.S. dollar.
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, 2005, Kyocera’s short-term borrowings and long-term debt including current portion totaled ¥144,164 million ($1,347 million). The ratio to total assets of 8.3% was still at a low level of dependence. Most borrowings were denominated in yen but certain borrowings were denominated in foreign currencies, such as the U.S. dollar. Details of these borrowings are described in “Contractual obligations.”
At March 31, 2005, Kyocera’s working capital totaled ¥551,218 million ($5,152 million), a decrease of ¥5,839 million ($55 million), or 1.0%, from ¥557,057 million at March 31, 2004. This was due mainly to decreases in cash and cash equivalents as a result of purchases of government bonds and negotiable certificate of deposits in consideration of the current and future financial position in accordance with our investment policy, and in notes and accounts payable as a result of decreases of orders and production in Telecommunications Equipment Group. 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 2005 was ¥145,523 million ($1,360 million) and cash and cash equivalents at March 31, 2005 was ¥310,592 million ($2,903 million). In Kyocera’s opinion, working capital is sufficient for present and predictable future requirements.
Capital expenditures in fiscal 2005 increased by ¥8,239 million ($77 million), or 15.0%, to ¥63,176 million ($590 million) from ¥54,937 million in fiscal 2004. R&D expenditures increased by ¥7,768 million ($73 million), or 16.7%, to ¥54,398 million ($508 million) from ¥46,630 million in fiscal 2004. Nearly all capital and R&D expenditures were funded using cash in hand or cash generated by operations.
During fiscal 2006, Kyocera projects total capital expenditures to be approximately ¥100,000 million ($935 million). Kyocera plans to invest in new factories and facilities mainly to expand business of organic packages, ceramic parts for LCD fabrication equipment, solar cells and modules, and LCDs for industrial equipment, and to commercialize the organic electroluminescent display business.
For fiscal 2006, Kyocera projects total R&D expenditures to be approximately ¥53,000 million ($495 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.
Kyocera Corporation undertakes purchases of its common stock to facilitate the implementation of flexible capital policies and develop its business in a dynamic manner in response to changes in the operating environment.
In fiscal 2005, Kyocera Corporation paid cash dividends totaling ¥11,249 million ($105 million), 60 yen (0.6 dollar) per share. Kyocera Corporation received approval at the general meeting of shareholders held on June 28, 2005 for the payment of year-end dividends totaling ¥9,374 million ($88 million), 50 yen (0.5 dollar) per share, on June 29, 2005 to all stockholders of record on March 31, 2005.
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Table of ContentsKyocera believes cash in hand and cash from operations will be sufficient to fund all cash requirements outlined above, at least through fiscal 2006. 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 ratio to assets of 67.3% at March 31, 2005, 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 Japanese 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.
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, 2005. Kyocera anticipates that funds to be required to fulfill these debt obligations and commitments will be generated internally from operations.
(A) At March 31, 2005, Kyocera’s contractual obligations mainly comprised of short-term borrowings and long-term debt including due within one year, which amounted to ¥66,556 million ($622 million) and ¥77,608 million ($725 million), respectively. Approximately 80% of those debts were attributable to KMC and KLC. KLC provides financial services such as credit financing and leasing. Due to the nature of its operations, KLC had ¥48,913 million ($457 million) of short-term borrowings and ¥47,671 million ($446 million) of long-term debt from banks and other financial institutions at March 31, 2005 as the primary source of funding for operating its business.
(B) AVX has a supply agreement for a significant portion of its anticipated material used in operation in its ordinary course of business.
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Table of ContentsSignificant customer
In fiscal 2005, Kyocera’s sales to KDDI amounted to ¥89,937 million ($841 million), or 7.6% of consolidated net sales. As KDDI sold its PHS business in October 2004, Kyocera’s sales of PHS-related products has not been included its sales to KDDI since then. In addition, Kyocera’s sales of mobile phone handsets to KDDI decreased.
KDDI provides telecommunication services, and Kyocera sells mainly telecommunications equipment 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, 2005, Kyocera Corporation’s equity interest in KDDI was 13.5%. 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.
Investment in WILLCOM, INC.
On June 21, 2004, the Carlyle Group (Carlyle), Kyocera, KDDI and DDI Pocket reached an agreement that a consortium of Carlyle, Kyocera and KDDI would acquire the business of DDI Pocket, a subsidiary of KDDI. Under the agreement, the company that succeeds DDI Pocket’s business, the name of which was changed to WILLCOM in February 2005, was invested 30% by Kyocera. In cooperation with WILLCOM, Kyocera will endeavor to expand sales in its PHS-related business by carving out new markets in Japan as well as overseas.
Restructuring activities
In fiscal 2005, Kyocera recorded ¥7,369 million ($69 million) of restructuring costs which consisted of ¥6,866 million ($64 million) related to the structural reform of Optical Equipment Group and ¥503 million ($5 million) related to the reform of Telecommunications Equipment Group.
Structural reform in Optical Equipment Group was focused on downsizing the camera business. Since the acquisition of Yashica Co., Ltd. in 1983, Kyocera has advanced its optical instruments 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 instruments 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 decided to significantly downsize Optical Equipment Group in fiscal 2005.
As part of the program to scale back this business, Kyocera decided to close 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 ($31 million), including expenses mainly related to headcount reductions.
In addition to the closure of overseas sales companies, a further ¥3,581 million ($33 million) in restructuring losses in fiscal 2005 was spent to downsize the domestic camera business. This included the implementation of sales promotions to reduce inventory.
Kyocera also recorded ¥503 million ($5 million) as restructuring costs in connection with transferring production in Telecommunications Equipment Group. This amount was primarily used on the reduction at KWC in line with the transfer of production to Mexico, where more cost-effective labor is available. The purpose of this move is to reduce costs in response to cost competition from rival companies. In order to further lower cost, KWC considered selling the manufacture division and devoting itself to sales, marketing and R&D.
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 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 ($228 million) and that resultant additional tax, including local taxes, etc., amounted to ¥12,748 million ($119 million).
Kyocera recognized this amount of ¥12,748 million ($119 million) as current income taxes in its consolidated statement of income for the year ended March 31, 2005, and made cash payments of ¥8,631 million ($81 million) on March 29, 2005 and ¥4,117 million ($38 million) on April 28, 2005.
On May 24, 2005, Kyocera Corporation filed a complaint against tax assessment based on transfer pricing adjustments with the Osaka Regional Tax Bureau. Although the final resolution of the proposed tax assessment is not certain, management believes the ultimate disposition of this matter will not have a material impact on the results of operations.
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Table of ContentsSettlement of LaPine Case in Fiscal 2004:
On September 1, 1994, the International Chamber of Commerce issued its award with respect to the arbitration between Kyocera Corporation and LaPine Technology Corporation (LTC), Prudential-Bache Trade Corporation (PBTC) (presently renamed Prudential-Bache Trade Services, Inc.), et al. for the alleged breach of an agreement by Kyocera Corporation in connection with the reorganization of LTC. The award ordered Kyocera Corporation to pay to LTC and PBTC as damages, approximately $257 million, including interest, arbitration costs and attorney’s fees. Kyocera Corporation filed a motion to vacate, modify and correct the award in the U.S. District Court for the Northern District of California pursuant to an agreement between the parties providing for broad judicial examination of arbitration awards.
With respect to this case, Kyocera Corporation subsequently appealed to the Ninth Circuit Court of Appeals and then to the Supreme Court of the United States asserting the validity of the provision for broad judicial examination of arbitration awards. On December 22, 2003, Kyocera Corporation reached agreement with Prudential Securities Group, Inc., Prudential Equity Group, Inc., LaPine Technology Corporation and LaPine Holding Company to settle all claims in pending litigation between the parties. Kyocera Corporation has paid $331.5 million pursuant to this settlement and recorded ¥35,454 million as cash payment in its consolidated financial statements in fiscal 2004.
Kyocera had recognized a provision for accrued litigation expenses as cost of sales in fiscal 2004. The excess accrual of ¥2,284 million was reversed as a reduction of cost of sales to account for the difference between accrued litigation expenses and the cash settlement in fiscal 2004.
Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities in Fiscal 2004:
In fiscal 2004, Kyocera Corporation and KMC transferred to the Japanese government the substitutional portion of EPF liabilities and the related government-specified portion of plan assets of EPF upon approval by the Ministry of the Health, Labor and Welfare in Japan.
Kyocera Corporation and KMC adopted Emerging Issues Task Force (EITF) Issue No. 03-02, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities” for the settlement process of the substitutional portion of EPF, and recorded ¥18,917 million of a settlement gain for the substitutional portion of EPF. Detailed information regarding this transfer process of and settlement gain for the substitutional portion of EPF is described in Note 10 to The Consolidated Financial Statements included in this annual report.
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.
A substantial portion of allowances for doubtful accounts is recorded with respect to finance receivables of KLC, in Others segment, which provides credit financing and commercial leasing services. Based on the factors discussed above, KLC sets estimated recovery percentages that are applied to the amount of receivables to determine future cash flow. On a case-by-case basis, adjustments are made to the amount of allowances so determined in light of particular customers’ circumstances. KLC continuously monitors the correlation between the allowances so determined and the actual loss experienced, and makes an appropriate modification to the schedule of percentages for determining allowance amounts.
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Table of ContentsAt March 31, 2005, KLC had ¥14,919 million ($139 million) of allowances for doubtful accounts against ¥122,084 million ($1,141 million) of finance receivables, which comprise over 70% of Kyocera’s allowances for doubtful accounts.
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 12 months 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 12 months.
In fiscal 2005, as a result of continuous strict controls and adjustments on inventories, Kyocera recognized inventory write-downs of ¥10,405 million ($97 million). 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 mobile handsets, information equipment and optical instruments. 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. In the optical instruments business and the telecommunications equipment business, Kyocera implemented structural reforms to improve future profitability and recognized inventory write-downs or losses on disposal based on business plans.
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 by the equity method when it believes that the decline of 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.
In fiscal 2005, Kyocera recognized losses on impairment of investment securities amounting to ¥132 million ($1 million), which was attributable mainly to management’s estimation that 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, 2005, the unrealized gain of ¥55,056 million ($515 million) on KDDI shares held by Kyocera Corporation decreased compared with that of ¥87,125 million at March 31, 2004 reflecting a fluctuation of the market price of the KDDI shares during fiscal 2005. 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 has adopted Statement of Financial Accounting Standards (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.
In fiscal 2005, Kyocera did not recognize any losses on impairment of long-lived assets or intangible assets with definite useful lives.
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. The impairment review of goodwill and other intangible assets conducted by Kyocera in fiscal 2003 indicated that there was an impairment loss on goodwill within the Applied Ceramic Products Group related to the acquisition of Kyocera Tycom Corporation and its consolidated subsidiaries (KTC), a U.S. subsidiary, which manufactures and sells micro drills for the information technology industry. A consolidated impairment loss of ¥3,175 million was booked as a cumulative effect of change in accounting principle. With the assistance of a third-party appraiser, Kyocera arrived at the implied fair value of goodwill using the discounted cash flow methodology, taking into the account sluggishness in KTC’s markets.
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Table of ContentsKyocera also undertook a review for impairment of goodwill and other intangible assets in fiscal 2005. The results of this review revealed no indications of any impairment in the carrying values of such assets.
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, 2005, deferred tax assets amounted to ¥78,819 million ($737 million), which Kyocera considers will reasonably be realized in the future compared with the amounts of taxable income and income taxes in fiscal 2005. In fiscal 2005, a U.S. subsidiary recorded a valuation allowance for its deferred tax assets based on expected recoverability of those assets considering current operating conditions.
Benefit plans
Projected benefit obligations and plan assets 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. An increase in accumulated benefit obligations may also require Kyocera to record additional minimum pension liability in accumulated other comprehensive income.
In fiscal 2004, Kyocera Corporation and KMC transferred to the Japanese government the substitutional portion of EPF liabilities and the related government-specified portion of plan assets of EPF. Kyocera Corporation and KMC adopted EITF Issue No. 03-02, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities” for the settlement process of the substitutional portion of EPF, and recorded ¥18,917 million of a settlement gain for the substitutional portion of EPF. As a result of this settlement, Kyocera’s projected benefit obligation decreased by ¥71,243 million and plan assets decreased by ¥29,493 million, respectively. This decrease in projected benefit obligation is particularly considered to lead to a reduction of a potential negative impact on Kyocera’s financial conditions and results of operations. Detailed information regarding this transfer process of and settlement gain for the substitutional portion of EPF is described in Note 10 to The Consolidated Financial Statements included in this annual report.
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.
Revenue recognition
Kyocera sells various types of products, including fine ceramic parts, semiconductor parts, and telecommunication equipment. Kyocera recognizes revenue upon completion of the earnings process, which occurs when products are shipped or 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.
Sales returns
Kyocera records an estimated sales return allowance at the time of sales based on its historical returns experience.
Products warranty
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.
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Table of ContentsRevenue from financial services
In addition to the tangible products as discussed above, Kyocera also provides certain services, primarily financial services provided by KLC, a wholly-owned subsidiary of Kyocera. 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.
New Accounting Standards:
In March 2004, EITF concluded its discussion of Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” EITF Issue No. 03-01 provides accounting guidance regarding the determination of when an impairment (i.e. fair value is less than carrying value) of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in earnings. EITF Issue No. 03-01 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities classified as available-for-sale or held-to-maturity that are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The disclosure requirements of EITF Issue No. 03-01 were effective December 31, 2003. The accounting guidance of EITF Issue No. 03-01 was effective in reporting periods beginning after June 15, 2004. The adoption of this statement did not have a material impact on Kyocera’s consolidated results of operations and financial position.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires that all abnormal idle facility expense, freight, handling costs, and spoilage be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 will not have a material impact on Kyocera’s consolidated results of operations and financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), “Share-Based Payments.” This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. SFAS No. 123R was announced to be effective as of the beginning of the first fiscal year that begins after June 15, 2005, however, on April 14, 2005, the Securities and Exchange Commission Staff postponed implementation of SFAS No. 123R and Kyocera plans to adopt SFAS No. 123R effective fiscal 2007. Kyocera has not completed its evaluation of the effect that SFAS No. 123R will have, but the believes that the effect will be consistent with the pro forma disclosures. Detailed information is described in Note 1: “Stock-Based Compensation” included in this annual report.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets - An Amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception to fair value accounting for exchanges of similar productive assets contained in APB Opinion No. 29 and replaces it with a general exception for exchange transactions that do not have commercial substance. The exception in APB Opinion No. 29 required certain non-monetary asset exchanges to be recorded on a carryover basis with no gain/loss recognition. Under SFAS No. 153, exchange transactions with commercial substance are required to be accounted for at fair value with gain/loss recognition on assets surrendered in exchange transactions. Kyocera will be required to adopt SFAS No. 153 on July 1, 2005, and believes the adoption of SFAS No. 153 will not have a material impact on Kyocera’s consolidated results of operations and financial position.
In March 2005, the FASB issued Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations-an interpretation of SFAS No. 143.” This Interpretation clarifies use of the term conditional asset retirement obligation in SFAS No. 143, “Accounting for Asset Retirement Obligation.” FIN No. 47 requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. Kyocera is currently evaluating the impact of FIN No. 47 on its consolidated results of operations and financial position.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3.” SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS No. 154 will depend on the change, if any, that Kyocera may identify and record in a future period.
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Table of ContentsQuantitative and Qualitative Disclosures about Market Risk:
Kyocera is exposed to market risk, including changes in foreign exchange rates, interest rates and equity prices. In order to hedge against these risks, Kyocera uses derivative financial instruments. Kyocera does not hold or issue derivative financial instruments for trading purposes. Kyocera regularly assesses these market risks based on policies and procedures established to protect against adverse effects of these risks and other potential exposures, primarily by reference to the market value of financial instruments. Although Kyocera may be exposed to losses in the event of non-performance by counterparties, Kyocera believes that its counterparties are creditworthy and does not expect such losses, if any, to be significant. There are no material quantitative changes in market risk exposure at March 31, 2005, when compared to March 31, 2004.
In the normal course of business, Kyocera also faces other risks such as country risk, credit risk, or legal risk, but they are not represented in the following tables.
Foreign Exchange Risk:
Kyocera enters into foreign currency forward contracts to hedge certain existing assets and liabilities denominated in foreign currencies, principally the U.S. dollar and the Euro. All such contracts currently in effect will mature generally within three months. The tables below provide information about Kyocera’s major foreign currency forward contracts existing at March 31, 2005, setting forth the contract amounts, fair value, and weighted average exchange rates. The contract amounts are generally used to calculate the contractual payments to be exchanged under the contracts.
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Table of ContentsInterest Rate Risk:
Kyocera enters into interest rate swaps and other contracts, which are mainly utilized by a Japanese subsidiary, KLC, to reduce market risk exposure to changes in interest rates.
The tables below provide information about Kyocera’s derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For interest rate swaps, the tables below present notional principal amount, weighted average interest rates by expected (contracted) maturity dates, and fair value. Notional amounts are used to calculate the contractual payments to be exchanged under the contracts.
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Table of ContentsEquity Price Risk:
Kyocera has marketable equity and debt securities, which are classified as available-for-sale and are carried in the consolidated balance sheets at fair value. Changes in fair value are recognized as other comprehensive income, net of taxes, as a separate component of stockholders’ equity.
Gross unrealized gains on marketable equity securities, which were ¥71,448 million ($668 million), included ¥55,056 million ($515 million) derived from a rise in the market price of KDDI shares held by Kyocera Corporation. Detailed information appears in Note 4 to The Consolidated Financial Statements included in this annual report.
Kyocera evaluates whether declines in fair value of debt and equity securities with readily determinable fair values are other-than-temporary. Other-than-temporary declines in fair value are recorded as a realized loss with a new cost basis. This evaluation is based mainly on the duration and the extent to which the fair value is less than cost and anticipated recoverability of fair value in the future.
Other-than-temporary loss on debt and equity securities with readily determinable fair values for the years ended March 31, 2003, 2004 and 2005 amounted to ¥2,717 million, ¥695 million and ¥1 million ($0 million), respectively. At March 31, 2005, Kyocera held the following available-for-sale marketable equity and debt securities.
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Kyocera Corporation and Consolidated Subsidiaries March 31, 2004 and 2005
(Yen in millions and U.S. dollars and shares in thousands–Note 2)
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The accompanying notes are an integral part of these statements.
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Consolidated Statements of Income Kyocera Corporation and Consolidated Subsidiaries For the three years ended March 31, 2005
(Yen in millions and U.S. dollars and shares in thousands, except per share amounts–Note 2)
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Stockholders’ Equity Kyocera Corporation and Consolidated Subsidiaries For the three years ended March 31, 2005
(Yen in millions and U.S. dollars and shares in thousands – Note 2)
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Cash Flows Kyocera Corporation and Consolidated Subsidiaries For the three years ended March 31, 2005
(Yen in millions and U.S. dollars in thousands –Note 2)
The accompanying notes are an integral part of these statements.
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Notes to The Consolidated Financial Statements
Kyocera Corporation and Consolidated Subsidiaries
(As used in the following Notes, references to “Kyocera” is to Kyocera Corporation and, except as the context otherwise requires, its consolidated subsidiaries. And also, unless other wise indicated and except for shares, per share amounts and exchange rates, Japanese yen amounts and US dollars amounts without any units are in millions for the Japanese yen and in the thousands for U.S. dollars -Note 2)
1. ACCOUNTING POLICIES:
Financial Statements Presentation:
The accounts of Kyocera Corporation and its Japanese subsidiaries are generally maintained in accordance with accounting principles generally accepted in Japan. Adjustments, which are not recorded in Kyocera Corporation’s books of account, have been made to the accompanying consolidated financial statements in order to present them in conformity with accounting principles generally accepted in the United States of America.
Basis of Consolidation and Accounting for Investments in Affiliated Companies:
The 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.” All significant intercompany transactions and accounts are eliminated. Investments in 20% to 50% owned companies are accounted for by the equity method, whereby Kyocera includes in net income its equity in the earnings or losses of these companies.
The consolidated variable interest entity for which Kyocera Corporation is the primary beneficiary does not have a material effect on Kyocera’s financial position and result of operations.
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 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.
Sales returns
Kyocera records an estimated sales return allowance at the time of sales based on its historical returns experience.
Products warranty
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 financial services
In addition to the tangible products as discussed above, Kyocera also provides certain services, primarily financial services provided by Kyocera Leasing Co., Ltd. (KLC), 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.
Cash and Cash Equivalents:
Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less.
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.
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 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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Table of ContentsInventories:
Inventories are stated at the lower of cost or market. Cost is determined by the average method for approximately 55% and 52% of finished goods and work in process at March 31, 2004 and 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.
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 the accounts.
Goodwill and Other Intangible Assets:
On April 1, 2002, Kyocera adopted Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”
Upon adoption of SFAS No. 141, Kyocera evaluated its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and made necessary reclassifications required by SFAS No. 141. Upon the adoption of SFAS No.142, Kyocera reassessed the useful lives and residual values of all existing intangible assets.
Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually. 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.
The principal estimated amortization for intangible assets are as follows:
In connection with the transitional goodwill impairment evaluation, SFAS No. 142 required Kyocera to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, Kyocera identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. To the extent a reporting unit’s carrying amount exceeded its fair value, an indication existed that the reporting unit’s goodwill was impaired. In the second step, Kyocera compared the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. The impairment loss is measured based on the amount by which the carrying amount exceeds the implied fair value of goodwill.
Impairment of Long-Lived Assets:
Pursuant to SFAS No.144, “Accounting for the Impairment or Disposal 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 group 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.
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 FASB Statement 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 designates certain interest rate swaps and foreign currency forward contracts as cash flow hedges under SFAS No. 133. Most of Kyocera’s foreign currency forward contracts are entered into as hedges of existing foreign currency denominated assets and liabilities and as such do not qualify for 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.
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Table of ContentsKyocera 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 hedge’s 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.
Stock-Based Compensation:
In December 2002, the Financial Accounting Standard Board (FASB) 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 Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employee and its related interpretations.” Accordingly, no compensation expense has been recognized by Kyocera Corporation and AVX. KWC recognized compensation expense in the Consolidated Statements of Income under APB No. 25, because KWC has a variable stock option plan.
The following table illustrates the effect on net income and earnings per share if Kyocera had applied the fair value recognition provisions of SFAS No. 123. For purposes of this pro forma disclosure, the fair value of the options is estimated using Black-Scholes option pricing model and amortized ratably to expense over the service period.
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Options granted in the year ended March 31, 2003, 2004 and 2005 had weighted average fair values of ¥1,294, ¥3,176 and ¥1,946 ($18.19), respectively using the Black-Scholes option pricing model. The following are weighted-average assumptions used for options during the three years ended March 31, 2005.
AVX Corporation and its consolidated subsidiaries (AVX)
Options granted in the year ended March 31, 2003, 2004 and 2005 had weighted average fair values of $5.00 to $9.18, $4.22 to $5.13 and $5.34 to $6.25, respectively using the Black-Scholes option pricing model. The following are weighted-average assumptions used for options during the three years ended March 31, 2005.
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