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Kyocera 6-K 2006
Form 6-K
Table of Contents

FORM 6-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the month of July 2006

 

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-


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SIGNATURE

 

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.

 

KYOCERA CORPORATION

/s/ Shoichi Aoki

Shoichi Aoki

Executive Officer

General Manager of Corporate financial & Accounting Group

 

Date: July 7, 2006


Table of Contents

Information furnished on this form:

 

EXHIBITS

 

    Exhibit    

    Number    


      
1.      Annual report for the year ended March 31, 2006


Table of Contents

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Table of Contents

Contents

 

01    Financial Highlights
02    To Our Shareholders
04    Feature Section
08    Reporting Segments at a Glance
10    Review of Operations
10   

Fine Ceramic Parts Group

10   

Semiconductor Parts Group

11   

Applied Ceramic Products Group

11   

Electronic Device Group

12   

Telecommunications Equipment Group

13   

Information Equipment Group

13   

Optical Equipment Group

14   

Others

15    Corporate Governance
18    Corporate Social Responsibility (CSR)
19    Financial Section
74    Major Consolidated Subsidiaries and Affiliates
75    Board of Directors, Corporate Auditors and Executive Officers
75    Investor Information

 

Corporate Profile

 

Since its founding in 1959, Kyocera (“Kyocera” as a consolidated group) has continuously strived to uphold its management rationale: “To provide opportunities for the material and intellectual growth of all our employees, and through our joint effort, contribute to the advancement of society and humankind.” In doing so, Kyocera creates new markets and develops new products using unique technologies. As a result, Kyocera has become a leading manufacturer of diverse components and equipment products, as well as a provider of high-value-added services. Going forward, Kyocera will continuously seek to create new value for society using its innovative “Amoeba Management” system and “Kyocera Philosophy,” which establish “Doing what is right as a human being” as the principal criterion for all business decisions.

 

Kyocera concentrates its efforts on supporting markets relating to telecommunications, information processing and environmental preservation, which are expected to grow rapidly in the future. The company’s revenue is mainly derived from products and services within the IT (Information Technology) industries. It goes without saying that the telecommunications and information processing markets will play a major role in the “Ubiquitous Network Age” as they contribute to the development of globalization. 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 automotive engine components. 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 that maximizes sales and achieves high profitability. We will aim to be respected by society for upholding the highest corporate ethics — meeting shareholders’ expectations and earning society’s trust as “The Company” that creates new value on a global scale.


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Financial Highlights

 

Kyocera Corporation and Consolidated Subsidiaries

 

     Years ended March 31,

     2002

   2003

   2004

   2005

   2006

   2006

Net sales

   ¥ 1,034,574    ¥ 1,069,770    ¥ 1,140,814    ¥ 1,180,655    ¥ 1,181,489    $ 10,098,197

Profit from operations

     51,561      83,388      108,962      100,968      103,207      882,111

Income before income taxes

     55,398      76,037      115,040      107,530      121,388      1,037,504

Net income

     31,953      41,165      68,086      45,908      69,696      595,692
    

  

  

  

  

  

Earnings per share:

                                         

Basic

   ¥ 169.02    ¥ 220.91    ¥ 364.79    ¥ 244.86    ¥ 371.68    $ 3.18

Diluted

     168.88      220.86      364.78      244.81      371.43      3.17

Cash dividends declared per share:

                                         

Per share of common stock

     60.00      60.00      60.00      80.00      100.00      0.85
    

  

  

  

  

  

Total assets

   ¥ 1,645,458    ¥ 1,635,014    ¥ 1,794,758    ¥ 1,745,519    ¥ 1,931,522    $ 16,508,735

Stockholders’ equity

     1,036,185      1,000,207      1,150,453      1,174,851      1,289,077      11,017,752
    

  

  

  

  

  

Depreciation

   ¥ 76,252    ¥ 64,988    ¥ 60,861    ¥ 58,790    ¥ 63,018    $ 538,615

Capital expenditures

     54,631      40,614      54,937      63,176      90,271      771,547
    

  

  

  

  

  

 

Notes:  

A)    The yen in millions and the U.S. dollars in thousands, except per share amounts.

   

B)     The U.S. dollar amounts have been translated at the rate of ¥117=US$1, the rate prevailing at March 31, 2006.

 

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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; fluctuations in the value of securities and other assets held by us and changes in accounting principles; business performance of other companies with which we maintain business alliances; laws and regulations relating to the taxation, and to manufacturing and trade; 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.

 

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To Our Shareholders

 

Aiming for further growth

 

Review of Fiscal 2006

 

As we pursued our goal to be a creative company that grows continuously, the year ended March 31, 2006 (fiscal 2006) brought strategic milestones within the Kyocera Group. We implemented medium-to-long term growth strategies in two key areas: (1) Strategic capital investments to further expand our businesses; and (2) Structural reforms to build highly a profitable foundation.

 

Strategic Investments for Further Business Expansion

 

We invested aggressively in the core business in order to expand capacities, improve productivity and seize business opportunities in areas of imminent growth. Capital expenditures in fiscal 2006 amounted to ¥90,271 million ($772 million), a year-on-year increase of 42.9%. The most significant increase occurred in the components businesses, where capital expenditures rose 67.2% year-on-year to ¥64,425 million ($551 million).

 

In the Semiconductor Parts Group specifically, we completed construction of a new plant and commenced mass production of organic packages to house MPUs for next-generation game consoles and digital consumer products, which are expected to rise in demand from 2006 onward. In our solar energy business (part of the Applied Ceramic Products Group), we constructed systems to boost production of photovoltaic cells in Japan, and commenced production of solar modules at a new plant in the Czech Republic. The Kyocera Group currently possesses a global production system for solar energy products, with operations in the Czech Republic, China, Mexico and Japan. By leveraging this network, we are positioned to reap new benefits as we respond to growing demand for solar energy-related products worldwide.

 

Other capital investments to support growth in profitability included the construction of a new production line for large-dimension fine ceramic parts used in next-generation LCD manufacturing equipment.

 

Structural Reforms for a Highly Profitable Foundation

 

We undertook structural reforms in both the Telecommunications Equipment Group and Optical Equipment Group in fiscal 2006 in order to generate improvements in profitability.

 

In the Telecommunications Equipment Group, we transferred production of cellular handsets from Kyocera Wireless Corp. (KWC), a U.S. subsidiary, to Flextronics International Ltd. (Flextronics), a leading contract manufacturer, in September 2005. At the same time, KWC’s manufacturing equipment and parts inventories were sold to Flextronics. This transfer of production from KWC to Flextronics led to a substantial reduction in manufacturing costs at KWC, with profits recovering significantly in the second half of fiscal 2006 compared with the first half.

 

We also continued to restructure the Optical Equipment Group by substantially downsizing the consumer camera equipment business in order to focus on optical modules. Although sales revenues from this business were much lower than in fiscal 2005, we were able to reduce losses significantly. For future profit growth, we will utilize Kyocera Group resources to develop the Optical Equipment Group as a specialist in optical components, including high-megapixel optical modules for mobile phone handsets.

 

Fiscal 2006 Results

 

Despite lower revenues from the equipment business due to restructuring, consolidated net sales increased due to higher sales of semiconductor parts, solar energy products, and ceramic cutting tools. Net sales increased 0.1% compared with fiscal 2005, to ¥1,181,489 million ($10,098 million).

 

We generated significantly higher profits from similar revenue levels. The higher profitability was led by structural reforms in the equipment business, notably in the Telecommunications Equipment and Optical Equipment Groups. Profit from operations rose 2.2% to ¥103,207 million ($882 million). Income before income taxes increased 12.9% to ¥121,388 million ($1,038 million), while net income amounted to ¥69,696 million ($596 million), an increase of 51.8% compared with fiscal 2005. Diluted earnings per share soared to ¥371.43 ($3.17).

 

As a part of an ongoing policy to focus on the core business, we reinvestigated the way to maximize synergies within our group companies. Consequently, in September 2005, Kyocera took advantages of an opportunity to sell its investment in an equity-method affiliate, Taito Corporation, a leading operation in the amusement business in Japan, in order to achieve best possible growth for both companies, Kyocera and Taito. As a result, Kyocera recorded a gain on sales of investment in an affiliate totaling 6,931 million ($59 million).

 

For a more detailed analysis of business performance, please refer to pages 20-36 (Operating and Financial Review and Prospects).

 

Fiscal 2007 Actions

 

A new organizational structure for Kyocera Group management was implemented in April 2006. Under this new structure, which aims at facilitating the decision-making process at the consolidated level, the President is fully responsible for the global execution of Group business policies, while the Chairman and Vice Chairmen provide support in executing business decisions. This new structure aims at making Kyocera “a creative company that grows continuously.” The Kyocera Group plans to focus on improving profitability in both the components and equipment businesses while pursuing intraGroup operational synergies to sustain growth under rapidly changing conditions.

 

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Specific areas of management focus in fiscal 2007 are as follows:

 

(1) Reinforce the “Amoeba Management” System of Internal Controls

 

The “Amoeba Management” system, which internally controls the operating performance of small groups, is unique to Kyocera and remains a source of competitive advantage over other companies. It has been a major driving force for growth since the company’s earliest days. During fiscal 2007 Kyocera plans to reinforce this system of controls to revitalize operations across development, manufacturing and sales functions, as well as other divisions affected indirectly. Our aim is to boost our ability to achieve internal targets. In particular, we aim to augment the power of our various manufacturing divisions to be profit centers for the company.

 

(2) Boost Performance from Strategic Investments and Structural Reforms

 

Another challenge in fiscal 2007 is to ensure that the strategic investments made in the previous year translate quickly into better performance. We will focus on raising profit margins in the components businesses, including the Fine Ceramic Parts Group, Semiconductor Parts Group and Applied Ceramic Products Group.

 

We also expect the structural reforms undertaken in the Telecommunications Equipment and Optical Equipment Groups during fiscal 2006 to translate into higher revenues and profits in fiscal 2007.

 

(3) Promote the Commercialization of Medium-Term Strategic Businesses

 

One final area of concentration is the commercialization of strategic businesses with the greatest medium-term earnings potential. We are concentrating primarily on harnessing Group resources to develop new technologies, products and market segments in the key sectors of information/communications technologies and environmental preservation. Specific areas in which we aim to expand our business by developing major new products include ceramic diesel-engine components, next-generation solar cells and solid oxide fuel cells. We are working to ensure that these businesses contribute to results as soon as possible.

 

As this overview of various ongoing initiatives shows, we are intently aiming for both sales growth and high profitability. Kyocera respectfully seeks the continued support and understanding of all stockholders and other stakeholders as we continue to move forward.

 

June 2006

 

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Noboru Nakamura, Chairman

 

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Makoto Kawamura, President

 

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Feature Section

 

Kyocera’s goal is to be a creative company with continuous sales growth and high profitability. This requires original, innovative products to target emerging market segments with strong growth potential.

 

Kyocera aims to be “a creative company that grows continuously.” To attain this goal, we are pursuing a strategy of “high-value-added diversification” into businesses where we can generate high profit margins. We seek to develop a robust business structure capable of generating continuous growth over the medium to long term, both by strengthening existing operations and by creating new businesses.

 

We are concentrating our resources on two sectors with significant growth potential: the telecommunications and information processing market, and the environmental preservation market. Within these two sectors, we plan to attain leadership by developing innovative new technologies, products and market segments. This section introduces some cutting-edge business development initiatives in both areas.

 

New Business Development in the Telecommunications and Information Processing Market

 

Wireless broardband systems are expected to become increasingly important in the “ubiquitous network” age. In addition, remarkable growth is occurring in the market for advanced digital consumer products. We supply a wide range of products and services for the telecommunications and information processing market, ranging from core components and handsets to essential systems and infrastructure. We are also developing strategic new products for this sector.

 

iBurstTM wireless broadband system

 

iBurstTM is a new wireless system that the Kyocera Group is developing for the telecommunications and information processing market. iBurstTM technology offers high user mobility, with each base station covering a wide area. In addition, the system’s data-transfer speed is superior to existing mobile phone networks and highly suitable for broadband services. We are presently supplying handsets and base stations for iBurstTM services in Australia, South Africa, Azerbaijan and Kenya. Going forward, we plan to expand this business globally by cultivating new markets in other countries.

 

Organic packages

 

We are also developing new markets for organic packages by facilitating the high-density circuitry required within smaller, thinner and faster semiconductors used in digital consumer products for the ubiquitous age.

 

By leveraging our leading build-up package technology, we are responding proactively to customer needs through integrated systems in development, manufacturing, sales, marketing and global support services. Organic packages are currently produced at three locations in Japan. The latest of these, at Ayabe in Kyoto Prefecture, commenced production in June 2005, mass-producing the latest flip-chip packages using state-of-the-art equipment and processes.

 

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Feature Section

 

Organic light-emitting diodes (OLEDs)

 

Kyocera is also developing organic light-emitting diode (OLED) displays that incorporate self-luminous elements. OLED displays are superior to conventional liquid-crystal displays (LCDs) in many respects, including better color reproducibility, faster response, higher contrast and lower power consumption. The Kyocera Group is currently developing OLEDs that employ amorphous silicon TFT substrates, widely used in LCDs, to create cost advantages. Preparations are in full swing to introduce small- and medium-sized OLEDs for commercial and industrial applications, with the objective of making them a core part of the ubiquitous network society.

 

Creating New Businesses in the Environmental Preservation Market

 

Greater emphasis is now being placed on technical and product innovations that contribute to environmental preservation and help prevent global warming to ensure the sustainable development of humankind and society. Kyocera is making a major contribution to environmental preservation through the development and sale of solar energy products that can harness the power of the sun. Another area in which we are helping to protect the global environment is in the development of fine ceramic components. Such products can play a key role in solving environmental problems by reducing automotive emissions, dioxins and other atmospheric pollutants.

 

Solar energy products

 

Solar energy products are attracting worldwide attention as a clean alternative to fossil fuels. By conducting continuous development to increase solar cell efficiency and establishing strong business structures, Kyocera hopes to make photovoltaic generating systems viable in more applications worldwide. Further, Kyocera is also developing new types of solar cells to reduce the amount of silicon needed to manufacture solar energy products.

 

Automotive components

 

In fine ceramic parts, we are developing piezo actuators for the automotive components field. Piezo actuators are ceramic functional parts used in fuel injection systems known as a common rail system, the beneficial technology which reduces nitrogen oxcide (NOx) emissions and particles from diesel engines. Kyocera’s piezo actuators feature quick responses, 3-5 times faster than those of conventional solenoid actuators. This facilitates shorter injection intervals and more precise control over fuel delivery, reducing NOx emissions and particulate emissions from diesel engines. We are working to develop piezo actuators in anticipation of more stringent emissions standards for automobiles worldwide.

 

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Common rail system

 

The common rail system compresses the fuel via a high pressure pump, storing it in a pressure vessel called a common rail. Injectors for each cylinder inject fuel into the combustion chamber. Besides injecting the fuel at high pressure, each injector precisely controls the timing and amount of fuel injection, resulting in close to perfect combustion, which ensures the reduction of nitrogen oxides emissions and particulate emissions from the exhaust gas.

 

Solid oxide fuel cells (SOFCs)

 

Another eco-friendly product under development is a high-efficiency power generating system based on SOFC technology. Kyocera’s SOFCs offer superior efficiency even in small systems. We are now working to commercialize a co-generation system for household use with a power rating in the 1-kilowatt (kW) class. This system was installed in an experimental housing complex owned by Osaka Gas Co., Ltd. in November 2005, marking the first such trial in Japan. The trial exceeded its power-generation efficiency goal of 49%, demonstrating effectiveness in conserving energy and reducing CO2 emissions. Technical development is presently underway to enhance system reliability and reduce costs for commercial market introduction.

 

We are firmly focused on expanding the Kyocera Group’s presence in markets with strong growth potential. Our goal remains to support future sales and profit growth by supplying advanced products throughout the world.

 

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Reporting Segments at a Glance

 

Components Business

 

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Fine Ceramic Parts Group

 

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Major products

 

Information & telecommunication components

 

Sapphire substrates

 

Semiconductor process equipment components

 

LCD process equipment components

 

Automotive & ITS related components

 

General industrial ceramic components

 

 

 

Semiconductor Parts Group

 

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Major products

 

Ceramic packages for surface mount devices

 

Ceramic multilayer packages and multilayer substrates

 

Metallized products

 

Optical device packages and components

 

Organic multilayer packages and substrates

 

 

 

Applied Ceramic Products Group

 

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Major products

 

Cutting tools

 

Micro drills

 

Residential & industrial photovoltaic generating systems

 

Solar cells and modules

 

Jewelry & applied ceramic related products

 

Dental & orthopedic implants

 

 

 

Electronic Device Group

 

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Major products

 

Ceramic capacitors, tantalum capacitors

 

Timing devices (temperature compensated crystal oscillators (TCXOs), voltage controlled oscillators (VCOs))

 

RF modules, ceramic resonators and filters

 

Thermal printheads, LED printheads

 

Amorphous silicon drums, liquid crystal displays

 

Connectors

 

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Equipment Business

 

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Telecommunications Equipment Group

 

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Major products

 

CDMA mobile phone handsets

 

PHS related products (PHS mobile phone handsets, PHS base stations, high speed wireless data transfer systems)

 

 

 

Information Equipment Group

 

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Major products

 

ECOSYS non-cartridge printers

 

Copiers

 

Digital network multifunctional products

 

 

 

Optical Equipment Group

 

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Major products

 

Optical modules

 

Aspherical lenses (plastic, glass)

 

 

 

Others

 

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Major products and services

 

Chemical materials for electronic components

 

Insulators, resin products

 

Telecommunications network systems business

 

Computer network business

 

IT solutions and services business

 

Consulting business

 

Leasing services, real estate services

 

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Review of Operations

 

Fine Ceramic Parts Group

 

Fiscal 2006 Results

 

Demand for parts used in semiconductor fabrication equipment remained sluggish amid a dull market for semiconductors. Sales of sapphire products for LCD projectors were also depressed, due to fierce competition from products using other materials. As a result, sales and profits in this segment decreased compared with fiscal 2005.

 

Business Outlook and Strategy

 

Kyocera expects demand for fine ceramic components used in semiconductor fabrication equipment to recover in fiscal 2007 as conditions improve in the broader semiconductor market. In addition, the rising popularity of large-screen LCDs TV sets continues to create demand for larger fine-ceramic components used in LCD fabrication equipment. To capture this demand, we will fully utilize a new mass-production facility established in fiscal 2006. We aim to expand our leading share of the global market for ceramic parts used in LCD fabrication equipment, a position gained by virtue of our superior manufacturing technology and mass-production systems.

 

Kyocera seeks to expand sales of sapphire products for use in light-emitting diodes (LEDs). Most current applications for LED-related sapphire products focus on mobile phone handsets. However, these applications are expected to expand in the future and bring greater sales volumes. Kyocera is currently working to raise the quality of its sapphire products while lowering their cost.

 

Emerging business opportunities within this segment include a growing market for components supplied to the automotive industry. The underlying growth in demand for automotive components and related products is solid, reflecting a desire by automakers to develop more eco-friendly vehicles to comply with new emissions standards and an increased need for components to support Intelligent Transport System (ITS) infrastructure. In addition, new equipment is being introduced to promote enhanced vehicle safety. The Kyocera Group is seeking to take advantage of in-house precision fabrication technologies and the unique characteristics of ceramic materials to expand into more automotive applications. We are currently focusing on developing and manufacturing products in response to environmental needs. Due to stricter EU emissions standards, rising sales of diesel vehicles in Europe provide Kyocera with an opportunity to expand sales of component that can help enhance combustion control in diesel engines.

 

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Semiconductor Parts Group

 

Fiscal 2006 Results

 

Sales of both ceramic and organic packages increased compared with the previous year in a reflection of rising demand for digital consumer products. The second half brought stronger demand for surface mount device (SMD) ceramic packages used in mobile phone handsets and packages for image sensors. Sales of organic packages benefited from rising demand for servers, and received a second-half boost from the start of a new business in organic packages for next-generation game consoles. The segment’s operating profit also increased despite the depreciation associated with establishing a new production facility for organic packages.

 

Business Outlook and Strategy

 

In the ceramic packaging business, Kyocera aims to continue building on its leading global market share by aggressively introducing new products. We seek further expansion of this business by leveraging our mass-production systems at facilities in Japan and China. At the same time, we continue to seek sustained growth through new markets. We are actively developing new applications for ceramic packages, not only in digital consumer products such as mobile phones and digital cameras, but also in emerging sectors of the automotive and medical equipment markets.

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Through its efforts to expand the organic packaging business, Kyocera has seized opportunities to supply products for next-generation game consoles. This has led to the construction of a new plant in Kyoto Prefecture with state-of-the-art equipment to mass-produce the latest organic flip-chip packages. Kyocera plans to continue expanding sales of organic packages in fiscal 2007, focusing primarily on product development to support advanced digital consumer products.

 

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Applied Ceramic Products Group

 

Fiscal 2006 Results

 

This segment recorded significantly higher sales and profits compared with fiscal 2005, due mainly to increased shipments of solar energy products and cutting tools.

 

Sales of solar energy products expanded due to optimized production and rising global demand. At the same time, this robust demand resulted in tighter supplies, and rising prices, for key raw materials used in fabricating solar cells. Cutting tool demand was strengthened by expanding levels of production at Japanese automakers. In both markets, Kyocera achieved steady profit gains through the aggressive introduction of new products.

 

Business Outlook and Strategy

 

In solar energy, Kyocera expects to endure a shortage of raw materials and rising material costs during fiscal 2007. In view of the strong growth in global demand for solar energy products, Kyocera aims to establish a highly profitable business foundation by improving its efficient use of raw materials and implementing new initiatives to boost manufacturing productivity.

 

Kyocera benefits from a uniquely integrated production process that covers the entire spectrum of the business, from raw-material processing to the installation of finished solar energy systems. With this competitive advantage, Kyocera seeks to improve efficiency continuously, striving to reduce raw material requirements even as we create products of greater power output through better “energy conversion efficiency.” Kyocera will also continue reducing costs through its quadripartite global production framework for solar energy products, which includes plants in Japan, China, Mexico and the Czech Republic.

 

In the cutting tools business, expansion efforts focus on the Asian market. Kyocera aims to boost global market share by making full use of its integrated production line that was built in Japan in fiscal 2006, as well as its mass-production facility in China. Kyocera is also actively seeking to introduce new products in this sector.

 

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Electronic Device Group

 

Fiscal 2006 Results

 

Sales and operating profit both dropped compared with fiscal 2005. Markets for mobile phone handsets and other digital consumer products were slow to recover in the first half of fiscal 2006, although demand for the segment’s leading products, such as ceramic capacitors and timing devices, regained momentum in the second half.

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Business Outlook and Strategy

 

Kyocera plans to expand its business by increasing sales of new components for digital consumer products and pursuing group synergies in development, manufacturing and marketing. Specifically, Kyocera will introduce new ceramic modules and expand its sales of miniature, high-capacitance ceramic capacitors for mobile phone handsets. In addition, Kyocera will seek new applications for low-inductance ceramic capacitors, including power supplies and MPU peripherals. In crystal-related components, Kyocera will seek greater market share by launching smaller, lower-profile crystal units for use in telecommunications, automotive and medical applications.

 

Kyocera has entered Asian markets for strategic expansion, particularly China, where sales efforts continue to focus on gaining market share by strengthening ties with AVX Corporation and promoting design-in activities.

 

In thin-film devices, R&D activity has focused on organic electroluminescent displays, and preparations to commercialize this business will continue.

 

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Telecommunications Equipment Group

 

Fiscal 2006 Results

 

Operating profits in this segment improved substantially compared with the previous year despite a decline in sales.

 

Sales of mobile phone handsets and PHS-related products for the Japanese market increased year-on-year due to new product introductions. In the U.S., the effects of a business restructuring at U.S. subsidiary Kyocera Wireless Corp. (KWC) resulted in a decline in sales that could not be offset by the growth in the Japanese market. KWC’s restructuring measures had a favorable effect on second-half profits, however, resulting in a significantly smaller operating loss compared with the prior year.

 

Business Outlook and Strategy

 

The main challenges in the mobile phone handset business include improving profitability at KWC and increasing market share in Japan. The completion of structural reforms at KWC has led to a new business model that involves outsourced manufacturing and differentiation through the development of multiple handset platforms and marketing. In addition to the benefits accruing from this structural reform, Kyocera aims to maximize the profitability of the mobile handset business by pursuing increased operational synergies within the Kyocera Group.

 

Specific examples of such synergy include the development of CDMA baseband systems by U.S subsidiary Kyocera Telecommunications Research Corporation. These are being incorporated into common platforms for further development by Kyocera Corporation and KWC. Moreover, the trend toward more functionally advanced handsets has put a premium on software development turnaround that has resulted in cost increases; Indian subsidiary Kyocera Wireless (India) Pvt. Ltd. is solving this issue by strengthening R&D, which increases competitiveness by further differentiating products while containing costs.

 

The planned introduction of mobile number portability in Japan in November 2006 has Kyocera aggressively introducing new handset models with upgraded music download capabilities and other advanced functions in an attempt to seize greater Japanese market share.

 

As the subscriber base for PHS communications services continues to grow in Japan, Kyocera aims to maintain a high share of the market by introducing new PHS handset models with advanced functions. In China, Kyocera is supporting an upgrade for existing wireless networks to facilitate packet-switched data communications. This provides an opportunity for Kyocera to expand its handset business by developing browser phones, data cards and related equipment for the Chinese market. Elsewhere, Kyocera is working to expand sales of PHS-related products in emerging markets such as Vietnam and Bangladesh.

 

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Information Equipment Group

 

Fiscal 2006 Results

 

Sales in this segment increased year-on-year despite harsh worldwide market conditions characterized by fierce price competition, especially in low-speed products. Kyocera achieved higher sales by launching new high-speed multi-function products (MFPs) for digital networks and focusing sales efforts on mid- to high-speed products. However, operating profit decreased, due primarily to higher product-development costs for color printers and solutions-equipped digital MFPs, and increased capital investment in information technology infrastructure for strengthening supply chain management.

 

Business Outlook and Strategy

 

Due to the introduction of new products developed in fiscal 2006, such as color printers and color MFPs with new functions for business users, sales of color machines are expected to increase. Kyocera will continuously strive to expand its line, and increase its sales of color machines. We plan to develop the “WiseCore” MFP controller platform as a means to meet a variety of needs for IT infrastructure. Such a flatform will allow Kyocera to provide total document solution services and facilitate management of electronic and paper-based documents. This controller will be available in the mid-speed MFPs to be introduced in fiscal 2007 and will be suitable for all business-use MFPs in the future.

 

Kyocera’s information equipment business is based on the ECOSYS concept, which was developed in-house. Designed around an amorphous silicon imaging drum with an extremely hard, durable surface, ECOSYS products offer eco-friendly benefits such as longer-life print engines, lower running costs and reduced disposable waste. Kyocera has extended the ECOSYS concept to the full lineup of Kyocera information equipment. Going forward, Kyocera will continuously develop this concept in order to reduce energy consumption and promote environment preservation while targeting major emerging markets such as China, India, Russia and Brazil.

 

Kyocera is also investing in intensive product development efforts to launch other new models based on the ECOSYS concept in the future. Plans call for establishing a new R&D center to consolidate development efforts for imaging and information equipment – ranging from commercial product design and image processor development to process and software engineering. This allows Kyocera to strengthen R&D, provide high-value-added products and services, and expand the document solutions business.

 

LOGO

 

Optical Equipment Group

 

Fiscal 2006 Results

 

This segment’s revenue declined compared with fiscal 2005 as sales of digital still cameras were discontinued and the company substantially downsized its consumer camera business. However, operating losses decreased considerably as structural reforms came to fruition.

 

Business Outlook and Strategy

 

The critical issue in this segment is to improve profitability. To do so, Kyocera will intensify its evolution of high-value-added products, such as miniature, high-pixel, low-profile optical modules for mobile phone handsets; lenses; and lens units. These efforts will capitalize on our abilities in lens design, manufacturing process technologies, and integrated expertise in electronic devices and semiconductor parts. By pursuing group synergies, Kyocera will strive to expand applications within data projectors and bar-code readers by adapting optical module technologies developed for mobile handsets. In addition, Kyocera will enhance its manufacturing process in China to reduce production costs and improve profitability.

 

LOGO

 

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Table of Contents

Others

 

Fiscal 2006 Results

 

Increased sales from this segment reflected rising demand for telecommunications engineering services from Kyocera Communication Systems Co., Ltd. (KCCS), in comparison with fiscal 2005. However, depressed demand for molded resin products and other items made by Kyocera Chemical Corporation (KCC) had a negative impact on profitability, and the segment’s operating profit fell slightly below the level of the previous year.

 

Business Outlook and Strategy

 

KCCS will focus on expanding business in both the telecommunications engineering services market and the information & communication technology (ICT) sector, which integrates expertise from the information technology and Internet protocol fields. The ICT business involves developing and offering customers business support in areas such as systems integration and security. In the telecommunications engineering services sector, KCCS aims to seize opportunities presented by the advent of mobile number portability by strengthening network systems for KDDI and proactively introducing related services. KCCS regards the entry of new carriers as an opportunity to expand its business, and will focus on installing base stations for mobile networks and providing wireless network maintenance and analysis services.

 

Kyocera Chemical Corporation (KCC) will strive to expand the scope of applications for its diverse product line by developing new resin materials for digital consumer products such as memory cards and audio players. In addition, KCC is seeking to develop new applications in the automotive market for epoxy casting resins and varnishes. Geographically, KCC aims to expand its business in China by utilizing local production bases there. Meanwhile, efforts to maximize synergies within the Kyocera Group continue through joint development projects in areas such as capacitors and solar cells. Such efforts enhance of expertise in materials and technologies throughout the Kyocera Group.

 

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Table of Contents

Corporate Governance

 

Basic Policy

 

Kyocera’s management rationale is “to provide opportunities for the material and intellectual growth of all our employees, and through our joint effort, contribute to the advancement of society and humankind.” Kyocera defines corporate governance as “structures to ensure that Directors manage the corporation in a fair and correct manner.” The purpose of corporate governance is to maintain the soundness and transparency of management, and to achieve the fairness and efficiency through which the Kyocera Group’s management rationale can be realized.

 

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 in managing the company was for the Kyocera Philosophy to apply to all who work for the enterprise — directors, managers and employees alike. The Kyocera Philosophy embodies many principles, 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. Since its founding, Kyocera has been guided by principles that naturally work toward achieving the corporate governance goals mentioned above.

 

Measures for Corporate Governance

 

Kyocera aims to implement corporate governance in compliance with the Kyocera Philosophy. In order to learn the philosophy, all employees are provided with an opportunity to receive training and materials devoted to its principles and practice. Through this training, employees acquire the ability to observe and implement the Kyocera Philosophy in the workplace. As of March 31, 2006, an aggregated total of approximately 40,000 Kyocera managers and employees in Japan attended training and education sessions designed to promote deeper understanding of the Kyocera Philosophy. Additionally, a total of approximately 7,000 managers of Kyocera subsidiaries outside Japan received similar training along these lines.

 

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Corporate Governance Systems

 

Kyocera implemented an Executive Officer system to achieve efficient and effective business management June 2003. Executive officers are responsible for executing business strategy under the authority of the President and Representative Directors, who are elected by the Board of Directors. The President and Representative Directors serve to improve management efficiency by delegating authority and responsibility while regularly evaluating the appropriateness of corporate governance and internal controls. In addition, the Kyocera Group Management Committee, comprised of Executive Officers and other Directors, meets monthly to ensure that all operations comply with the company’s ethical standards.

 

In compliance with its Articles of Incorporation approved by the shareholders meeting, Kyocera established the Corporate Auditors and Board of Corporate Auditors to regularly evaluate Kyocera Group business conduct. This consists of two internal and three external auditors with expertise in law, accounting and management. The Corporate Auditors attend meetings of the Board of Directors and various other committees to ensure the appropriateness of business conduct.

 

Kyocera defines internal controls as “systems established within the corporate organization to achieve management policy and master plans in a fair manner, in order to effectuate the Company’s management rationale.” By respecting the Kyocera Philosophy as a corporate culture and enhancing internal management control systems, Kyocera aims to maintain the solid corporate governance our shareholders expect.

 

In April 2003, a Kyocera Disclosure Committee was established to ensure the timely disclosure of public information. This committee evaluates the basic process of disclosing information as well as the accuracy of the company’s Annual Report, Form 20-F and related documents.

 

In further support of its corporate governance commitment, Kyocera established a risk management department to strengthen its risk management system. Kyocera also established internal complaint reporting systems so that employees who become aware of any breach of an internal rule can report the matter immediately. In addition to the internal auditing system, which regularly audits business conduct and reports the results to Directors, a Global Audit Division was established in May 2005 in accordance with Section 304 of the Sarbanes-Oxley Act of 2002.

 

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NYSE 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.

 

Corporate Governance

Practices Followed

          by NYSE-listed U.S. Companies          


       

Corporate Governance

Practices Followed

by Kyocera Corporation


1. A NYSE-listed U.S. company must have a majority of directors meeting the independence requirements under Section 303A of the NYSE Listed Company Manual.        

For large Japanese companies, including Kyocera Corporation, which employ a corporate governance system based on a board of corporate auditors, Japan’s company law has no independence requirement with respect to directors. The task of overseeing management and independent auditors is assigned to the corporate auditors, who are separate from Kyocera Corporation’s management.

 

Large Japanese companies, including Kyocera Corporation, are required to have at least one “outside” corporate auditor who must meet additional independence requirements under Japan’s company law. An “outside” corporate auditor means a corporate auditor who has not served as a director, manager or any other employee of Kyocera Corporation or any of its sub-sidiaries for the five years prior to the appointment.

 

As of the date of this Annual Report, Kyocera Corporation has five corporate auditors, of whom three are outside corporate auditors.

 

2. A NYSE-listed U.S. company must have an audit committee composed entirely of independent directors, and the audit committee must have at least three members.        

Like a majority of Japanese companies, Kyocera Corporation employs a board of corporate auditors as described above. Under this system, the board of corporate auditors is a legally separate and independent body from the board of directors. The function of the board of corporate auditors is similar to that of members of the audit committee of a U.S. company: to monitor the performance of the directors, and review and express opinions on the method of auditing by Kyocera Corporation’s independent auditors and on such independent auditors’ audit reports, for the protection of Kyocera Corporation’s shareholders.

 

Large Japanese companies, including Kyocera Corporation, are required to have at least three corporate auditors. Currently, Kyocera Corporation has five corporate auditors. Each corporate auditor serves a four-year term of office. In contrast, the term of office of each director of Kyocera Corporation is two years.

 

With respect to the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees, Kyocera Corporation relies on an exemption under that rule which is available to foreign private issuers with boards of corporate auditors meeting certain requirements.

 

3. A NYSE-listed U.S. company must have a nominating/corporate governance committee composed entirely of independent directors.        

Kyocera Corporation’s directors are elected at a general meeting of shareholders. Its board of directors does not have the power to fill vacancies thereon. Kyocera Corporation’s corporate auditors are also elected at a general meeting of shareholders. A proposal by Kyocera Corporation’s board of directors to elect a corporate auditor must be approved by a resolution of its board of corporate auditors. The board of corporate auditors is empowered to adopt a resolution requesting that Kyocera Corporation’s directors submit a proposal for election of a corporate auditor to a general meeting of shareholders. The corporate auditors have the right to state their opinions concerning election of a corporate auditor at the general meeting of shareholders.

 

4. A NYSE-listed U.S. company must have a compensation committee composed entirely of independent directors.        

The total amount of compensation for Kyocera Corporation directors and the total amount of compensation for Kyocera Corporation corporate auditors are proposed to, and voted upon by, a general meeting of shareholders. Once the proposals for each of such total amounts of compensation are approved at the general meeting of shareholders, each of the board of directors and board of corporate auditors allocate the respective total amounts among their respective members.

 

5. A NYSE-listed U.S. company must generally obtain shareholder approval with respect to any equity compensation plan.        

Japanese companies, including Kyocera Corporation, generally issue “stock acquisition rights” (granting the holder thereof the right to acquire from the issuer shares of its common stock at a prescribed price) for stock option purposes. Typically, when stock acquisition rights are used for such purposes, they are issued under terms and conditions which are especially favorable to the recipients thereof, and because of that, such issuance is subject to approval at a general meeting of shareholders under Japan’s company law. Kyocera Corporation obtains approval at a general meeting of shareholders with respect to its issuance of stock acquisition rights for stock option purposes.

 

 

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Corporate Social Responsibility (CSR)

 

Corporate Social Responsibility (CSR)

 

Since Kyocera’s founding, its management rationale has been “to provide opportunities for the material and intellectual growth of all our employees, and through our joint effort, contribute to the advancement of society and humankind.” The Kyocera Philosophy, on which management practices are based, upholds “doing what is right as a human being” as the principal criterion for making business decisions. The essence of Kyocera has thus always been a matter of working hard for the ultimate good of society and mankind, based on fundamental ethical and moral values—values that derive their power to motivate from the best aspects of the human character: justice, equality, integrity, industry, courage, philanthropy, humility and loyalty. Hence, for Kyocera, CSR does not represent any new concept or value system, but is rather a question of putting the Kyocera Philosophy into action. Kyocera’s firm conviction is that implementing this philosophy helps to build mutual trust with customers, stockholders, suppliers, local communities and other stakeholders, and contributes to the sustainable long-term development of both Kyocera and society in general.

 

Kyocera CSR Activities

 

CSR Policies

 

Kyocera CSR activities focus on four areas:

 

  “Amoeba management” system

 

  Corporate governance

 

  Social contributions

 

  Stakeholder communications

 

CSR Promotional Framework

 

In November 2005, Kyocera established a CSR Committee and Corporate CSR Division to oversee and promote CSR activities across the Kyocera Group. The CSR Committee discusses, formulates and implements CSR-related company policy on a global basis while promoting CSR activities within Kyocera. The Corporate CSR Division is responsible for developing specific Group-wide activities based on the policies and related matters determined by the CSR Committee.

 

Major Social Contribution Activities

 

Kyocera is committed to creating useful products that contribute to human progress in economic and social terms. As a responsible corporate citizen, Kyocera maintains an active concern for issues that affect local communities and society as a whole. Besides working to address these specific issues, Kyocera strives to utilize its position as a major corporation to contribute both economically and culturally to society through sponsorship and other activities.

 

— Sustainability Presentations

 

Kyocera production sites conduct regular sustainability presentations as part of their efforts to improve communications with local communities. Site managers invite local residents, government officials and supplier representatives to attend these presentations on the economic, social and environmental activities of Kyocera. These occasions also provide opportunities for factory tours and discussions of related issues.

 

Major Environmental Preservation Activities

 

Environmental issues threaten to imperil the very survival of humanity. In recognition of this, Kyocera is actively working to develop eco-friendly products while promoting environmental preservation activities such as recycling and reducing greenhouse gas emissions and industrial wastes. Ensuring that emitted substances are as biodegradable as possible is one of Kyocera’s basic environmental guidelines.

 

— Product Eco-Assessment System

 

April 2006 saw the commencement of Kyocera’s Environment-Consciousness Evaluation System to promote the development of eco-friendly products. Under this system, all our business and development divisions evaluate the eco-consciousness of their products and technologies at each development stage. This process involves quantitative assessments of the resources and energies consumed over the course of a product’s life cycle, along with estimates of the environmental impact of any related emissions. A product that meets eco-conscious criteria is given an eco-label designating it as a “Kyocera Global Eco-Friendly Product.” Through this initiative, Kyocera aims to fulfill its social responsibility as a manufacturer to promote the development of eco-friendly parts and finished products from the design stage onward.

 

For further details of CSR activities, please refer to the Kyocera Sustainability Report, which is accessible online at Kyocera’s web site.

 

In English:

 

http://global.kyocera.com/ecology/2006.html

 

In Japanese:

 

http://www.kyocera.co.jp/ecology/2006.html

 

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Table of Contents

Financial section

 

Contents

 

20    Operating and Financial Review and Prospects
37    Selected Financial Data
37    Market Price and Dividend Data
38    Consolidated Balance Sheets
40    Consolidated Statements of Income
41    Consolidated Statements of Stockholders’ Equity
42    Consolidated Statements of Cash Flows
43    Notes to The Consolidated Financial Statements
73    Report of Independent Registered Public Accounting Firm

 

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Table of Contents

Financial Section

 

Operating and Financial Review and Prospects

 

Kyocera Corporation and Consolidated Subsidiaries

 


 

Presentation of Certain information in Financial Section of Annual Report 2006

 

  References to “Kyocera,” are to Kyocera Corporation and, except as the context otherwise requires, its consolidated subsidiaries.

 

  “Fiscal 2006” refers to Kyocera’s fiscal year ended March 31, 2006, and other fiscal years are referred to in a corresponding manner.

 

  Unless otherwise indicated, the yen amounts for the year ended March 31, 2006 and as of March 31, 2006 are translated into the U.S. dollars solely for readers’ convenience at the rate of ¥117.00 = $1.00, the approximate prevailing rate at March 31, 2006. These translations do not imply that the yen amounts actually represent, or have been or could be converted into, equivalent amounts in the U.S. dollars.

 


 

Operating Results

 

Overview

 

Kyocera develops, produces and distributes various kinds of products globally for the telecommunications and information processing and environmental protection markets. Kyocera Corporation was established in 1959 as a manufacturer of ceramic parts for electronic equipment and has been expanding and diversifying its business mainly through active merger and acquisition activities, as well as 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. Kyocera earns revenue and income and generates cash from sales of these products.

 

Kyocera divides its worldwide operations into eight reporting segments for its financial reporting purposes: the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group, the Electronic Device Group, the Telecommunications Equipment Group, the Information Equipment Group, the Optical Equipment Group and Others. Kyocera categorizes the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group and the Electronic Device Group into one main business referred to “the components business,” and also categorizes the Telecommunications Equipment Group, the Information Equipment Group and the Optical Equipment Group into another main business referred to “the equipment business.”

 

Kyocera’s revenue and profits mostly come through sales of products and providing services in the telecommunications and information processing markets. In the first quarter of fiscal 2006, the business environment was severe in the electronics industry, which is a key market for Kyocera, as recovery in demand was moderate while components prices declined significantly. Nonetheless, the business environment made an about-turn last summer. Not only has production of core digital consumer products such as mobile phone handsets, PCs and digital home appliances expanded remarkably, but demand for related electronic components also maintained an upward trend until the end of the fourth quarter of fiscal 2006.

 

In this market condition, consolidated net sales remained roughly the same as in fiscal 2005, while profits increased due to a substantial improvement in the equipment business as a result of the positive effects of structural reforms.

 

Results of Operations

 

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

 

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

 
     Years ended March 31,

   

Increase

(Decrease)


 
     2005

    2006

   
     Amount

    %

    Amount

    %

    %

 

Net sales

   ¥ 1,180,655     100.0     ¥ 1,181,489     $ 10,098,197     100.0     0.1  

Cost of sales

     855,067     72.4       838,295       7,164,915     71.0     (2.0 )
    


 

 


 


 

 

Gross profit

     325,588     27.6       343,194       2,933,282     29.0     5.4  

Selling, general and administrative expenses

     224,620     19.0       239,987       2,051,171     20.3     6.8  
    


 

 


 


 

 

Profit from operations

     100,968     8.6       103,207       882,111     8.7     2.2  

Interest and dividend income

     6,396     0.5       8,968       76,650     0.8     40.2  

Interest expense

     (1,275 )   (0.1 )     (1,301 )     (11,120 )   (0.1 )   —    

Foreign currency transaction gains (losses), net

     2,618     0.2       (316 )     (2,701 )   (0.0 )   —    

Equity in losses of affiliates and unconsolidated subsidiaries

     (1,678 )   (0.1 )     (1,216 )     (10,393 )   (0.1 )   —    

Loss on impairment of investment in an affiliate

     —       —         (3,492 )     (29,846 )   (0.3 )   —    

Gain on sale of investment in an affiliate

     —       —         6,931       59,239     0.6     —    

Gains on exchange for the shares

     —       —         5,294       45,248     0.4     —    

Other, net

     501     0.0       3,313       28,316     0.3     561.3  
    


 

 


 


 

 

       6,562     0.5       18,181       155,393     1.6     177.1  
    


 

 


 


 

 

Income before income taxes and minority interests

     107,530     9.1       121,388       1,037,504     10.3     12.9  

Income taxes

     58,480     4.9       47,303       404,299     4.0     (19.1 )
    


 

 


 


 

 

Income before minority interests

     49,050     4.2       74,085       633,205     6.3     51.0  

Minority interests

     (3,142 )   (0.3 )     (4,389 )     (37,513 )   (0.4 )   —    
    


 

 


 


 

 

Net income

   ¥ 45,908     3.9     ¥ 69,696     $ 595,692     5.9     51.8  
    


 

 


 


 

 

 

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Table of Contents

Net sales

 

Consolidated net sales for fiscal 2006 increased by ¥834 million ($7 million), or 0.1%, to ¥1,181,489 million ($10,098 million) compared with ¥1,180,655 million in fiscal 2005.

 

In the component business, demand for electronic equipment only showed a slight recovery in the first quarter of fiscal 2006, and performance was affected negatively by a considerable decline in component prices. In the equipment business, structural reforms of the mobile phone handset business at Kyocera Wireless Corp. (KWC), a U.S. subsidiary, were conducted in the first half of fiscal 2006. At the same time, the camera business of the Optical Equipment Group was considerably reduced. As a result, consolidated net sales in the first half amounted to ¥545,258 million ($4,660 million).

 

On the other hand, production activities for core digital consumer equipment such as mobile phone handsets, PCs and digital home appliances expanded markedly from last summer. Furthermore, demand for electronic components remained high into the fourth quarter. In addition, the introduction of new mobile phone handsets and PHS-related products coupled with aggressive efforts in expanding sales of printers and digital-multifunction products led to a substantial increase in sales in the equipment business in the second half. Consequently, consolidated net sales for the second half were ¥636,231 million ($5,438 million), which showed a significant increase of ¥90,973 million ($778 million), or 16.7%, compared with the first half.

 

Consolidated net sales in the components business in fiscal 2006 increased by ¥23,272 million ($199 million), or 4.2%, compared with fiscal 2005. In particular, sales in the Applied Ceramic Products Group were strong throughout the year, notably solar energy products and cutting tools. Sales in the Applied Ceramic Products Group resulted in an increase of ¥23,676 million ($202 million), or 25.2%, compared with fiscal 2005.

 

Consolidated net sales in the equipment business decreased by ¥34,476 million ($295 million), or 6.5%, compared with fiscal 2005. Sales in the Telecommunications Equipment Group and the Optical Equipment Group declined by ¥21,883 million ($187 million) and ¥20,829 million ($178 million), or 8.7% and 58.2%, respectively, compared with fiscal 2005, due to continued structural reforms.

 

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

 

Net sales by reporting segment

 

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

 

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

 
     Years ended March 31,

   

Increase

(Decrease)


 
     2005

    2006

   
     Amount

    %

    Amount

    %

    %

 

Fine Ceramic Parts Group

   ¥ 73,711     6.2     ¥ 69,373     $ 592,932     5.9     (5.9 )

Semiconductor Parts Group

     127,960     10.8       135,299       1,156,402     11.4     5.7  

Applied Ceramic Products Group

     93,879     8.0       117,555       1,004,744     9.9     25.2  

Electronic Device Group

     262,997     22.3       259,592       2,218,735     22.0     (1.3 )

Telecommunications Equipment Group

     250,918     21.3       229,035       1,957,564     19.4     (8.7 )

Information Equipment Group

     241,145     20.4       249,381       2,131,461     21.1     3.4  

Optical Equipment Group

     35,776     3.0       14,947       127,752     1.3     (58.2 )

Others

     118,040     10.0       124,974       1,068,154     10.6     5.9  

Adjustments and eliminations

     (23,771 )   (2.0 )     (18,667 )     (159,547 )   (1.6 )   —    
    


 

 


 


 

 

     ¥ 1,180,655     100.0     ¥ 1,181,489     $ 10,098,197     100.0     0.1  
    


 

 


 


 

 

 

(1) Fine Ceramic Parts Group

 

Sales in this segment in fiscal 2006 decreased by ¥4,338 million ($37 million), or 5.9%, to ¥69,373 million ($593 million) compared with ¥73,711 million in fiscal 2005. This decrease was due to less demand for ceramic parts used in semiconductor fabrication equipment than in fiscal 2005, and to decreased sales of sapphire products for LCD projectors resulting from intensified market competition with other substitute materials.

 

(2) Semiconductor Parts Group

 

Sales in this segment increased by ¥7,339 million ($63 million), or 5.7%, to ¥135,299 million ($1,156 million) compared with ¥127,960 million in fiscal 2005. Demand for ceramic packages for digital consumer products such as mobile phone handsets and digital cameras recovered in the second half. Furthermore, sales of organic packages for servers and digital consumer products increased. Approximately 85% of sales in this segment were sales of ceramic packages.

 

(3) Applied Ceramic Products Group

 

Sales in this segment increased by ¥23,676 million ($202 million), or 25.2%, to ¥117,555 million ($1,005 million) compared with ¥93,879 million in fiscal 2005. This increase was due to strong sales growth recorded in the solar energy business amid an expanding global market spurred by rising environmental awareness. Sales of cutting tools also grew due to healthy production activity in the automobile industry.

 

(4) Electronic Device Group

 

Sales in this segment decreased by ¥3,405 million ($29 million), or 1.3%, to ¥259,592 million ($2,219 million) compared with ¥262,997 million in fiscal 2005. Components demand for digital consumer products such as mobile phone handsets started to recover last summer. However, this was insufficient to compensate for a decline in sales in the first half of fiscal 2006, mainly due to slow sales of thin-film devices resulting from decreased demand for LCDs for mobile phone handsets and crystal related components for digital still cameras and mobile phone handsets. However sales at AVX Corporation, a key subsidiary in this segment, grew steadily, especially in the digital consumer equipment and telecommunications equipment markets.

 

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Table of Contents

(5) Telecommunications Equipment Group

 

Sales in this segment decreased by ¥21,883 million ($187 million), or 8.7%, to ¥229,035 million ($1,958 million) compared with ¥250,918 million in fiscal 2005. Although domestic sales of new mobile phone handsets and PHS handsets were strong, overseas sales of mobile phone handsets decreased as KWC was in the process of executing structural reforms in the first half of fiscal 2006. Slow overseas sales of PHS-related products also contributed to the decrease.

 

(6) Information Equipment Group

 

Sales in this segment increased by ¥8,236 million ($70 million), or 3.4%, to ¥249,381 million ($2,131 million) compared with ¥241,145 million in fiscal 2005. This increase reflected the introduction of new printers and digital multifunction products and encouraged sales activities, which contributed to higher sales volume.

 

(7) Optical Equipment Group

 

Sales in this segment decreased by ¥20,829 million ($178 million), or 58.2%, to ¥14,947 million ($128 million) compared with ¥35,776 million in fiscal 2005. The main reason for the considerable decrease was the withdrawal from the digital still camera business as a result of the structural reform of Kyocera’s camera business in fiscal 2005.

 

(8) Others

 

Sales in this segment increased by ¥6,934 million ($59 million), or 5.9%, to ¥124,974 million ($1,068 million) compared with ¥118,040 million in fiscal 2005. The increase was due in part to strong sales recorded in the telecommunications engineering business of Kyocera Communication Systems Co., Ltd. Sales at a subsidiary of Kyocera Communication Systems Co., Ltd., which was newly consolidated in fiscal 2005 also contributed to the overall increase in sales. However, sales of Kyocera Chemical Corporation decreased compared with fiscal 2005 due to slow sales of molding products and flexible print boards.

 

Net sales by geographic segment

 

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

 

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

 
     Years ended March 31,

  

Increase

(Decrease)


 
     2005

   2006

  
     Amount

   %

   Amount

   %

   %

 

Japan

   ¥ 472,417    40.0    ¥ 474,980    $ 4,059,658    40.2    0.5  

United States of America

     248,333    21.0      253,696      2,168,342    21.5    2.2  

Asia

     203,848    17.3      198,731      1,698,556    16.8    (2.5 )

Europe

     175,850    14.9      184,351      1,575,650    15.6    4.8  

Others

     80,207    6.8      69,731      595,991    5.9    (13.1 )
    

  
  

  

  
  

     ¥ 1,180,655    100.0    ¥ 1,181,489    $ 10,098,197    100.0    0.1  
    

  
  

  

  
  

 

Sales in Japan, which comprised 40.2% of consolidated net sales, increased by ¥2,563 million ($22 million), or 0.5%, to ¥474,980 million ($4,060 million) compared with ¥472,417 million in fiscal 2005 due to sales growth in solar energy products, mobile phone handsets and PHS-related products. Overseas sales, which comprised 59.8% of consolidated net sales, decreased by ¥1,729 million ($15 million), or 0.2%, to ¥706,509 million ($6,039 million) compared with ¥708,238 million in fiscal 2005 due primarily to decreased sales in the Telecommunications Equipment Group.

 

Since almost all overseas sales were denominated in the U.S. dollars or Euro, the depreciation of the yen against these currencies during fiscal 2006 increased consolidated net sales by approximately ¥32.2 billion ($275 million) compared with fiscal 2005 after translation into the yen.

 

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

 

Sales in the United States increased by ¥5,363 million ($46 million), or 2.2%, to ¥253,696 million ($2,168 million) compared with ¥248,333 million in fiscal 2005. Although sales in the Telecommunications Equipment Group in the United States declined due to continued structural reforms at KWC, sales in the Electronic Device Group, the solar energy business and the Information Equipment Group increased. Sales in Asia decreased by ¥5,117 million ($44 million), or 2.5%, to ¥198,731 million ($1,699 million) compared with ¥203,848 million in fiscal 2005. Although sales in solar energy business and cutting tools business in the Applied Ceramic Products Group and sales in the Electronic Group grew, sales in the Telecommunications Equipment Group, especially mobile phone handsets, decreased. Sales in Europe increased by ¥8,501 million ($73 million), or 4.8%, to ¥184,351 million ($1,576 million) compared with ¥175,850 million in fiscal 2005 due mainly to growth in the solar energy business amid continued market expansion. Sales in Others decreased by ¥10,476 million ($90 million), or 13.1%, to ¥69,731 million ($596 million) compared with ¥80,207 million in fiscal 2005 due to decreased sales of the Telecommunications Equipment Group in Latin America, particularly mobile phone handsets.

 

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Cost of sales and gross profit

 

In fiscal 2006, cost of sales decreased by ¥16,772 million ($143 million), or 2.0%, to ¥838,295 million ($7,165 million) from ¥855,067 million in fiscal 2005. Raw material costs of ¥345,309 million ($2,951 million) accounted for 41.2%, and labor costs of ¥156,363 million ($1,336 million) accounted for 18.7% of this total. The ratio of cost of sales to net sales was 71.0%, a decrease of 1.4 points compared with 72.4% in fiscal 2005. In fiscal 2005, Kyocera recorded ¥5,421 million of one time expenses in line with structural reforms in the Telecommunications Equipment Group and the Optical Equipment Group. Cost of sales in fiscal 2006 decreased due mainly to outsourcing the manufacture of mobile phone handsets of KWC to Flextronics International Ltd., a leading provider of electronics manufacturing services, in the Telecommunications Equipment Group and to significantly downsizing of the camera business in the Optical Equipment Group.

 

As a result, gross profit increased by ¥17,606 million ($150 million), or 5.4%, in fiscal 2006 to ¥343,194 million ($2,933 million) from ¥325,588 million in fiscal 2005. The gross profit ratio increased by 1.4 points from 27.6% to 29.0%.

 

SG&A expenses and profit from operations

 

Selling, general and administrative (SG&A) expenses in fiscal 2006 increased by ¥15,367 million ($131 million), or 6.8%, to ¥239,987 million ($2,051 million) compared with ¥224,620 million in fiscal 2005. Labor cost was ¥115,370 million ($986 million), or 48.1% of total SG&A expenses, and sales promotion and advertising cost was ¥38,274 million ($327 million), or 15.9% of total SG&A expenses. The proportion of SG&A expenses to net sales rose by 1.3 points to 20.3% in fiscal 2006 compared with 19.0% in fiscal 2005. The increase in SG&A expenses in fiscal 2006 reflected an increase in costs associated with aggressive R&D activities for new businesses and new products. As a result, profit from operations increased by ¥2,239 million ($19 million), or 2.2%, to ¥103,207 million ($882 million) compared with ¥100,968 million in fiscal 2005. The operating margin rose by 0.1 point to 8.7% in fiscal 2006 compared with 8.6% in fiscal 2005.

 

Interest and dividend income

 

Interest and dividend income in fiscal 2006 increased by ¥2,572 million ($22 million), or 40.2%, to ¥8,968 million ($77 million) compared with ¥6,396 million in fiscal 2005. This was mainly due to an increase in dividend income from KDDI Corporation (KDDI) and favorable fund management results at AVX Corporation. Kyocera has an investment policy aimed at low risk, stability and liquidity, and does not typically invest in high-risk financial instruments only for pursuing profits.

 

Interest expense

 

Interest expense in fiscal 2006 increased by ¥26 million ($0 million), or 2.0%, to ¥1,301 million ($11 million) compared with ¥1,275 million in fiscal 2005. Though interest rates in the Japanese financial market were on a slight upward trend, there was not material impact on interest expense.

 

Foreign currency translation

 

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

 

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

 

Gains and losses from investments

 

In fiscal 2006, Kyocera’s earnings or losses on equity-method investments resulted in losses of ¥1,216 million ($10 million), a decrease of ¥462 million ($4 million) compared with losses of ¥1,678 million in fiscal 2005.

 

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

 

Kyocera Corporation owned a 36.02% interest in Taito Corporation, a major affiliate which operates in the electric amusement business and accounted for by the equity method. On September 28, 2005, Kyocera Corporation sold its entire holding of shares of Taito Corporation in a tender offer bid for the shares of Taito Corporation by Square Enix Co., Ltd., one of the leading companies in the game software industry. As a result of this sale of the shares of Taito Corporation, Kyocera Corporation recorded a gain on sales of investment in an affiliate of ¥6,931 million ($59 million).

 

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

 

Following the merger of Mitsubishi Tokyo Financial Group, Inc. and UFJ Holdings, Inc., on October 1, 2005, Kyocera’s shares of UFJ Holdings, Inc. were exchanged for the shares of the new company, Mitsubishi UFJ Financial Group, Inc. As a result of this share exchange, Kyocera recorded a gain of ¥5,281 million ($45 million) in the third quarter of fiscal 2006.

 

Income before income taxes

 

The Applied Ceramic Products Group, especially the solar energy business, recorded higher sales, although sales in the Electronics Device Group significantly declined in the first half. As a result, operating profit in the components business decreased compared with fiscal 2005. In contrast, operating profit in the equipment business increased compared with fiscal 2005. The increase in operating profit reflected benefits of structural reforms in the Optical Equipment Group and the Telecommunication Equipment Group in fiscal 2005. Consequently, income before income taxes increased by ¥13,858 million ($118 million), or 12.9%, to ¥121,388 million ($1,038 million) compared with ¥107,530 million in fiscal 2005.

 

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Operating profit by reporting segment

 

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

 

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

 
     Years ended March 31,

   

Increase

(Decrease)


 
     2005

    2006

   
     Amount

    Amount

    %

 

Fine Ceramic Parts Group

   ¥ 11,535     ¥ 11,014     $ 94,137     (4.5 )

Semiconductor Parts Group

     17,550       17,742       151,641     1.1  

Applied Ceramic Products Group

     17,129       21,876       186,974     27.7  

Electronic Device Group

     35,406       27,170       232,222     (23.3 )

Telecommunications Equipment Group

     (14,918 )     (1,706 )     (14,581 )   —    

Information Equipment Group

     36,186       26,412       225,744     (27.0 )

Optical Equipment Group

     (15,387 )     (5,774 )     (49,350 )   —    

Others

     13,019       12,560       107,350     (3.5 )
    


 


 


 

       100,520       109,294       934,137     8.7  

Corporate

     8,683       13,358       114,171     53.8  

Equity in losses of affiliates and unconsolidated subsidiaries

     (1,678 )     (1,216 )     (10,393 )   —    

Adjustments and eliminations

     5       (48 )     (411 )   —    
    


 


 


 

Income before income taxes

   ¥ 107,530     ¥ 121,388     $ 1,037,504     12.9  
    


 


 


 

 

(1) Fine Ceramic Parts Group

 

Operating profit in this segment decreased by ¥521 million ($4 million), or 4.5%, to ¥11,014 million ($94 million) compared with ¥11,535 million in fiscal 2005. This was primarily due to the decrease in sales of parts for semiconductor fabrication equipment and sapphire products for LCD projectors, the core products in this segment.

 

(2) Semiconductor Parts Group

 

Operating profit in this segment increased by ¥192 million ($2 million), or 1.1%, to ¥17,742 million ($152 million) compared with ¥17,550 million in fiscal 2005. Operating profit was impacted by an increase in depreciation costs combined with capital expenditures of ¥24,136 million ($206 million) geared towards business expansion, including the construction of a new factory for organic packages. Profit from increased sales of ceramic packages, however, led to a slight increase in overall operating profit in this segment.

 

(3) Applied Ceramic Products Group

 

Operating profit in this segment increased by ¥4,747 million ($41 million), or 27.7%, to ¥21,876 million ($187 million) compared with ¥17,129 million in fiscal 2005. Increased sales and enhanced productivity of solar energy business and cutting tools business, core areas in this segment, led to an increase in operating profit. In particular, effective utilization of four production bases located globally enhanced productivity and led to a significant increase in profit in the solar energy business, despite a trend of increases in raw material costs.

 

(4) Electronic Device Group

 

Operating profit in this segment decreased by ¥8,236 million ($70 million), or 23.3%, to ¥27,170 million ($232 million) compared with ¥35,406 million in fiscal 2005. Component demand for digital consumer products began to recover last summer, which contributed to a marked improvement in operating profit in the second half. Nonetheless, a decline in demand for thin-film devices combined with stagnant demand and declining unit prices, especially in components for mobile phones in the first half which contributed to the decrease in operating profit.

 

(5) Telecommunications Equipment Group

 

Operating loss in this segment improved significantly by ¥13,212 million ($113 million) to ¥1,706 million ($15 million) compared with ¥14,918 million in fiscal 2005. Despite a one time expense of approximately ¥3.1 billion ($26 million) in line with structural reforms at KWC that included the transfer of mobile phone manufacturing operations to Flextronics International Ltd., operating profit from mobile phone handsets and PHS handsets in the domestic market increased.

 

(6) Information Equipment Group

 

Operating profit in this segment decreased by ¥9,774 million ($84 million), or 27.0%, to ¥26,412 million ($226 million) compared with ¥36,186 million in fiscal 2005. This was due mainly to a decline in product prices amid intensified global market competition and increased development costs for color printers and digital multifunction products equipped with solutions for business expansion. R&D expenses in this segment increased by ¥3,146 million ($27 million) compared with fiscal 2005.

 

(7) Optical Equipment Group

 

Operating loss in this segment improved by ¥9,613 million ($82 million) to ¥5,774 million ($49 million) compared with ¥15,387 million in fiscal 2005. The downsizing of the camera business, which included the withdrawal of the digital camera business, led to the reduction in operating loss.

 

(8) Others

 

Operating profit in this segment decreased by ¥459 million ($4 million), or 3.5%, to ¥12,560 million ($107 million) compared with ¥13,019 million in fiscal 2005. This was due mainly to a decline in sales of Kyocera Chemical Corporation.

 

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Table of Contents

Corporate

 

Corporate income and losses constitute income and expenses related to the provision of management-related services by Kyocera’s head office to each reporting segment, together with any profit-and-loss items that management judges not to belong within the above reporting segments, such as gains or losses on valuation of investment securities. Corporate income increased by ¥4,675 million ($40 million), or 53.8%, to ¥13,358 million ($114 million) compared with ¥8,683 million in fiscal 2005. Interest and dividends were the main contributors. In addition, income in fiscal 2006 included a gain of ¥6,931 million ($59 million) through the sale of all of Kyocera’s shares of Taito Corporation, a gain of ¥5,281 million ($45 million) on shares of UFJ Holdings, Inc. in connection with the exchange of shares for the shares of Mitsubishi UFJ Financial Group, Inc., and a loss of ¥3,492 million ($30 million) on impairment of the investment in Triumph-Adler AG Group, an affiliate of Kyocera Mita Corporation. As a result, corporate gain increased compared with fiscal 2005.

 

Taxes

 

Current and deferred income taxes in fiscal 2006 decreased by ¥11,177 million ($96 million), or 19.1%, to ¥47,303 million ($404 million) compared with ¥58,480 million in fiscal 2005. The effective tax rate of 39.0% in fiscal 2006 was 15.4 points lower than 54.4% in fiscal 2005. The amount of income taxes in fiscal 2005 included the additional income taxes of ¥12,748 million by receiving a notice of tax assessment based on transfer pricing adjustments from the Osaka Regional Tax Bureau stating that, in the Bureau’s judgment, allocation of profit earned from transfers of products between Kyocera Corporation and its overseas subsidiaries was not appropriate from fiscal 1999 to fiscal 2003.

 

Minority interests

 

Kyocera’s minority interests are principally related to AVX Corporation, which accounted for approximately 30% of all minority ownership interests. Minority interests increased by ¥1,247 million ($11 million) to ¥4,389 million ($38 million) in fiscal 2006 compared with ¥3,142 million in fiscal 2005. This was mainly due to a large increase in net income at AVX Corporation.

 

Structural reforms

 

In fiscal 2005, Kyocera recorded ¥7,369 million of one time expenses in line with structural reforms in the Optical Equipment Group and the Telecommunications Equipment Group. In fiscal 2005, structural reform in the Optical Equipment Group was focused on downsizing the camera business. As a result, costs associated with the closure of overseas sales companies amounted to ¥3,285 million, including expenses mainly related to headcount reductions. In addition, Kyocera recorded ¥3,581 million of one time costs in the domestic camera business, including expenses mainly related to the implementation of sales promotions to reduce inventory.

 

In the Telecommunications Equipment Group, Kyocera transferred production location of KWC to Mexico in fiscal 2005. The purpose of this move is to reduce costs in response to cost competition from rival companies. As a result, Kyocera recorded ¥503 million as headcount reduction costs related to the transfer of production. In order to further lower costs, Kyocera transferred KWC’s mobile phone manufacturing operations to Flextronics International Ltd. in fiscal 2006.

 

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

 

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

 

 

Liquidity and Capital Resources

 

Capital resources

 

In the short term, Kyocera expects cash demands for working capital and funds for capital expenditures required for the expansion of operations, purchases of Kyocera Corporation’s common stock, and payments of dividends to stockholders. Kyocera’s primary source of short-term liquidity is cash generated by operations. Certain subsidiaries also generate capital in the form of loans from financial institutions. At March 31, 2006, Kyocera’s short-term borrowings and long-term debt including current portion totaled ¥140,572 million ($1,201 million). The ratio to total assets of 7.3% still reflected a low level of dependence. Most borrowings were denominated in the yen but certain borrowings were denominated in foreign currencies, such as the U.S. dollar. And there is no material seasonality in Kyocera’s borrowing requirement. Details of these borrowings are described in “Tabular Disclosure of Contractual obligations,” which also includes the information regarding obligations for the acquisition or construction of property, plant and equipment.

 

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Table of Contents

Capital expenditures in fiscal 2006 increased by ¥27,095 million ($232 million), or 42.9%, to ¥90,271 million ($772 million) from ¥63,176 million in fiscal 2005. In fiscal 2006, capital expenditures for business expansion increased significantly, especially in the solar energy business and organic package business, compared with fiscal 2005. R&D expenditures increased by ¥3,038 million ($26 million), or 5.6%, to ¥57,436 million ($491 million) from ¥54,398 million in fiscal 2005. Nearly all capital and R&D expenditures were funded using cash in hand or cash generated by operations.

 

During fiscal 2007, Kyocera expects total capital expenditures to be approximately ¥72,000 million ($615 million), and total R&D expenditures to be approximately ¥63,000 million ($538 million). Kyocera believes that Kyocera needs to invest its resources continuously in the development of new business areas and improved technology in order to create new products, commercialize advanced technologies and thereby secure future earnings streams.

 

At March 31, 2006, Kyocera’s working capital totaled ¥542,045 million ($4,633 million), a decrease of ¥9,173 million ($78 million), or 1.7%, from ¥551,218 million at March 31, 2005. This was due to the effect of a decrease in inventories, mainly in the Telecommunications Equipment Group and the Information Equipment Group, and an increase in notes and accounts payable which exceeded the effect of an increase in short-term investments including negotiable certificate of deposits. Kyocera plans to continue to improve capital efficiency by shortening manufacturing lead-time and reducing inventory level. Cash from operations has generally been sufficient for Kyocera to fund its working capital requirements and to fulfill its future capital expenditures, debt repayments and other obligations. Kyocera’s net cash provided by operating activities in fiscal 2006 was ¥171,077 million ($1,462 million) and cash and cash equivalents at March 31, 2006 were ¥300,809 million ($2,571 million). Kyocera believes that its working capital is sufficient for present and predictable future requirements.

 

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

 

In fiscal 2006, Kyocera Corporation paid cash dividends totaling ¥18,748 million ($160 million), at ¥100 ($0.9) per share. Kyocera Corporation received approval at the general meeting of shareholders held on June 23, 2006 for the payment of year-end dividends totaling ¥9,387 million ($80 million), at ¥50 ($0.4) per share, on June 26, 2006 to all stockholders of record on March 31, 2006.

 

Kyocera believes cash in hand and cash from operations will be sufficient to fund all cash requirements outlined above, at least through fiscal 2007. Consequently, Kyocera does not currently intend to use any other external financing sources that might affect its credit agency ratings. If cash generated by operations are insufficient for funding purposes, Kyocera retains other financing options, including external sources, such as short-term or long-term borrowings, as well as financing directly in the capital markets through issuances of debt or equity securities. As evidenced by an equity to assets ratio of 66.7% at March 31, 2006, 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.

 

Cash flows

 

The following table shows a summary of Kyocera’s cash flows for fiscal 2005 and fiscal 2006:

 

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

 
     Years ended March 31,

    Increase
(Decrease)


 
     2005

    2006

   
     Amount

    Amount

    %

 

Cash flows from operating activities

   ¥ 145,523     ¥ 171,077     $ 1,462,197     17.6  

Cash flows from investing activities

     (132,494 )     (165,467 )     (1,414,248 )   24.9  

Cash flows from financing activities

     (67,344 )     (23,289 )     (199,051 )   (65.4 )

Cash and cash equivalents at end of year

     310,592       300,809       2,571,017     (3.1 )

 

Net cash provided by operating activities in fiscal 2006 increased by ¥25,554 million ($218 million), or 17.6%, to ¥171,077 million ($1,462 million) from ¥145,523 million in fiscal 2005. This was due to an increase in net income by ¥23,788 million ($203 million), or 51.8%, to ¥69,696 million ($596 million) from ¥45,908 million in fiscal 2005, coupled with a decrease in inventory as a result of inventory normalization and an increase in notes and account payable in line with an increase in orders and production.

 

Net cash used in investing activities in fiscal 2006 increased by ¥32,973 million ($282 million), or 24.9%, to ¥165,467 million ($1,414 million) from net cash used in investing activities of ¥132,494 million in fiscal 2005. In fiscal 2006, proceeds from sales of Taito Corporation shares and a decrease in payment for purchase of investments and advances compared with fiscal 2005 provided cash inflow in investing activities. Nonetheless, payment for purchases of property, plant and equipment increased owing to aggressive capital expenditure, payment for purchase of securities increased in line with fund management, and deposits of negotiable certificates of deposits and time deposits increased compared with fiscal 2005. As a result, net cash used in investing activities in fiscal 2006 increased compared with fiscal 2005.

 

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Table of Contents

Net cash used in financing activities in fiscal 2006 decreased by ¥44,055 million ($377 million), or 65.4%, to ¥23,289 million ($199 million) from ¥67,344 million in fiscal 2005. Although dividend payments increased in fiscal 2006 compared with fiscal 2005, an increase in short-term debt caused net cash used in financing activities to decrease compared with fiscal 2005.

 

The yen’s depreciation against the U.S. dollar and Euro between March 31, 2005 and 2006 resulted in an increase in cash and cash equivalents of ¥7,896 million ($67 million).

 

At March 31, 2006, cash and cash equivalents totaled ¥300,809 million ($2,571 million). This represented a decrease of ¥9,783 million ($84 million), or 3.1%, from ¥310,592 million at March 31, 2005. Most of Kyocera’s cash and cash equivalents were denominated in the yen but certain cash and cash equivalents, mainly in overseas subsidiaries, were denominated in foreign currencies, such as the U.S. dollar.

 

Assets, liabilities and stockholders’ equity

 

Kyocera’s total assets at March 31, 2006 increased by ¥186,003 million ($1,590 million), or 10.7%, to ¥1,931,522 million ($16,509 million), compared with ¥1,745,519 million at March 31, 2005.

 

Cash and cash equivalents decreased by ¥9,783 million ($84 million), or 3.1%, to ¥300,809 million ($2,571 million). This was due mainly to the effect of purchases of government bonds and deposits with over 3 months original maturities aiming for higher interest from investments, exceeding cash gained by the sale of all of Kyocera’s shares of Taito Corporation.

 

Short-term investments increased by ¥53,004 million ($453 million), or 151.7%, to ¥87,942 million ($752 million), due mainly to increases in deposits with over 3 months original maturities and bonds maturing within one year, which were reclassified from securities and other investments.

 

Short-term and long-term finance receivables increased by ¥13,247 million ($113 million), or 12.4%, to ¥120,475 million ($1,030 million), due mainly to an increase of loan assets by Kyocera Leasing Co., Ltd. Short-term and long-term finance receivables also included finance lease receivables.

 

Inventories decreased by ¥22,847 million ($195 million), or 10.7%, to ¥190,564 million ($1,629 million). This was due mainly to a reduction of inventories in the Telecommunications Equipment Group in Kyocera Corporation and in Kyocera Mita Corporation, as well as sales of inventories following the outsourcing of the manufacture of mobile phone handsets of KWC.

 

Investments in and advances to affiliates and unconsolidated subsidiaries decreased by ¥23,268 million ($199 million), or 76.0%, to ¥7,355 million ($63 million), due mainly to the sale of all of Kyocera’s shares of Taito Corporation and loss on impairment of investment in Triumph-Adler AG Group, an affiliate of Kyocera Mita Corporation.

 

Securities and other investments increased by ¥122,940 million ($1,051 million), or 28.6%, to ¥553,377 million ($4,730 million), due mainly to an increase in market value at March 31, 2006 of KDDI stock and other equity securities compared with March 31, 2005, and purchases of government bonds.

 

Total property, plant and equipment at cost, net of accumulated depreciation, increased by ¥26,349 million ($225 million), or 10.2%, to ¥285,346 million ($2,439 million). In fiscal 2006, aggressive capital expenditures were executed in the solar energy business and organic package business. Capital expenditure in fiscal 2006 was ¥90,271 million ($772 million) and depreciation was ¥63,018 million ($539 million).

 

Intangible assets increased by ¥15,380 million ($131 million), or 97.1%, to ¥31,227 million ($267 million), due mainly to an increase of patent rights in the Telecommunications Equipment Group.

 

Kyocera’s total liabilities at March 31, 2006 increased by ¥67,317 million ($575 million), or 13.2%, to ¥577,503 million ($4,936 million), compared with ¥510,186 million at March 31, 2005.

 

Total debt, comprised of short-term borrowings and long-term debt including debt due within one year, decreased by ¥3,592 million ($31 million), or 2.5%, to ¥140,572 million ($1,201 million), as repayments of loans exceeded borrowings from banks.

 

Trade notes and accounts payable increased by ¥16,631 million ($142 million), or 19.1%, to ¥103,503 million ($885 million), due mainly to increases of purchases with strong demand for components.

 

Other notes and accounts payable increased by ¥17,307 million ($148 million), or 49.9%, to ¥51,997 million ($444 million), due mainly to an increase in purchases of government bonds and accounts payable related to patent right contracts.

 

Deferred income taxes increased by ¥29,341 million ($251 million), or 30.5%, to ¥125,686 million ($1,074 million), due mainly to an increase in market value at March 31, 2006 of KDDI stock and other equity securities compared with March 31, 2005.

 

Minority interests in subsidiaries, principally AVX Corporation, increased by ¥4,460 million ($38 million), or 7.4%, to ¥64,942 million ($555 million), compared with ¥60,482 million at March 31, 2005, due mainly to strong performance at AVX Corporation.

 

Total stockholders’ equity at March 31, 2006 increased by ¥114,226 million ($976 million), or 9.7%, to ¥1,289,077 million ($11,018 million), compared with ¥1,174,851 million at March 31, 2005.

 

Retained earnings at March 31, 2006 increased by ¥50,948 million ($435 million), or 5.6%, due to net income for fiscal 2006 of ¥69,696 million ($596 million) and cash dividend payments of ¥18,748 million ($160 million).

 

Accumulated other comprehensive income increased by ¥61,108 million ($522 million), or 516.2%, to ¥72,947 million ($623 million). Net unrealized gains on securities increased by ¥40,188 million ($343 million), or 94.6%, due mainly to an increase in market value at March 31, 2006 of KDDI stock and other equity securities compared with March 31, 2005. Foreign currency translation adjustments increased by ¥21,396 million ($183 million), or 73.9% due to the depreciation of the yen against the U.S.dollar and Euro.

 

The stockholders’ equity ratio at March 31, 2006 was 66.7%, a decrease of 0.6 points compared with 67.3% at March 31, 2005.

 

Significant customer

 

In fiscal 2006, Kyocera’s sales to KDDI amounted to ¥97,177 million ($831 million), or 8.2% of consolidated net sales.

 

KDDI provides telecommunication services, and Kyocera sells mainly telecommunication equipments to KDDI. Kyocera Corporation made an equity investment in KDDI when it was founded and currently, a director of Kyocera Corporation is a member of the board of directors of KDDI. At March 31, 2006, Kyocera Corporation’s equity interest in KDDI was 12.93%. 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.

 

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Tabular disclosure of contractual obligations

 

The following tables provide information about Kyocera’s contractual obligations and other commercial commitments that will affect Kyocera’s liquidity for the next several years, as of March 31, 2006. Kyocera anticipates that funds to be required to fulfill these debt obligations and commitments will be generated internally from operations:

 

     (Yen in millions)

Contractual obligations


   Less than
1 year


   2-3 years

   4-5 years

   Thereafter

   Total

Short-term borrowings *

   ¥ 90,865    ¥ —      ¥ —      ¥ —      ¥ 90,865

Interest payments for short-term borrowings *

     644      —        —        —        644

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

     16,347      25,617      4,824      2,919      49,707

Interest payments for long-term debt *

     377      361      133      102      973

Supply agreement material used in operation

     2,482      8,831      10,078      20,697      42,088

Operating Leases

     7,785      8,955      3,191      5,437      25,368

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

     13,236      —        —        —        13,236
    

  

  

  

  

Total Contractual Obligations

   ¥ 131,736    ¥ 43,764    ¥ 18,226    ¥ 29,155    ¥ 222,881
    

  

  

  

  

     (U.S. dollars in thousands)

Contractual obligations


   Less than
1 year


   2-3 years

   4-5 years

   Thereafter

   Total

Short-term borrowings *

   $ 776,624    $ —      $ —      $ —      $ 776,624

Interest payments for short-term borrowings *

     5,505      —        —        —        5,505

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

     139,718      218,948      41,231      24,949      424,846

Interest payments for long-term debt *

     3,222      3,085      1,137      872      8,316

Supply agreement material used in operation

     21,214      75,479      86,136      176,897      359,726

Operating Leases

     66,538      76,539      27,274      46,470      216,821

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

     113,128      —        —        —        113,128
    

  

  

  

  

Total Contractual Obligations

   $ 1,125,949    $ 374,051    $ 155,778    $ 249,188    $ 1,904,966
    

  

  

  

  

 

* At March 31, 2006, Kyocera’s contractual obligations were mainly comprised of short-term borrowings and long-term debt including those due within one year, which amounted to ¥90,865 million ($777 million) and ¥49,707 million ($425 million), respectively. Over 80% of those debts were attributable to Kyocera Mita Corporation and Kyocera Leasing Co., Ltd.

 

Kyocera Leasing Co., Ltd. provides financial services such as credit financing and leasing. Due to the nature of its operations, Kyocera Leasing Co., Ltd. had ¥80,351 million ($687 million) of short-term borrowings and ¥25,857 million ($221 million) of long-term debt from banks and other financial institutions at March 31, 2006 as the primary source of funding for operating its business.

 

For Kyocera’s variable interest rate of borrowings and debt, Kyocera utilized the rates in effect as of March 31, 2006 when estimating schedule of interest payments.

 

In addition to contractual obligations shown in the above tables, Kyocera forecasts to contribute ¥9,058 million ($77 million) to its defined benefit penstion plans in fiscal 2007.

 

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Quantitative 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 the 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, 2006, when compared to March 31, 2005. 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 currency 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 Euro. All such contracts currently in effect will mature generally within three months. The following tables provide information about Kyocera’s major foreign currency forward contracts existing at March 31, 2006, 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.

 

    

(Yen in millions) (Pay/Receive)

(Except average contractual rates)


 

Forward exchange contracts to sell foreign currencies            


   US$/Yen

    Euro/Yen

    US$/STG

 

Contract amounts

   ¥ 50,398     ¥ 48,297     ¥ 17,375  

Fair value

     (348 )     (1,022 )     83  

Weighted average contractual rates

     0.009       0.007       1.288  
    

(Yen in millions) (Receive/Pay)

(Except average contractual rates)


 

Forward exchange contracts to purchase foreign currencies                


         CZK/STG

    Yen/ US$

 

Contract amounts

           ¥ 5,775     ¥ 4,107  

Fair value

             (17 )     (29 )

Weighted average contractual rates

             41.539       116.560  
     (U.S. dollars in thousands) (Pay/Receive)

 

Forward exchange contracts to sell foreign currencies            


       US$/Yen    

        Euro/Yen    

        US$/STG    

 

Contract amounts

   $ 430,752     $ 412,795     $ 148,504  

Fair value

     (2,974 )     (8,735 )     709  
     (U.S. dollars in thousands) (Receive/Pay)

 

Forward exchange contracts to purchase foreign currencies                


             CZK/STG    

        Yen/US$    

 

Contract amounts

           $ 49,359     $ 35,103  

Fair value

             (145 )     (248 )

 

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Table of Contents

Interest rate risk

 

Kyocera enters into interest rate swaps and other contracts, which are mainly utilized by a Japanese subsidiary, Kyocera Leasing Co., Ltd., to reduce market risk exposure to changes in interest rates. The following tables 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 amounts, 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.

 

Other finance receivables (including due within one year)

                     
                 (Yen in millions)

 
           Average
interest rate


    Expected maturity date

   Total

   Fair value

 
         2007

   2008

   2009

   2010

   2011

   Thereafter

     

Other finance receivables

         3.87 %   ¥ 36,940    21,031    1,166    1,291    1,596    52,056    ¥ 114,080    ¥ 114,110  

Long-term debt (including due within one year)

                     
                 (Yen in millions)

 
           Average
pay rate


    Expected maturity date

   Total

   Fair value

 
         2007

   2008

   2009

   2010

   2011

   Thereafter

     

Loans, principally from banks

 

  0.90 %   ¥ 16,347    12,609    13,008    2,596    2,228    2,919    ¥ 49,707    ¥ 49,837  

Interest rate swaps

                     
                 (Yen in millions)

 

Notional principal amount        


  

Average

receive
rate


    Average
pay rate


    Expected maturity date

   Total

   Fair value

 
       2007

   2008

   2009

   2010

   2011

   Thereafter

     

(Variable to Fixed)

                                                           

¥28,850

   0.22 %   1.73 %   ¥ 200    200    23,200    200    5,050    —      ¥ 28,850    ¥ (511 )

Other finance receivables (including due within one year)

                     
                 (U.S. dollars in thousands)

 
          

Average

interest rate


    Expected maturity date

   Total

   Fair value

 
         2007

   2008

   2009

   2010

   2011

   Thereafter

     

Other finance receivables

         3.87 %   $ 315,726    179,752    9,966    11,034    13,641    444,923    $ 975,042    $ 975,299  

Long-term debt (including due within one year)

                     
                 (U.S. dollars in thousands)

 
           Average
pay rate


    Expected maturity date

   Total

   Fair value

 
         2007

   2008

   2009

   2010

   2011

   Thereafter

     

Loans, principally from banks

 

  0.90 %   $ 139,718    107,769    111,179    22,188    19,043    24,949    $ 424,846    $ 425,957  

Interest rate swaps

                     
                 (U.S. dollars in thousands)

 

Notional principal amount        


  

Average

receive

rate


   

Average

pay rate


    Expected maturity date

   Total

   Fair value

 
       2007

   2008

   2009

   2010

   2011

   Thereafter

     

(Variable to Fixed)

                                                           

$246,581

   0.22 %   1.73 %   $ 1,709    1,709    198,291    1,709    43,163    —      $ 246,581    $ (4,368 )

 

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Equity 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 ¥141,059 million ($1,206 million), included ¥111,178 million ($950 million) derived from a rise in the market price of KDDI shares held by Kyocera Corporation. Detailed information appears in Note 3 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 the 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, 2004, 2005 and 2006 amounted to ¥695 million, ¥1 million and ¥113 million ($1 million), respectively. At March 31, 2006, Kyocera held the following available-for-sale marketable equity and debt securities.

 

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

     March 31, 2006

     Cost

   Fair value

   Cost

   Fair value

Due within 1 year

   ¥ 19,312    ¥ 19,331    $ 165,060    $ 165,222

Due after 1 year to 5 years

     117,674      116,690      1,005,760      997,351

Due after 5 years

     517      547      4,419      4,675

Equity securities

     274,985      415,950      2,350,299      3,555,128
    

  

  

  

     ¥ 412,488    ¥ 552,518    $ 3,525,538    $ 4,722,376
    

  

  

  

 

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Research and Development Activities

 

Kyocera promotes a strategy of “high-value-added diversification,” which aims continuously at expanding sales and boosting profitability in its components and equipment businesses. To achieve these objectives, Kyocera seeks to enhance existing businesses and to create new businesses by integrating group-wide management resources while advancing, focusing and integrating technological capabilities. Kyocera will channel its energies into two high-growth-potential areas; the markets for telecommunications and information processing and for environmental preservation. R&D activities are conducted in all of these markets in the realms of materials, components, devices and equipment. Specific initiatives in each reporting segment follow.

 

(1) Fine Ceramic Parts Group

 

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

 

(2) Semiconductor Parts Group

 

Kyocera is advancing the development of new ceramic and organic packages for digital consumer products, where demand is expected to expand. In the ceramic packages business, efforts are being made to develop smaller, thinner and more highly sophisticated ceramic packages with a variety of built-in functions in order to meet rapid advancements in mobile phone handsets. Kyocera is also developing ceramic packages for different types of sensors for use in the automotive market. Elsewhere, Kyocera is developing organic packages for next-generation MPUs and their peripheral devices.

 

(3) Applied Ceramic Products Group

 

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

 

(4) Electronic Device Group

 

Kyocera develops various electronic components for the high-growth digital consumer products and automotive markets. In the digital consumer products, Kyocera is working to develop components for the hard-disk-drive market, in which demand is growing in line with increasing product sophistication. Specifically, Kyocera develops small, high-capacitance ceramic capacitors, ultra small, low frequency crystal units, ceramic resonators and shock sensors products. Global Positioning System (GPS) modules and other products are being developed in accordance with the spreading of a network society.

 

In thin-film devices, Kyocera is developing thermal printheads for digital photo printers capable of handling high-pixel photos, and industrial-use LCDs equipped with LED backlights to meet the need for environmentally-friendly products. In addition, Kyocera is working on the commercial application of organic EL displays, which are especially superior in moving images in mobile equipment while preserving a low-energy consumption feature.

 

(5) Telecommunications Equipment Group

 

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

 

(6) Information Equipment Group

 

Kyocera is promoting the development of more color-based and solutions-oriented products based on the ECOSYS concept, which is realized through the incorporation of a long-lasting amorphous silicon drum. Apart from bolstering the lineup for both black and white and color machines, Kyocera is advancing the development of document solutions products that can handle the integrated management of documents and digital information.

 

(7) Optical Equipment Group

 

Kyocera is developing optical components such as lenses and optical modules for mobile phone handsets by integrating optical technologies with electronic devices and semiconductor parts technologies amassed within the group. In particular, Kyocera focuses on the development of optical modules for small, low-profile mobile phone handsets with high-resolution displays and zoom capability. Kyocera is also developing the projector and barcode reader markets for further growth.

 

(8) Others

 

Kyocera Chemical Corporation is currently strengthening the development of semiconductor and LCD related materials. Focused efforts include the development of photo-sensitive, heat-resistant resin as a protective coating for the surface of semiconductors and of photo spacers for LCDs. The development of materials for different capacitors and materials for solar cells creates positive synergistic effects with Kyocera’s other businesses. Kyocera Communication Systems Co., Ltd. is promoting development in the area of fixed mobile convergence (FMC) and optimization by anticipating the needs for next-generation mobile handsets and other mobile communication equipment. In addition, Kyocera Communication Systems Co., Ltd. continues to develop authentication and security technologies, which seek to meet the need for fast changing next-generation networks.

 

iBurstTM is a trade mark of ArrayComm, Inc.

 

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

 

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

 
     Years ended March 31,

  

Increase

(Decrease)

%


 
     2005

   2006

  
     Amount

   Amount

  

Fine Ceramic Parts Group

   ¥ 4,252    ¥ 3,107    $ 26,556    (26.9 )

Semiconductor Parts Group

     2,890      3,549      30,333    22.8  

Applied Ceramic Products Group

     2,747      3,923      33,530    42.8  

Electronic Device Group

     11,416      10,940      93,504    (4.2 )

Telecommunications Equipment Group

     14,972      15,313      130,880    2.3  

Information Equipment Group

     13,270      16,416      140,308    23.7  

Optical Equipment Group

     2,636      1,079      9,222    (59.1 )

Others

     2,215      3,109      26,573    40.4  
    

  

  

  

Total

   ¥ 54,398    ¥ 57,436    $ 490,906    5.6  
    

  

  

  

 

Critical Accounting Policies and Estimates

 

Kyocera’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. 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 the consolidated financial statements and the reported amounts of the 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 the finance receivables of Kyocera Leasing Co., Ltd. in the Others segment, which provides credit financing and commercial leasing services. Based on the factors discussed above, Kyocera Leasing Co., Ltd. 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. Kyocera Leasing Co., Ltd. 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.

 

At March 31, 2006, Kyocera Leasing Co., Ltd. had ¥6,332 million ($54 million) of allowances for doubtful accounts against ¥126,741 million ($1,083 million) of finance receivables, which comprise over 50% 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 if the age of corresponding inventory is shorter than 12 months.

 

In fiscal 2006, as a result of continuous strict controls and adjustments on inventories, Kyocera recognized inventory write-downs of ¥8,446 million ($72 million). The amounts of these inventory write-downs by reporting segments appear in Note 17 to The Consolidated Financial Statements included in this annual report. A large portion of these inventory write-downs arose from inventories of telecommunication equipment and information equipment. These products were subject to a decrease in demand and a decline in price, or turned out to be obsolete because of their short product lives. In the telecommunications equipment business, Kyocera implemented structural reforms to improve future profitability following the previous year and recognized inventory write-downs or losses on disposal based on business plans.

 

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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. Inventory write-downs generally 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. The impairment losses are recorded as Corporate losses.

 

In fiscal 2006, Kyocera recognized losses on impairment of investment securities amounting to ¥385 million ($3 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, 2006, the unrealized gain of ¥111,178 million ($950 million) on KDDI shares held by Kyocera Corporation increased compared with that of ¥55,056 million at March 31, 2005, reflecting a fluctuation of the market price of the KDDI shares during fiscal 2006. 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 3 to The Consolidated Financial Statements in this annual report.

 

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

 

Impairment of long-lived assets

 

Kyocera reviews its long-lived assets and intangible assets with definite useful lives for impairment periodically. Long-lived assets and intangible assets with definite useful lives are considered to be impaired when the expected undiscounted cash flow from the asset is less than its carrying value. A loss on impairment is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets and intangible assets with definite useful lives. In fiscal 2006, Kyocera recognized loss on impairment of long-lived assets in a foreign subsidiary. However this loss on impairment did not have a material impact on Kyocera’s consolidated results of operations and financial position.

 

Goodwill and other intangible assets

 

Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, rather than being amortized, and also following any events or changes in circumstances that might lead to impairment. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

 

Kyocera undertook a review for impairment of goodwill and other intangible assets in fiscal 2006. The results of this review revealed no 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, 2006, deferred tax assets amounted to ¥82,342 million ($704 million), which Kyocera considers will reasonably be realized in the future compared with the amounts of taxable income and income taxes in fiscal 2006.

 

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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 Kyocera Mita Corporation transferred to the Japanese government the substitutional portion of Employee Pension Fund liabilities and the related government-specified portion of plan assets of Employee Pension Fund. Kyocera Corporation and Kyocera Mita Corporation 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 Employee Pension Fund, and recorded ¥18,917 million of a settlement gain for the substitutional portion of Employee Pension Fund. 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 Employee Pension Fund is described in Note 9 to The Consolidated Financial Statements included in this annual report.

 

Sensitivity analysis of benefit plans

 

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

 

     (Yen in millions)

 
    

Effect on projected

benefit obligation

as of March 31, 2006


   

Effect on income before

income taxes for the year ending

March 31, 2007


 

Discount rates

                

0.5% decrease

   ¥ 8,011     ¥ (284 )

0.5% increase

     (7,316 )     286  

Expected rate of return on plan assets

                

0.5% decrease

     —         (556 )

0.5% increase

     —         556  

 

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 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. Most of these conditions are satisfied at the time of delivery to customers in domestic sales (FOB destination) and at the time of shipment (FOB shipping) for export sales.

 

Sales returns

 

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

 

Products warranty

 

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 product warranty reserve 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. 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.

 

35


Table of Contents

New Accounting Standards

 

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 Accounting Principles Board (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 would begin after June 15, 2005, however, on April 14, 2005, the Securities and Exchange Commission Staff postponed implementation of SFAS No. 123R. Kyocera will adopt SFAS No. 123R effective on April 1 2006, and estimates that the impact of SFAS No. 123R will be approximately ¥400 million ($3 million) on Kyocera’s consolidated results of operations for fiscal 2007.

 

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 ended after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on Kyocera’s 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 changes, if any, that Kyocera may identify and record in a future period.

 

In November 2005, the FASB issued FASB Staff Position 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (FSP FAS 115-1 and FAS 124-1). FSP FAS 115-1 and FAS 124-1 explains the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. In addition, it also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairment. FSP FAS 115-1 and FAS 124-1 is effective in reporting periods beginning after December 15, 2005. The adoption of FSP FAS 115-1 and FAS 124-1 did not have a material impact on Kyocera’s consolidated results of operations and financial position.

 

36


Table of Contents

Selected 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)

     2002

   2003

   2004

   2005

   2006

   2006

For the years ended March 31:

                                         

Net sales

   ¥ 1,034,574    ¥ 1,069,770    ¥ 1,140,814    ¥ 1,180,655    ¥ 1,181,489    $ 10,098,197

Profit from operations

     51,561      83,388      108,962      100,968      103,207      882,111

Income before cumulative effect of change in accounting principle

     33,791      43,421      68,086      45,908      69,696      595,692

Net income

     31,953      41,165      68,086      45,908      69,696      595,692
    

  

  

  

  

  

Earnings per share (B):

                                         

Income before cumulative effect of change in accounting principle:

                                         

Basic

   ¥ 178.74    ¥ 233.02    ¥ 364.79    ¥ 244.86    ¥ 371.68    $ 3.18

Diluted

     178.59      232.97      364.78      244.81      371.43      3.17

Net Income:

                                         

Basic

     169.02      220.91      364.79      244.86      371.68      3.18

Diluted

     168.88      220.86      364.78      244.81      371.43      3.17

Weighted average number of shares outstanding:

                                         

Basic

     189,050      186,338      186,643      187,489      187,514       

Diluted

     189,204      186,382      186,649      187,528      187,640       

Cash dividends declared per share (B):

                                         

Per share of common stock

     60.00      60.00      60.00      80.00      100.00      0.85
    

  

  

  

  

  

At March 31:

                                         

Total assets

   ¥ 1,645,458    ¥ 1,635,014    ¥ 1,794,758    ¥ 1,745,519    ¥ 1,931,522    $ 16,508,735

Long-term debt

     96,856      60,736      70,608      33,557      33,360      285,128

Common stock

     115,703      115,703      115,703      115,703      115,703      988,915

Stockholders’ equity

     1,036,185      1,000,207      1,150,453      1,174,851      1,289,077      11,017,752
    

  

  

  

  

  

Depreciation

   ¥ 76,252    ¥ 64,988    ¥ 60,861    ¥ 58,790    ¥ 63,018    $ 538,615

Capital expenditures

     54,631      40,614      54,937      63,176      90,271      771,547
    

  

  

  

  

  

Exchange rate (Yen=US$1) (C):

                                         

Period-end

   ¥ 132.70    ¥ 118.07    ¥ 104.18    ¥ 107.22    ¥ 117.48       

Average

     125.05      121.94      112.75      107.49      113.15       

High

     134.77      133.40      120.55      114.30      120.93       

Low

     115.89      115.71      104.18      102.26      104.41       
    

  

  

  

  

      

 

(A) See Note 2 to The Consolidated Financial Statements.

 

(B) See Note 1 to The Consolidated Financial Statements.

 

(C) Exchange rate is based upon the noon buying rate in New York City for cash transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.

 

Market Price and Dividend Data

 

For Voting Securities by Fiscal Quarter

 

          2005

   2006

          1st

   2nd

   3rd

   4th

   1st

   2nd

   3rd

   4th

Common Stock:

                                                            

Market price per share (A)

   – High    ¥ 9,630    ¥ 9,380    ¥ 8,320    ¥ 8,080    ¥ 8,500    ¥ 8,670    ¥ 8,860    ¥ 10,830
     – Low      8,110      7,370      7,080      7,120      7,090      7,640      7,220      8,510

Cash dividends paid per share

          30.00      —        30.00      —        50.00      —        50.00      —  

American Depositary Share:

                                                            

Market price per share (B)

   – High    $ 90.90    $ 86.20    $ 77.23    $ 77.58    $ 78.45    $ 78.02    $ 74.27    $ 91.59
     – Low      71.10      67.81      68.86      68.67      67.20      69.01      62.58      73.33

Cash dividends paid per share (C)

     0.28      —        0.29      —        0.45      —        0.41      —  

 

(A) Price on the Tokyo Stock Exchange

 

(B) Price on the New York Stock Exchange

 

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

 

37


Table of Contents

Consolidated Balance Sheets

Kyocera Corporation and Consolidated Subsidiaries

March 31, 2005 and 2006

 

ASSETS


   2005

    2006

    2006

 

Current assets:

                        

Cash and cash equivalents (Note 12)

   ¥ 310,592     ¥ 300,809     $ 2,571,017  

Short-term investments (Notes 3 and 12)

     34,938       87,942       751,641  

Trade receivables (Note 6):

                        

Notes

     29,552       24,597       210,231  

Accounts

     201,374       210,393       1,798,231  

Short-term finance receivables (Notes 4 and 12)

     40,801       39,505       337,650  
    


 


 


       271,727       274,495       2,346,112  

Less allowances for doubtful accounts and sales returns

     (7,981 )     (7,425 )     (63,462 )
    


 


 


       263,746       267,070       2,282,650  

Inventories (Note 5)

     213,411       190,564       1,628,752  

Deferred income taxes (Note 15)

     38,659       40,411       345,393  

Other current assets

     34,229       33,872       289,504  
    


 


 


Total current assets

     895,575       920,668       7,868,957  
    


 


 


Investments and advances:

                        

Investments in and advances to affiliates and unconsolidated subsidiaries (Note 6)

     30,623       7,355       62,863  

Securities and other investments (Notes 3 and 12)

     430,437       553,377       4,729,718  
    


 


 


       461,060       560,732       4,792,581  

Long-term finance receivables (Notes 4 and 12)

     66,427       80,970       692,051  

Property, plant and equipment, at cost (Note 8):

                        

Land

     55,210       58,286       498,171  

Buildings

     225,964       249,506       2,132,530  

Machinery and equipment

     656,780       697,383       5,960,538  

Construction in progress

     14,384       13,473       115,154  
    


 


 


       952,338       1,018,648       8,706,393  

Less accumulated depreciation

     (693,341 )     (733,302 )     (6,267,538 )
    


 


 


       258,997       285,346       2,438,855  

Goodwill (Note 7)

     28,110       31,351       267,957  

Intangible assets (Note 7)

     15,847       31,227       266,898  

Other assets

     19,503       21,228       181,436  
    


 


 


     ¥ 1,745,519     ¥ 1,931,522     $ 16,508,735  
    


 


 


 

The accompanying notes are an integral part of these statements.

 

38


Table of Contents

(Yen in millions and U.S. dollars and shares in thousands—Note 2)

 

LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY


   2005

    2006

    2006

 

Current liabilities:

                        

Short-term borrowings (Notes 8 and 12)

   ¥ 66,556     ¥ 90,865     $ 776,624  

Current portion of long-term debt (Notes 8 and 12)

     44,051       16,347       139,718  

Notes and accounts payable:

                        

Trade

     86,872       103,503       884,641  

Other

     34,690       51,997       444,419  

Accrued liabilities:

                        

Payroll and bonus

     34,821       37,998       324,769  

Income taxes

     31,180       27,658       236,393  

Other

     28,849       31,414       268,496  

Other current liabilities

     17,338       18,841       161,034  
    


 


 


Total current liabilities

     344,357       378,623       3,236,094  
    


 


 


Long-term debt (Notes 8 and 12)

     33,557       33,360       285,128  

Accrued pension and severance liabilities (Note 9)

     31,166       27,092       231,556  

Deferred income taxes (Note 15)

     96,345       125,686       1,074,239  

Other non-current liabilities

     4,761       12,742       108,906  
    


 


 


Total liabilities

     510,186       577,503       4,935,923  
    


 


 


Minority interests in subsidiaries

     60,482       64,942       555,060  

Commitments and contingencies (Note 13)

                        

Stockholders’ equity (Note 14):

                        

Common stock:

                        

Authorized 600,000 shares

Issued 191,309 shares

     115,703       115,703       988,915  

Additional paid-in capital

     162,061       161,994       1,384,564  

Retained earnings

     916,628       967,576       8,269,880  

Accumulated other comprehensive income

     11,839       72,947       623,479  

Common stock in treasury, at cost (Note 10): 3,828 shares at March 31, 2005 and 3,554 shares at March 31, 2006

     (31,380 )     (29,143 )     (249,086 )
    


 


 


Total stockholders’ equity

     1,174,851       1,289,077       11,017,752  
    


 


 


     ¥ 1,745,519     ¥ 1,931,522     $ 16,508,735  
    


 


 


 

39


Table of Contents

Consolidated Statements of Income

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2006

 

(Yen in millions and U.S. dollars and shares in thousands, except per share amounts–Note 2)

 

     2004

    2005

    2006

    2006

 

Net sales (Note 6)

   ¥ 1,140,814     ¥ 1,180,655     ¥ 1,181,489     $ 10,098,197  

Cost of sales

     860,224       855,067       838,295       7,164,915  
    


 


 


 


Gross profit

     280,590       325,588       343,194       2,933,282  

Selling, general and administrative expenses

     171,628       224,620       239,987       2,051,171  
    


 


 


 


Profit from operations

     108,962       100,968       103,207       882,111  

Other income (expenses):

                                

Interest and dividend income

     4,883       6,396       8,968       76,650  

Interest expense (Note 11)

     (1,286 )     (1,275 )     (1,301 )     (11,120 )

Foreign currency transaction (losses) gains, net (Note 11)

     (1,546 )     2,618       (316 )     (2,701 )

Equity in earnings (losses) of affiliates and unconsolidated subsidiaries (Note 6)

     2,575       (1,678 )     (1,216 )     (10,393 )

Loss on impairment of investment in an affiliate (Note 6)

     —         —         (3,492 )     (29,846 )

Gain on sale of investment in an affiliate (Note 6)

     491       —         6,931       59,239  

Gains on exchange for the shares (Note 3)

     —         —         5,294       45,248  

Other, net

     961       501       3,313       28,316  
    


 


 


 


       6,078       6,562       18,181       155,393  
    


 


 


 


Income before income taxes and minority interests

     115,040       107,530       121,388       1,037,504  

Income taxes (Note 15):

                                

Current (Note 20)

     29,576       52,872       47,521       406,162  

Deferred

     20,734       5,608       (218 )     (1,863 )
    


 


 


 


       50,310       58,480       47,303       404,299  
    


 


 


 


Income before minority interests

     64,730       49,050       74,085       633,205  

Minority interests

     3,356       (3,142 )     (4,389 )     (37,513 )
    


 


 


 


Net income

   ¥ 68,086     ¥ 45,908     ¥ 69,696     $ 595,692  
    


 


 


 


Earnings per share (Note 18):

                                

Net income:

                                

Basic

   ¥ 364.79     ¥ 244.86     ¥ 371.68     $ 3.18  

Diluted

     364.78       244.81       371.43       3.17  

Cash dividends declared per share:

                                

Per share of common stock

     60.00       80.00       100.00       0.85  

Weighted average number of shares of common stock outstanding:

                                

Basic

     186,643       187,489       187,514          

Diluted

     186,649       187,528       187,640          

 

The accompanying notes are an integral part of these statements.

 

40


Table of Contents

Consolidated Statements of Stockholders’ Equity

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2006

 

(Yen in millions and U.S. dollars and shares in thousands – Note 2)

 

     Common
Stock


   Additional
Paid-in
Capital


    Retained
Earnings
(Note 14)


    Accumulated Other
Comprehensive Income
(Note 14)


   

Treasury Stock

(Note 10)


    Comprehensive
Income


 

Balance, March 31, 2003 (184,964)

   ¥ 115,703    ¥ 167,675     ¥ 825,057     ¥ (56,194 )   ¥ (52,034 )        

Net income for the year

                    68,086                     ¥ 68,086  

Foreign currency translation adjustments

                            (20,693 )             (20,693 )

Minimum pension liability adjustment - net of taxes of ¥5,419 (Note 9)

                            9,454               9,454  

Net unrealized gains on securities - net of taxes of ¥61,421 (Note 3)

                            89,136               89,136  

Reclassification adjustments for net losses on securities - net of taxes of ¥12 (Note 3)

                            60               60  

Net unrealized gains on derivative financial instruments (Note 11)

                            32               32  

Reclassification adjustments for net losses on derivative financial instruments (Note 11)

                            251               251  
                                           


Total comprehensive income for the year

                                          ¥ 146,326  
                                           


Cash dividends

                    (11,174 )                        

Purchase of treasury stock (14)

                                    (105 )        

Reissuance of treasury stock (5)

            4                       44          

Exchange of stock for acquisition of an affiliate (2,529) (Note 21)

            (5,607 )                     20,739          

Stock option plan of a subsidiary

            19                                  
    

  


 


 


 


       

Balance, March 31, 2004 (187,484)

     115,703      162,091       881,969       22,046       (31,356 )        

Net income for the year

                    45,908                     ¥ 45,908  

Foreign currency translation adjustments

                            6,704               6,704  

Minimum pension liability adjustment - net of taxes of ¥125 (Note 9)

                            (152 )             (152 )

Net unrealized losses on securities - net of taxes of ¥11,909 (Note 3)

                            (18,441 )             (18,441 )

Reclassification adjustments for net losses on securities - net of taxes of ¥1,234 (Note 3)

                            1,661               1,661  

Net unrealized losses on derivative financial instruments (Note 11)

                            (27 )             (27 )

Reclassification adjustments for net losses on derivative financial instruments (Note 11)

                            48               48  
                                           


Total comprehensive income for the year

                                          ¥ 35,701  
                                           


Cash dividends

                    (11,249 )                        

Purchase of treasury stock (21)

                                    (170 )        

Reissuance of treasury stock (18)

            (5 )                     146          

Stock option plan of a subsidiary

            (25 )                                
    

  


 


 


 


       

Balance, March 31, 2005 (187,481)

     115,703      162,061       916,628       11,839       (31,380 )        

Net income for the year

                    69,696                     ¥ 69,696  

Foreign currency translation adjustments

                            21,396               21,396  

Minimum pension liability adjustment - net of taxes of ¥322 (Note 9)

                            (428 )             (428 )

Net unrealized gains on securities - net of taxes of ¥29,400 (Note 3)

                            42,054               42,054  

Reclassification adjustments for net gains on securities - net of taxes of ¥1,206 (Note 3)

                            (1,866 )             (1,866 )

Net unrealized losses on derivative financial instruments (Note 11)

                            (75 )             (75 )

Reclassification adjustments for net losses on derivative financial instruments (Note 11)

                            27               27  
                                           


Total comprehensive income for the year

                                          ¥ 130,804  
                                           


Cash dividends

                    (18,748 )                        

Purchase of treasury stock (20)

                                    (170 )        

Reissuance of treasury stock (294)

            (67 )                     2,407          
    

  


 


 


 


       

Balance, March 31, 2006 (187,755)

   ¥ 115,703    ¥ 161,994     ¥ 967,576     ¥ 72,947     ¥ (29,143 )        
    

  


 


 


 


       

Balance, March 31, 2005

   $ 988,915    $ 1,385,137     $ 7,834,427     $ 101,188     $ (268,205 )        

Net income for the year

                    595,692                     $ 595,692  

Foreign currency translation adjustments

                            182,872               182,872  

Minimum pension liability adjustment - net of taxes of $2,752 (Note 9)

                            (3,658 )             (3,658 )

Net unrealized gains on securities - net of taxes of $251,282 (Note 3)

                            359,436               359,436  

Reclassification adjustments for net gains on securities - net of taxes of $10,308 (Note 3)

                            (15,949 )             (15,949 )

Net unrealized losses on derivative financial instruments (Note 11)

                            (641 )             (641 )

Reclassification adjustments for net losses on derivative financial instruments (Note 11)

                            231               231  
                                           


Total comprehensive income for the year

                                          $ 1,117,983  
                                           


Cash dividends

                    (160,239 )                        

Purchase of treasury stock

                                    (1,453 )        

Reissuance of treasury stock

            (573 )                     20,572          
    

  


 


 


 


       

Balance, March 31, 2006

   $ 988,915    $ 1,384,564     $ 8,269,880     $ 623,479     $ (249,086 )        
    

  


 


 


 


       

 

The accompanying notes are an integral part of these statements.

 

41


Table of Contents

Consolidated Statements of Cash Flows

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2006

 

(Yen in millions and U.S. dollars in thousands – Note 2)

 

     2004

    2005

    2006

    2006

 

Cash flows from operating activities:

                                

Net income

   ¥ 68,086     ¥ 45,908     ¥ 69,696     $ 595,692  

Adjustments to reconcile net income to net cash provided by operating activities:

                                

Depreciation and amortization

     70,260       65,909       73,186       625,521  

Provision for doubtful accounts

     2,387       (18 )     (466 )     (3,983 )

Write-down of inventories

     14,013       10,405       8,446       72,188  

Gain on sale of investment in an affiliate (Note 6)

     (491 )     —         (6,931 )     (59,239 )

Gains on exchange for the shares (Note 3)

     —         —         (5,294 )     (45,248 )

Deferred income taxes

     20,734       5,608       (218 )     (1,863 )

Minority interests

     (3,356 )     3,142       4,389       37,513  

Equity in (earnings) losses of affiliates and unconsolidated subsidiaries (Note 6)

     (2,575 )     1,678       1,216       10,393  

Loss on impairment of investment in an affiliate (Note 6)

     —         —         3,492       29,846  

Gain on settlements of pension plans (Note 9)

     (24,870 )     —         —         —    

Foreign currency adjustments

     1,294       (2,391 )     272       2,325  

Change in assets and liabilities:

                                

(Increase) decrease in receivables

     (34,704 )     68,558       (9,237 )     (78,949 )

(Increase) decrease in inventories

     (35,751 )     (25,598 )     21,263       181,735  

(Increase) decrease in other current assets

     (4,402 )     14       (3,331 )     (28,470 )

Increase (decrease) in notes and accounts payable

     20,701       (31,914 )     14,390       122,992  

(Decrease) increase in accrued income taxes

     (9,197 )     13,566       (4,720 )     (40,342 )

Increase (decrease) in other current liabilities

     9,441       (1,744 )     3,284       28,068  

Increase (decrease) in other non-current liabilities

     2,761       (11,464 )     (118 )     (1,008 )

Settlement regarding LaPine Case (Note 22)

     (35,454 )     —         —         —    

Other, net

     3,698       3,864       1,758       15,026  
    


 


 


 


Total adjustments

     (5,511 )     99,615       101,381       866,505  
    


 


 


 


Net cash provided by operating activities

     62,575       145,523       171,077       1,462,197  
    


 


 


 


Cash flows from investing activities:

                                

Payments for purchases of available-for-sale securities

     (10,038 )     (81,946 )     (98,219 )     (839,479 )

Payments for purchases of held-to-maturity securities

     (27,943 )     (10,141 )     (11,070 )     (94,615 )

Payments for purchases of investments and advances

     (7,917 )     (11,858 )     (224 )     (1,915 )

Sales and maturities of available-for-sale securities

     28,954       40,955       50,090       428,120  

Maturities of held-to-maturity securities

     48,533       8,719       2,340       20,000  

Proceeds from sales of investment in an affiliate

     5,004       —         24,133       206,265  

Payments for purchases of property, plant and equipment

     (50,712 )     (59,381 )     (91,436 )     (781,504 )

Payments for purchases of intangible assets

     (8,157 )     (4,820 )     (10,589 )     (90,504 )

Proceeds from sales of property, plant and equipment, and intangible assets

     2,720       2,920       3,350       28,632  

Acquisition of businesses, net of cash acquired (Note 19)

     (2,271 )     (2,794 )     3       26  

Acquisitions of minority interests

     —         (5 )     (3,575 )     (30,556 )

Deposit of negotiable certificate of deposits and time deposits

     (674 )     (112,903 )     (132,286 )     (1,130,650 )

Withdrawal of negotiable certificate of deposits and time deposits

     79       95,220       100,923       862,590  

Deposit of restricted cash

     (1,994 )     —         —         —    

Withdrawal of restricted cash

     52,983       —         —         —    

Other, net

     1,014       3,540       1,093       9,342  
    


 


 


 


Net cash provided by (used in) investing activities

     29,581       (132,494 )     (165,467 )     (1,414,248 )
    


 


 


 


Cash flows from financing activities:

                                

(Decrease) increase in short-term debt

     (23,823 )     (18,490 )     23,363       199,684  

Proceeds from issuance of long-term debt

     48,975       21,077       19,876       169,880  

Payments of long-term debt

     (33,152 )     (58,720 )     (48,458 )     (414,171 )

Dividends paid

     (12,372 )     (12,614 )     (20,473 )     (174,983 )

Net (purchases) sales of treasury stock

     (33 )     (28 )     2,169       18,539  

Other, net

     (17 )     1,431       234       2,000  
    


 


 


 


Net cash used in financing activities

     (20,422 )     (67,344 )     (23,289 )     (199,051 )
    


 


 


 


Effect of exchange rate changes on cash and cash equivalents

     (8,912 )     3,775       7,896       67,487  
    


 


 


 


Net increase (decrease) in cash and cash equivalents

     62,822       (50,540 )     (9,783 )     (83,615 )

Cash and cash equivalents at beginning of year

     298,310       361,132       310,592       2,654,632  
    


 


 


 


Cash and cash equivalents at end of year

   ¥ 361,132     ¥ 310,592     ¥ 300,809     $ 2,571,017  
    


 


 


 


 

The accompanying notes are an integral part of these statements.

 

42


Table of Contents

Notes to The Consolidated Financial Statements

 

Kyocera Corporation and Consolidated Subsidiaries